Best Practices and Trends in Royalty Monetization 1 Speakers John P. Gourary Partner Covington & Burling LLP Stephen D. Sencer Deputy General Counsel Emory

Best Practices and Trends in Royalty Monetization 1

Speakers

John P. GouraryPartnerCovington & Burling LLP

Stephen D. SencerDeputy General CounselEmory University

610437-2


About Covington Covington & Burling LLP is a preeminent law firm with 650 attorneys in six offices,

known for its industry practices, creativity and ability to address the most cutting-edge and sophisticated corporate, litigation and regulatory matters. Covington is consistently ranked among the top U.S. and international firms. Notable rankings include: American Lawyer - “The A-List” – a listing of twenty elite US law firms; Practical Law Company – “#1 Life Sciences Firm Worldwide”; and Corporate Board Member – “America’s Best Corporate Law Firms” – the top 20 firms identified

by corporate directors and general counsel. John P. Gourary, co-head of Finance at Covington, has worked extensively on

pharmaceutical royalty monetizations. John has advised universities, life sciences companies, groups of inventors and investment funds on pharmaceutical royalty monetization transactions with an aggregate value in excess of $2 billion. John advised:

– Northwestern University on the sale of a portion of its worldwide royalty interest in Lyrica for $700 million, the largest pharmaceutical royalty monetization ever;

– Emory University on its ground-breaking monetization of the royalty rights associated with Emtriva for $540 million, recognized by Investment Dealers’ Digest as the 2005 Healthcare Deal of the Year; and

– Zurich Financial Services Group on the first pharmaceutical royalty securitization, a $130 million senior/subordinated financing.


Discussion Topics

• When should monetization be considered/key factors to consider

• University decision-making process

• Key members of the transaction team

• Preparing for the transaction

• Process and indicative timing


Key Factors to Consider

• Nature of product– Medically necessary/sales potential

– Intellectual property and/or regulatory protection

• Late stage or approved product– FDA or EMEA approval/sales history

• Identity of licensee– Credit quality/reputation/marketing abilities

• Size/duration of royalty stream


Stakeholders

• Technology Transfer

• Finance/Investments

• General Counsel

• Trustees/President/Provost/Department Chairs

• Inventors


Pros & Cons of Monetization (Pros)

• Diversification

– Reduce exposure to specific product / field / industry

• Raise Funds Immediately

– Generate funds for important capital investments

• Important to Inventors

– Different time horizons / perspectives from University

• Potential Positive Publicity


Pros & Cons of Monetization (Cons)

• Potential discount over life of product

• Transaction costs

– Financial

– Opportunity (time and energy)

• Exchanging a potentially stable, long-term income stream for a one-time payment


Key Members of Transaction Team

• Internal

– Business (Tech Transfer)

– Financial (Finance/Investments)

– Legal (General Counsel)


Key Members of Transaction Team

• External

– Investment Banker (depending on deal size)

– Consultant (maybe)

– Outside Counsel


Threshold Considerations for Seller

• Sell all or a portion of the royalty?

• Are inventors/stakeholders participating?

• Informing Board of Trustees

• Reliance on outside advisors and outside counsel


Preparing for the Transaction

• Analyze License Agreement

• Decide what you are selling

• Seller’s due diligence

– Valuation

– IP and regulatory review

• Internal process and approvals

• Relationship with, and role of, Inventors


Analyze License Agreement

• Assignment restrictions• Confidentiality sections• Royalty payments/term/stacking provisions/deductions• Ambiguities • Required consents


Decide What You Are Selling• Straight Sale of Royalty Interest (or xx%)• Structured Sale

– xx% of royalty interest, but subject to a cap on annual or aggregate payments

– xx% of royalty interest, but only for some time period

– limit to royalties on sales of certain specified products

– limit to royalties on sales in certain countries/regions

• Structured sale can potentially address fundamental differences in perceived value

• Simplicity is a virtue


The Royalty Purchase Agreement

• Not an assignment of the License Agreement• Agreements between University and Purchaser

– University’s obligation to pay over royalties– How University will administer and enforce its

rights under the License Agreement• Limited representations and warranties by University• Purchaser assumes economic risks of royalty stream

and license agreement


Seller’s Due Diligence

• Valuation– Prospects for product and revenues– Markets, applications, and competition– Likely draw on assistance of financial advisor and

consultant, if applicable • IP and Regulatory Review

– Validity and term of licensed patents– Identify any regulatory risks– No surprises once process is launched


Internal Process and Approvals

• Identify Board and other required internal approvals– Consider what level of flexibility you will need

• Identify any required external approvals/consents– License Agreement– Credit Agreements/Indentures

• Identify designated contact for external communications– Need to speak with one voice

• Timing Issues


Process - Possible Approaches to Sale

• Sale to Royalty Payor

– Amendment to License Agreement

• Negotiate with a single bidder

• Limited auction process

– Approach a limited number of potential buyers

• “Classic” auction process

• Alternative structures (securitization or debt financing)


Indicative Timing• Preparation for Sale

– Engage Working Group Members • Counsel to Seller • Financial Advisor• Independent Consultant

– Intellectual Property due diligence issues– Independent Consultant’s Report– License Agreement analysis

• Required Amendments/Consents– Royalty Purchase Agreement– Disbursement Agreement (with Inventors)– Information Memorandum for Bidders– Confidentiality Agreements for Bidders– Process Letter outlining auction process

10-14 weeks(Maybe longer depending oncomplexity of transaction /need to obtain consents)


Indicative Timing

• First Round Bids

• Analysis of First RoundBids received

• Elimination of certain bidders

• Second Round Process Letter

• Second Round Bids

• Negotiate RPA with winning Bidder (sign and close)

• Total Time:

~4 weeks from launch

~1 week

~2 weeks from launch of Second Round

~2 weeks

20-24 weeks(Maybe longer depending ontime needed to prepare for sale)


Summary

• Assemble the right teams (inside and outside advisors) and establish methods of communication (inside and outside)

• Prepare for the transaction (internal due diligence)

• Structuring the transaction - sale to royalty payor, limited or “classic” auction, or securitization?

• Timing

Documents

Best Practices and Trends in Royalty Monetization 1 Speakers John P. Gourary Partner Covington & Burling LLP Stephen D. Sencer Deputy General Counsel Emory