Presentation given April 27, 2010 at the Chicago Bar Association

1. IP Exploitation Strategies and Best Practices for the Current Economy
Chicago Bar Association – Intellectual Property Law Committee
April 27, 2010
Rick Nathan, ASA, CFA
The Sorbi Group, LLC

2. Case Study
 Closely held company holding patents and technology related to a
unique lipid complex, which enables fat and pharmaceutical therapies,
for example, to be absorbed directly into the body from the intestines
and into the lymphatic system, and enables enhanced absorption
through the skin or into skin cells, and by inhalation of various
formulations
 Consider multiple investment strategies including vertical integration,
sale of assets (patents and technology), licensing certain rights, or other
 Provide guidance on a suitable value proposition
April 27, 2010 © 2010, The Sorbi Group, LLC 2

3. What are the Questions?
Within the context of today’s economic hardship:
 How to better align IP management with associated business lines?
 How to establish a successful and clarified licensing campaign?
 What other exploitation structures should be pursued?
 How will a changing political/regulatory framework affect my strategies?
 What valuation techniques should be relied upon and how?
April 27, 2010 © 2010, The Sorbi Group, LLC 3

4. Critical Differences Today
 The notion of price versus value
 The notion of risk versus uncertainty
 The notion of measurement versus communication
 How should valuation techniques be relied upon
April 27, 2010 © 2010, The Sorbi Group, LLC 4

5. The notion of price versus value
 Price reflects what is paid. Value reflects what is received, and reflects
intrinsic economic worth
 Price reflects a market exchange process - Value reflects utility
 When you make the assumption that price and value are equivalent,
then any focus on cutting costs to reduce prices often results in similar
reductions in the very level of service or product the end-user requires
 The “value” of IP needs to reflect its value-in-use, not its value-in-
exchange
 Today’s economy obscures value even more due to greater asymmetric
information
April 27, 2010 © 2010, The Sorbi Group, LLC 5

6. A Rubric for Value-In-Use
Intellectual
Property
Does the
IP meet a Is the IP Are Is there Is there
market YES YES YES YES YES
adequately complement adequate demonstrated
need in protected? assets return for leadership?
line with
available in the risk?
firm
house?
strategy?
NO NO NO NO
Can the IP Can Can
be complement market
adequately YES assets be YES leadership YES
protected? obtained? be
secured?
NO NO NO NO
Store or Dispose License to Outside Parties Joint Venture Vertical Integration
Value chain decoupling
6
April 27, 2010 © 2010, The Sorbi Group, LLC

7. The notion of risk vs. uncertainty
 Differentiating risk from uncertainty is critical for companies to more
clearly communicate their value proposition
 Risk represents the chance of loss, is determinate, and thus presents
foreseeable consequences - mathematical probabilities can be applied
 Uncertainty results when randomness cannot be expressed in terms of
probabilities
 Today’s uncertainties reflect political/regulatory, economic, and
financial unknowns
 Bottom line Risk can be monetized, uncertainty cannot. The
commingling of risk and uncertainty widens the “price-value spread.”
April 27, 2010 © 2010, The Sorbi Group, LLC 7

8. A Rubric for Risk “Decisioning”
Market Scenario Analysis Market Risk Analysis
Vertical Integration
 Business Unit A Target Applications
Field of Use 1 Market Timing
Business Unit A
Complementary Licensing Vertical Integration
Strategic Partner A Stage-Gate Alignment
Viability
Vertical Integration Target Applications
Business Unit B Market Timing
Field of Use 2 Vertical Integration Strategic Partner B Partner Contributions
Business Unit C Licensing Economics
IP Rights IP Risk Analysis
Nature of IP Claims (e.g., COM)
Qualitative Scoring
Complementary Licensing Stage-Gate Alignment
 Strategic Partner B Viability
Field of Use 3
Field of Use 3 Speculative
Speculative
Field of Use 4
Field of Use 4 Speculative
Speculative
April 27, 2010 © 2010, The Sorbi Group, LLC 8

9. Case Study – Biolipid Market Scenarios
Vertical Integration
 Avanti Polar Lipids, Inc.
Medical Nutrition Stand-Alone Mfg. and Distrbn.
License to Pharma
 Axcan (Scandishake), Ross (Abbott), Bristol Myers, etc.
Nutrition Products Organization
License to Pharma Janssen (J&J), Sirion Thereapeutics (Sytera), Pfizer, etc.
Active Compound Developer/Manufacturer
Drug Delivery License to Drug Delivery
 Eurand, N.V., Biovail Corporation, etc.
IP Rights Delivery and/or Formulation Platform Provider
License to Contract Mfg. Avanti Polar Lipids, Inc., Ben Venue Laboratories, (Boehringer Ingelhe
 Outsourcing
Dermatology
Speculative
(Sports) Nutrition
Speculative
April 27, 2010 © 2010, The Sorbi Group, LLC 9

10. Case Study – Biolipid Risk Characteristics
Vertical Integration CF Viability Strongest (Taste Improved But Not Optimal)
 HIV, Cancer, etc. Malnutrition ≠ Compromised ability to break down fat
Medical Nutrition Unknown Pathophysiology Between Conditions
Need Clinical
Investigation License to Pharma
"NIH Syndrome"
License to Pharma
"NIH Syndrome"
Active Ingredient Savings < IND Cost
Drug Delivery License to Drug Delivery
 Portfolio Expansion
IP Rights Hydrophilic Benefit
8 yr. RUL U.S. COM Claims Rate of Diffusion Benefit
Method Work-Arounds Highly Litigious IP
License to Contract Mfg.
 Differentiator
Dermatology
Speculative Same Mechanism as Drug Delivery
Highly Litigious IP
(Sports) Nutrition
Speculative Bioavailability Issues (Bulk)
Not Tested On Healthy
Underweight Product ≠ Overweight Nutrition Solution
April 27, 2010 © 2010, The Sorbi Group, LLC 10

11. How to decrease uncertainty
 Combining uncertainties through large-scale organization
 Increasing control of the situation
 Slowing the march of progress
 Increasing knowledge, that is, by highlighting what comprises value,
without blurring risk and uncertainty through a measurement problem
April 27, 2010 © 2010, The Sorbi Group, LLC 11

12. The notion of measurement vs. communication
 Traditional valuation is focused on a model or construct for
measurement (the “how”), as opposed to a conception on definition
(the “what”)
 Traditional valuation is holistic and as such results in a “price”
 Traditional valuation hinders communication, that is, the parts of any
whole cannot exist and cannot be understood except in their relation to
the whole;
 Traditional valuation is “model risk agnostic”
April 27, 2010 © 2010, The Sorbi Group, LLC 12

13. Case Study: Ability to Quantify – Model Risk
Weighted Average
29% 7% 29% 37%
Priority
18% 22% Weighted Confidence Map
40%
6 5 4 3 2 1
Strength of Analysis Medical Nutrition - CF
Revenue Projections
Assessment of Risk
Analytically Derived
Existing Revenue Projections
Empirical Royalty
Existing Revenue
Public Domain
Rate Analysis
Existing DCF
Royalty Rate
W
Projections
Projections
Analysis
e
Medical Nutrition - Other
i
g Analytically Derived Royalty
h Rate Analysis Empirical Royalty Rate 30%
t Analysis
○ ○ ○ ○ ○ ○
Confidence
5 Sports Nutrition
0.0 0%
○ ○ ◔ ○ ○ ○
P W A
r 4 Dermatology & Cosmetic e v
0.0 i 0% Existing DCF Projections
◑ ◑ ◑ ○ ○ ○
i e
o 3 Drug Delivery g r 20%
0.5 r 17% h a
◑ ○ ◑ ◑ ◔ ○
i Assessment of Risk
2 Medical Nutrition - Other t g
t Drug Delivery
0.5 33% e e
◑ ○ ◑ ● ◑ ◕
y d
1 Medical Nutrition - CF
1.0 38%
●
10%
Very good confidence 1
Public Domain Revenue
◕
Projections
Good confidence 3/4
Some confidence 1/2 ◑ Sports Nutrition Dermatology & Cosmetic 0%
◔
6 5 4 3 2 1 0
Not much confidence 1/4
Strength of Valuation Analysis Strength of Application Analysis Priority
No confidence 0 ○
Strength of Application Analysis Strength of Valuation Analysis
Medical Nutrition - CF 38% Existing Revenue Projections 37%
Medical Nutrition - Other 33% Empirical Royalty Rate Analysis 29%
Drug Delivery 17% Analytically Derived Royalty Rate Analysis 29%
Dermatology and Cosmetic 0% Existing DCF Projections 22%
Sports Nutrition 0% Assessment of Risk 18%
Public Domain Revenue Projections 7%
April 27, 2010 © 2010, The Sorbi Group, LLC 13

14. Case Study Actions
 Vertical integration/JV model of Cystic Fibrosis – Medical Nutrition Use
 Licensing model of CF – Medical Nutrition
 Licensing model of CF, HIV, Cancer, Eating Disorders, Underweight
Elderly, and Organ Transplant – Medical Nutrition
 Licensing model of Drug Delivery
April 27, 2010 © 2010, The Sorbi Group, LLC 14

15. Case Study – Quantifying Risk
Characteristics Low High Start-Up 1st Stage Expand IPO
Unproven technology, new market 50% 70% x x x
New product, new technology, new market 35% 45% x x
New product, not well understood, existing market 30% 40% x
New product, well understood, existing market 25% 35% x x
New features, well understood, existing market 20% 30% x
Required Rate of Return
50.0% 45.0% 40.0% 35.0% 30.0% 25.0% 20.0%
CF Nutrition- Models 2,3
Other Med Nutrition
Drug Delivery
CF Nutrition- Model 1
April 27, 2010 © 2010, The Sorbi Group, LLC 15

16. Case Study Recommendations
 Promising efficacy studies related to Cystic Fibrosis malnutrition,
coupled with personal investor preferences, suggest narrowcast
approach
 Additional market segment value (Other Medical Nutrition, Sports
Nutrition, Cosmetics, and Drug Delivery) is compromised by necessary
investment and time to establish commercial viability and adoption
 JV with contract manufacturer for CF malnutrition, based on total
vertical integration value ranging between $10MM and $20MM, with a
20% chance that value is less than $14MM, or greater than $18MM
April 27, 2010 © 2010, The Sorbi Group, LLC 16

17. Implications for Licensing Today
 In-licensing should be focused on value, out-licensing should be focused on
price  does this seem counter-intuitive?
 Licensee is purchasing a covenant-not-to-sue. However, the licensee is a
price-taker in that she will be willing to pay up to the maximum value
provided by the freedom to operate
 Licensor is potentially trading reasonable royalty against lost profits, and
therefore will seek to extract maximum consideration
 Licensees need to focus marginally more on the notions of risk,
measurement, and valuation
 Licensors need to focus marginally more on the notions of uncertainty,
communication, and exchange
April 27, 2010 © 2010, The Sorbi Group, LLC 17

18. Unique Considerations for Brands
 Marks, et al are subject to less of a dichotomy between monopoly rights
and enablement, when compared with patents vs. know how
 Marks impose more operating risk (short half-lives without continuing
investment)
 Mark equity is a function of underlying complement assets, that is,
complement assets both catalyze and benefit from increasing market
power
 As a result, Marks inure more readily to goodwill and need to be treated
more like franchise assets
April 27, 2010 © 2010, The Sorbi Group, LLC 18

19. Thank You
The Sorbi Group, LLC
3061 Doriann Drive
Northbrook, IL 60062
www.thesorbigroup.com
Rick S. Nathan, ASA, CFA
Managing Director
847-562-4002 (voice)
847-521-4939 (fax)
rnathan@thesorbigroup.com
April 27, 2010 © 2010, The Sorbi Group, LLC 19