By Peter A Ackerman and Russell L Parr
The life sciences industries provide some of the best examples of the risk/reward continuum inherent in the creation and commercialisation of ideas. The risks are considerable given the costs of complex research and development, regulatory requirement, and intellectual property owned by others that must be manoeuvred in order to ensure freedom to operate a business. The rewards are potentially meteoric and come in the form of substantial returns to investors and meaningful contributions to humankind. For all of these reasons an organisation must internally manage its intellectual assets effectively. Only if you know what you have are you in a position to calculate its value, align it with a strategic plan, track its evolution, and use and optimise its commercial possibilities. Internal IP asset management is all the more critical in the biotechnology and pharmaceutical sectors given their resurgent success due to greater emphasis on focused product development and licensing activities.
Significance of IP and intangibles
Corporations once dominated industries by acquiring and managing extensive holdings of natural resources and manufacturing facilities. Barriers to entry were high because enormous amounts of fixed asset investments were required to attempt to displace well-entrenched players.
Today, companies that once dominated industries find themselves battling for new sources of revenue and in many cases for their very survival. Up-start companies are creating new products and services based not on extensive resource holdings or cash hoards, but on intellectual and intangible asset resources. In the past we managed our cash, inventory and maintained our machinery. This is still important, but more important is the management of the intellectual property and intangible assets shown in Figure 1.
The necessity of strong internal IP asset management
The evolution of knowledge is particularly rapid in the biotechnology and pharmaceutical industries, with resultant increases in quantities of IP rights. Many of these ownership rights present barriers to innovators who need to use patented research tools, methods, compounds and biologic processes. Since rarely can any individual company go it alone anymore, cooperation with other IP rights holders is necessary in order to clear a path to profitability. Along with this comes increased exposure to regulatory compliance and litigation risks. These drivers are elaborated below.
Interdependence
The trend today in the life sciences is away from independence and towards a vital need for the talents of others. The captive internalisation of technology is rarely a viable model anymore. The past saw technology commercialised solely by its developer. Corporations conducted research and focused efforts on promising discoveries. Additional effort brought about innovative new products and the new products were brought to market by the originator. This has changed for all industries including biotechnology and pharmaceuticals. Small biotechnology research firms are very often the source of new innovations while large established drug houses are still the best means for managing clinical trials, gaining government approvals and implementing global distribution activities.
Technology management is thus beginning to centre on leveraging technology that is owned internally to gain access to technology and partners that are neededexternally. This is the very nature of a sector with upstream pioneer patents that might be so broad in scope or numbers as to cover any downstream innovation activity – activity that might require either covered research methods and tools, or substantive compounds and other bits and pieces of IP in order to be fully commercialised.
The challenges attendant to such patent thickets that new innovators must cut their way through is itself being addressed through various methods, including the creation of patent pools. These are the entity framework for agreements among patent holders to license their IP to one another or to aggregate and cross-license IP rights. (Such arrangements are not new, just their growth in quantity and complexity: The Wright Company and the Curtiss Company held key aircraft patents in 1917 that effectively blocked the building of new airplanes needed by the US during World War I. A committee formed by then-Secretary of the Navy Franklin D Roosevelt caused the creation of a private aircraft patent pool which became the Manufacturers Aircraft Association.)
Strategic alliances among competitors have also proved effective. Angiotech, Boston Scientific and Cook Inc entered into a worldwide co-exclusive licensing agreement for the development and commercialisation of a drug-eluting stent. The result was the fastest-selling medical device in history – US$1.9 billion in revenues in its first nine months on the market.
Collaborations have been successful but they introduce a challenge with regard to sharing of the economic benefits that are derived from the separate contributions. The drug industry is illustrative. In the past, a royalty on sales was all that was paid by a large pharmaceutical company to a biotechnology firm for a licence of the new invention. In the past, valuing the patented invention in the hands of the inventing biotechnology firm primarily focused on the present value of the future stream of royalty payments expected to be received from the major pharmaceutical company. Today, small biotechnology companies are requiring their large pharmaceutical company partners to allow for greater participation in the economic benefits of commercialising new inventions. Retained manufacturing and promotion rights have entered the deal picture. These rights represent added sources of future economic benefits beyond the traditional royalty income.
A comparison of the division of rights, then and now, is shown in Figures 2 and 3. Figure 2 lists the division of rights that have been traditional. The inventing biotechnology company patents an invention and then finds
a large drug company interested in pursuing refinement of the invention. If an efficacious product was ultimately developed, the biotechnology inventor would get royalties and the drug company would get an exclusive worldwide licence for commercialisation. Often the drug companies obtained complete commercial control of the invention and the inventor received royalties from the licensor. Figure 3 is an example of emerging new deal parameters.
In order for interdependent IP rights holders to succeed in coopetition, they must have a clear sense as to what they own individually. They must know:
• Who the idea generators are.
• What pre-existing baggage they brought with them (non-competes, NDAs, prior inventions and to whom they might have
been assigned, etc).
• What protective documents they signed once they entered the organisation
(assignment of IP rights, NDAs, noncompetes, non-solicitation agreements,
etc).
• What projects or portions of projects they touched.
• What patents, trade secrets and copyrights contain their ideas.
• What products and revenues map to their IP.
• What activities have occurred that implicate the IP (commercial negotiations, publications, speeches, collateral, etc).
They must also have a vigorous programme in place to ensure the integrity of confidential information, as depicted in Figure 4.
The due diligence leading up to licensing-in and licensing-out activities as well as the post-deal royalty and compliance tracking required are further reasons for tight internal asset management. With no system for tracking and monitoring royalty obligations, significant revenue leakage can result. It has been estimated that in 80% of royalty audits conducted, material revenue gaps are identified. Closer monitoring can significantly mitigate this problem.
The better one’s internal IP and contract management practices, the better situated one is to leverage those assets.
Regulatory compliance and best practices
The 25-year old US Bayh-Dole Act was a domestic initiative that granted ownership of inventions to publicly funded research institutions and contractors. The goal was to provide incentive to researchers to innovate while balancing other policy objectives. Other countries have implemented similar programmes (eg, Japan’s Special Measures for the Promotion of Industrial Revitalisation, and China’s Regulation on the Management of Intellectual Property Rights Generated by the State Science Research Project).
Along with a grant of public research funds there are of course a number of reporting and implementation requirements, such as appropriate employee agreements, invention disclosures, title elections, patent filings and invention utilisation. As articulated by the National Institutes of Health: “NIH cannot support the research unless it has assurance that its funds will be used in an appropriate manner, adequate documentation of transactions will be maintained, and assets will be safeguarded.” The NIH webbased iEdison database system is helpful, although grantee organisations must still roll up the necessary information internally in order to timely comply.
Sarbanes-Oxley (SOX), meanwhile, was good in spirit inasmuch as it was aimed at enhancing corporate governance and accountability practices and tightening auditing functions, though it has been referred to in practice as “the corporate equivalent of root canal”. Criticism has centred predominantly around Section 404’s control system requirements and the costs associated with compliance. Other countries have or are considering similar regulations.
Many companies have come to realise that there are long-term benefits to implementing systems and procedures to deal with such regulations. Document controls and processes can be optimised such that they serve not just SOX compliance purposes, but such other functions as:
• Due diligence for M&A, capitalisation, and stakeholder reporting events.
• Integration of financial and other internal control processes.
• Enhanced internal business intelligence and resultant competitive advantages.
• Reduced revenue leakage through greater scrutiny of contractual terms and conditions.
• Greater internal transparency and streamlined IT systems.
By viewing compliance requirements as an opportunity to adopt best information management practices, overall corporate value can be increased. Even non-public companies that are not covered by the regulations would be positioning themselves for better liquidity value through mergers, acquisitions or IPOs with such healthy root systems in place.
Litigation
Biotechnology and pharmaceutical innovation impact so many people in such important ways that profitability and policy issues drive them to more litigation risk. A few recent examples:
• In July 2005 the Brazilian government negotiated with Abbott Laboratories Inc a substantial price reduction for the lucrative AIDS drug Kaletra under the threat of a compulsory licence (under certain conditions, governments can issue a licence for companies to use a patented process or make a patentedproduct without the patent owner’s consent). Despite this, Abbott has been sued in Brazil by a group of organisations with the apparent approval of the Finance Minster in an effort to break its patent there so that generic replacements can be implemented.
• Lilly ICOS has requested a reexamination of Pfizer’s Viagra patent following the US Patent and Trademark Office’s own order of re-examination (this is the process in which the USPTO reexamines the validity of a patent in the face of substantial new questions of patentability). This came about after Pfizer sued Lilly for offering the competing Cialis for sale in the US. The USPTO, as of this writing, has rejected one of Pfizer’s key patent claims. This is but one of many backfired infringement allegations and re-examination requests that are occurring with greater frequency.
• Medtronic Sofamor Danek sued Dr Gary K Michelson, a prolific inventor who holds more than 200 US and 450 foreign patents and applications covering inventions related to spinal fusion, surgical implants and surgical techniques, for breach of contract and other claims. Dr Michelson countersued for patent infringement and other claims. He prevailed in October 2004 with a judgment in the amount of US$110 million in compensatory damages plus a 10% royalty on Medtronic’s gross revenues of the implants, instruments and methods covered by the patented systems, plus punitive damages totalling US$400 million; a total award of US$570 million. Dr Michelson (and his licensing company, Karlin Technology) spent US$62 million in legal fees. In April 2005, the parties settled all disputes and litigation between them for US$1.35 billion, the largest medical device settlement in history.
• The US Hatch-Waxman Act (Drug Price Competition and Patent Term Restoration Act of 1984) is a regulatory framework that attempts to balance incentives for continued innovation by research-based pharmaceutical companies and opportunities for market entry by generic drug manufacturers. It provides a more efficient approval route for generic products than for initial innovator drugs (Abbreviated New Drug Application ANDA), and it allows development of generics while the branded product is still protected by patents. Under the Act, one of the most profitable ways in which a generic drug manufacturer can enter the market is the Paragraph IV Certification, a scenario in which patent protection has not expired but the generic drug maker claims either that the patent is invalid or that its product does not infringe the patent. If the patent owner does not timely sue for infringement, the generic applicant gets a period of market exclusivity that locks everyone else out. Invariably, however, such an application draws litigation. It has yet to be seen how this might work in the area of biogenerics, which are not covered under Hatch-Waxman. The stakes are certainly high. Barr Laboratories successfully challenged Eli Lilly’s patents covering Prozac after filing a Paragraph IV Certification. Barr launched a generic version in 2001 taking advantage of its Hatch-Waxman six-month market exclusivity. During this time, sales of Barr’s generic were over US$300 million and its stock price nearly tripled.
The stakes are also high in light of the increasing sophistication and wealth of those who apply for broad patents or purchase IP rights with the sole intention of deriving royalties for their use. Some are referred to as trolls (pay the toll to cross the bridge) who use litigation as a vehicle for obtaining the licences. Often the first shot across the bow is a requested paid-up licence that is a few clicks less than the cost of litigation (average patent litigation expense is US$2 million, according to the IP Law Bulletin). If rejected, the economics change significantly and future royalties become the issue.
It is thus becoming widely recognised that the best defence is a good offence. In order to offset the costs associated with the threat of litigation and resultant damages, companies are discovering ways in which to create additional and alternative revenue streams by reaching out to other industries and developing robust licensing programmes. One good example is the crossover use of electricalimpedance tomography, which is used by the oil and gas industry to map mineral deposits and probe oil wells, and by the medical field to image the heart and lungs.
Implementation using technology
Just as computer science has been combined with biomolecular research to speed up the identification of DNA sequences, so too should technology be used to speed up the strategic management of a company. Keeping track of and valuing IP is difficult, time-consuming and expensive because it requires the collection, integration and analysis of so much data. It is almost impossible to do well manually or with systems that were not thoughtfully designed for the task. Information is spread across multiple departments within an organisation, often in dispersed geographies, and is frequently managed using file folders, banker boxes, separate spreadsheets and internally cobbled database applications.
Optimally, internal research is easily, instantly and securely accessible by collaborators and business-level decision makers. There should be real-time visibility of the manner in which IP is being used and protected. There should transparency of who is connected to the IP, how it is linked to particular products and competitive opportunities, and the contracts and commitments that generate funding and revenue. In this way an organisation can course-correct and allocate resources more efficiently and earlier in a decision cycle, while also minimising risk. Strategy can be managed at the speed of business. And key information can be cost-efficiently rolled up at the click of a mouse for due diligence and compliance purposes.
Summary
Intellectual and intangible assets are the most valuable portion of the asset base of most companies today, particularly those in the life sciences industries. Due to increased IP interdependence, regulatory and generally optimal information management requirements, and litigation threats, companies must internally control their IP assets. This is best achieved through sound strategy adoption enabled by technologies that help to cost-efficiently identify, protect, value and leverage these assets.
[This article originally appeared in IAM Magazine.]
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