Valuation of intellectual properties

Case Studies for Valuation of Intellectual Property Rights

(Paper presented by Dr. Heinz Goddar, Boehmert & Boehmert/Forrester & Boehmert,
German Patent Attorney, European Patent and Trademark Attorney, Munich,
Germany, Past President of LES International (LESI), at an EPO Licensing Seminar at
Ljubljana, Slovenia, on January 17/18, 2006)

1. Determinination of Net Present Value (NPV) It is generally accepted that the Net Present Value (NPV) of Intellectual Property Rights (IPRs), particularly patents, can easiest be determined in accordance with the method of so- According to this method, one will have to answer the question, first, during which period of future use of the Patents in question which amount of royalty stream would be achieved by an owner of the patent, if the patent would be licensed out to a third party. Another assumption, leading to the same result, would be to determine the royalty stream or flow, over the aforementioned period of time, that the patentee would not have to pay and therefore save royalties because of being the owner of the Patents and not having to pay royalties to third Based on these assumptions, the NPV, generally, can be determined according to the In this formula, C0 is the royalty cash flow in the starting year, C1 in the first year thereafter, and so on, until Cty means the royalty stream in the terminal year of (patent) protected sales. Furthermore, r is the discount rate to be applied, i. e. the average bank interest rate for lending For the purpose of this presentation, it appears as reasonable to assume that the discount rate would be 10%. Accordingly, (1+r) would be 1.1. EP 1 057 829 “Novel compounds and pharmaceutical compositions containing the same” is directed to an erectile dysfunction drug. Equivalent granted patents exist in Japan and U.S.A., namely Japanese patent 3 145 364 and Under ”erectile dysfunction”, the inability of a male to achieve or maintain an erection sufficient for his sexual needs or the needs of his partner is understood. Erectile Dysfunction (ED) is a prevalent male health problem of global dimensions. Approximately 150 million men worldwide suffer from ED of some degree, and this value is projected to be more than ED appears to be a common cross-cultural denominator, affecting 19% to 64% of men aged 40 to 80 years, both in developing and industrialized countries. The causes of ED are either of physiological or psychological nature. Reduced blood flow to the penis and nerve damage are the most comment causes. A broad and expanding panoply of options is available for the management of ED, including oral phosphodiesterase type 5 (PDE5) inhibitors, such as Sildenafil, the most famous representative of this ”family” being the product Viagra of Pfizer, see below. Amongst those are, first of all, oral phosphodiesterase type 5 inhibitors (PDE5), such as Sildenafil, see above, Vardenafil and Tadalafil. Other representatives of this ”family” are Yohimbine, Apomorphine SL, Alprostadil, and Papaverine/Phentolamine. A psychological therapy may be effective in conjunction with medical or surgical treatment. The U.S. FDA’s 1998 approval of Sildenafil citrate, a selective inhibitor of PDE5, marketed, as stated above, under ”Viagra” by Pfizer, marked the advent of arguably the reliable effective and safe treatment for ED. Sildenafil is the current market leader for ED worldwide with more than 90% market share. Newer, more selective inhibitors of PDE5, namely Vardenafil and Tadalafil have undergone final testing and approval by U.S. FDA and the European Agency for the Evaluation of Medicinal Products (EMEA). The last mentioned agents are expected to occupy a place among first-line therapies for ED. Pfizer’s sales of Sildenafil (Viagra) in 2001 had a total, worldwide value of 1.5 billion USD. Bayer/GSK had sales of Verdenafil (Nuviva) in 2003 of about 1.0 billion USD, Lilly/ICOS had sales of Tadalafil (Cialis) in 2003 of 1.0 billion USD. The drug market of Saudi Arabia being one of the leading markets in the Middle East, it is of interest to mention the following figures: The total drug market of Saudi Arabia in 2001 had comprised nearly 3 billion USD, out of 8 billion USD, the latter being the total Middle East market value. The ED treatment sales in Saudi Arabia in 2001 have comprised 23 million USD, the 2002 ED treatment sales 25 million USD. For comparison purposes, the Sildenafil (Viagra) market has shown, in detail, the following sales figures during some last few years: In 2001 1,500 million USD, after, in 2000, 1,380 million USD, in 1999 1,000 million USD, and in 1998 800 million USD. Based on market analysis, one may assume that the sales volume of Sildenafil, worldwide, in 2001, namely 1.5 billion USD, will at least remain constant for the foreseeable future, in spite of the additional competitive products coming into the market place, as mentioned above, due Based on market analysis, one may assume that subject matter of EP 1 057 829 with its erectile dysfunction drug at least, on the basis of a conservative assumption, will capture 10% of the total Sildenafil market, i. e. 10% of a total net sales volume of Viagra in 2001 of 1.5 billion USD, i. e. 150 million USD annually. This total market share of 10% of the worldwide market of Sildenafil (Viagra), namely 150 million USD yearly, would correspond to 25% of the yearly revenue (net sales) of Viagra coming in 2001 from markets outside EU, Japan, and U.S.A., the latter ”outside” market being only 40% of the total worldwide market, i. e. in 2001, in the case of Sildenafil (Viagra), comprising 600 million USD. The aforementioned assumption, namely that the EP 1 057 829 product will achieve annual worldwide sales of 150 million USD, starting after market approval, appears as conservative, when considering the strong patent protection for the EP 1 057 829 product, as already achieved and further improved by the Patents as discussed here. Based on the above mentioned background informations and assumptions, it appears as justified to determine the NPV of all of the patent family of EP 1 057 829 related to erectile dysfunction as one block. It would be difficult to determine a price ”tag” for each patent independently, since only all together, in a manner difficult to differentiate, they give a scope of protection for the EP 1 057 829 product in question that will lead to a competitive edge in the market place justifying the assumption of both the above mentioned annual sales figure of 150 million USD and a royalty rate of the order of magnitude as discussed below. If one takes into consideration that it would still take five years to finalize the full development of the EP 1 057 829 to marketability, by going through the necessary FDA procedures in the most interesting markets, namely EU, Japan, and U.S.A., one comes to the following calculation, assuming that 25% of the full development of the EP 1 057 829 drug, in the following designated as the Product, has been completed: It appears as justified to assume that, starting from year 6, i.e. with C6 in the above mentioned formula, the user of EP 1 057, neglecting both further expansion of sales as well as inflation factors, will constantly have an annual income in accordance with a reasonable and acceptable royalty rate applied to constant annual sales of 150 million USD, with an average expected residual time of use of about 10 years, i.e. extending to C15. As far as a reasonable royalty rate is concerned, it appears as appropriate to use the well known 25% Rule in valuing IP as developed originally by Robert Goldscheider, most recently discussed on pp. 123 ff. of Les Nouvelles, Volume No. 4, December 2002. According to this rule, in case of a fully developed, marketable product the reasonable and generally accepted royalty rate will be about 25% of the net profit before taxes achieved by a licensee (or patentee, the latter saving corresponding royalties) when being protected by the patent or According to general observations, for a block buster patent or a block buster group of patents, in pharmaceutical industry over the last decade an average net profit of about 80% has been achievable, of course only for the period of protection as given by the respective This has led to the observation that generally for block busters in pharmaceutical industry royalty rates of 20% appear as applicable. Since a royalty rate of 20% would need a fully developed product, after marketing approval, in case of the Product, where only about 25% of the finalization of the product for marketability have been done, it appears as justified to take only a corresponding fraction of the otherwise reasonable royalty rate of 20%, namely 25% thereof, i. e. a royalty rate of 5%, into due consideration, this being a very conservative Taking the aforementioned royalty rate of 5% and applying this according to the above mentioned assumptions to the annual sales of the user of EP 1 057 829 and its foreign equivalents of 150 million USD to be expected starting with year 6, this will lead to an annual royalty income of 7.5 million USD. s like Sildenafil. Putting this value into the above mentioned NPV-formula for the years 6 – 15, this will lead to a discounted royalty stream, i. e. NPV, of 4.230 + 3.848 + 3.498 + 3.180 + 2.891 + 2.628 + 2.389 + 2.172 + 1.974 + 1.795, i. e. 28.61 million USD, using in the determination of C6 – C15, according to r = 0,1, because of the assumption of a discount rate of 10%, the following denominators: 1.772, 1.949, 2.144, 2.359, 2.594, 2.854, 3.139, 3.453, 3.798, and 4.178, This calculation shows that a very conservative monetary value of the patent family of EP 1 057 829, following license analogy, can be determined as being 28.61 million USD at this In view of the fact that the profitability of drug manufacturers in certain areas, like Middle East, compared with invested capital, will be even higher than 80%, namely possibly reaching values like 160% or even more, because of particularly the lower cost for research and development as well as testing in the approval phase, it would appear as not being unreasonable to assume that the aforementioned value of 28.61 million USD could even be doubled, i. e. reaching 57.22 million USD. As stated above, however, 28.61 million USD appears to be the more conservative figure. EP 1 178 316 is directed to a “Medical kit and method for the dermination of a drug”. There The beginnings of laboratory medicine can be traced to 19th century London when ward laboratories first performed bedside chemical analyses of urine and faecal specimens. In the last century (20th) laboratory diagnostic testing has advanced rapidly with complicated and centralised laboratories performing the majority of tests. Immunologically-based tests have gained prominence due to the unique nature of the detection tool, the antibody molecule. Overall, the field of laboratory medicine has matured in conjunction with the development of highly efficient and reliable central laboratories capable of producing large numbers of accurate and reproducible results, as well as point-of-care testing (POCT) devices capable of As we move into the 21st century, advances in scientific knowledge about disease have caused a rapid increase in total laboratory automation and an expansion in POCT. It may seem that the use of both POCT and centralised laboratories as contradictory, since the former employs simple-to-use technology for low-volume testing in decentralised locations, while the latter uses highly complex technology for high-volume testing in a central location. However, these two modes of providing diagnostic laboratory services not only complement each other, but are becoming necessary services for hospital laboratories to incorporate if they wish to be The main driving force towards increased POCT is the economic pressure on health care delivery systems in all country of the world. This pressure will continue to impact how laboratory-testing services are provided in the future. In the developed world, it is very clear that patient care is moving along two continuums: from inpatient to outpatient settings and from the doctor’s office to the home setting. The economic benefits both to the health service and the patient are tremendous. POCT and home testing will save so much of the doctor’s time. It will speed up diagnosis of disease, hence faster treatment will be offered to the patient. The cost of POCT and home-based tests will be far less than those performed in a Another very important factor for the benefit of home-based testing is related to the psychological behaviour of the patient. Many people delay visiting a doctor either because of lack of time or because of embarrassment (e.g., in case of sexually related illness). Availability of home-based kits with proper information can lead to a reduction in more serious damage incurred on the patient. For example, Colorectal cancer can be treated better if detected early in development by performing a simple test. Many sexually transmitted diseases are asymptotic yet can cause serious damage to the re-productive system leading to infertility. Cholesterol monitoring can give an early indication of serious cardiovascular This concept has found use in other areas of need, such as environmental testing of pollutants, food quality and hygiene testing, drink quality and hygiene testing and agricultural testing of The tests are Nunc based immunoassays for the detection of either antibodies or antigens in the sample. For example, in the test for Leishmania, antigens from the parasite are pre-coated on a stick. The biological sample (blood) is added and if antibodies to the parasite are present, they will be revealed by colour development on the stick. A control stick is also included to ensure that the test is done properly. Each kit will have positive and negative controls and full explanation of the test and how to perform it. The test target groups of almost equal market share for the product of EP 1 178 316, in the 2- Pathogen detection in food and drink. Including water quality testing. 3- Drug level in humans and animals. This seeks to establish effective dose during drug use and detection of elevated levels for non desirable effects. 4- Environmental control of pesticides, vegetables growth hormones and any other One may assume that Europe and U.S.A. together will have an annual sales volume, with test kits like the to-be Product Kit, of 9.7 million USD each, i. e. 19.4 million USD together, for each of the above mentioned test target groups. For all 4 target groups together, the estimated sales achievable by the Product Kit, based on a conservative assumption, will be in total 77.6 million USD, ”worldwide”, i. e. for U.S.A. and Europe, annually. A royalty rate of 8% appears as applicable, since for diagnostics and other medical products of the kind in question, different from pharmaceuticals as such, usually royalties in this range Also, to be conservative, one may assume that, starting with year 2 (C2 in the NPV-formula), 5 years of patent ”monopolized” use may be expected, since after that possibly new kits of different principles may replace, in view of the quick progress of technology, the to-be This will lead, using in the NPV formula the stages C2 – C6, a total royalty stream, duly discounted, of 22.40 million USD (5.51 million USD per test target). EP 1 226 810 is directed to “Use of a composition for entrapping oil and/or fat and the composition itself”. The patent is concerned with an anti-obesity drug. There are no foreign Obesity is a disease of energy imbalance, diagnosed by using the Body Mass Index (BMI), which relates a patient’s height to weight (Kg/m2)., If such a ratio is over 30, then the patient is obese. Obesity is a chronic stigmatized disease, and the WHO has classified it recently as There are more than 300 million overweight people in the US, Japan, and the five largest European Pharma markets (UK, France, Germany, Italy & Spain). Over 20% of the adults in the US are obese; obesity among adults in the US has increased by nearly 50% between 1980 and 1994. 19% of the UK population is obese, of which 10% are 6 years old and 17% are 15 Obesity is a disease of multifaceted causes and thus the treatment of it is multifaceted, too. Management of overweight patients has been difficult. Lifestyle changes (Diet control and physical activity) in conjunction with drug therapy can be very beneficial. Based on the above, one can use the following mechanisms of action to classify drug treatment for obesity: 1- Drugs of Systemic action such as Amphetamine derivatives that reduce food intake. 2- Drugs of nutrient partitioning such as Orlistat (Xenical) that affects metabolic 3- Drugs that increase energy expenditure (legally not approved). The two leading prescription weight loss drugs are Reductil (Abbott) and Xenical (Roche). Citizens of the U.S.A. spend over 30 billion USD annually on various weight loss products. Xenical, launched in 1999, in 2001 had U.S. sales of 157 million USD. The obesity market, although one of the fastest growing markets in the developed world, has been found to be a far more difficult market to conquer than many companies anticipated, Taking into consideration the prevalence of obesity and the forecast of the market, it is worth to note that the obesity market in the U.S .generated 426 million USD in sales in the year 2000, but this figure is expected to increase to over 1.3 billion USD by 2010. Lifestyle changes and the approval of anti-obesity drugs for treatment of other indications such as Diabetes type 2 will continue to drive the market. The above mentioned weight control products can be categorized into 2 types, namely ethical (drugs) products, like xenical, and non ethical and OTC products, like a product known as The non ethical products are dominant in the market. From U.S.A. data one can deduct a 1:3 ratio market share of ethical : non ethical market size. The patent in question here is a product patent in which the principle of action depends on nutrient partitioning. Although the product Liponet is an OTC product, in the following, based on a conservative assumption, xenical is used as a comparison product, which is an ethical drug, but works by the same principle of nutrient partitioning as Liponet. Xenical sales in the EU having been similar to that of the U.S.A., i. e. about annual sales of 157 million in 2001, and taking into due consideration that the Patent (EP 1 226 810) only covers countries in Europe, it appears as justified to assume, on a very conservative basis, that Liponet, after market approval, will capture about 10% of Xenical’s sales value in EU, as achieved in the year 2001, i. e. annual sales of 15.7 US$ by Liponet will have to be taken into As further assumptions, it appears as justified that Liponet will be introduced into the market starting with year 4, the FDA procedures for such an OTC product being much easier than in It also appears as justified, because of the much lower cost of development still to be invested for the OTC product Liponet in question, particularly in view of the earlier marketability of the product, that a reasonable royalty rate of 10% should be applicable, being 50% of a typical Taking into due consideration the above mentioned NPV formula, with a constant annual royalty stream of 1.57 million USD, using the NPV formula for the years 4 to 13, also here applying the usual use period of pharmaceutical patents of at least 10 years after market approval, this leads to NPV = 1.072 + 0.975 + 0.886 + 0.806 + 0.732 + 0.666 + 0.605 + 0.550 As a conclusion, the NPV of Liponet is estimated to be 7.29 million USD.

Source: http://www.uil-sipo.si/fileadmin/upload_folder/Case_Studies_for_Valuation_of_Intellectual_Property_Rights1.pdf