University research and funding: bridging the 'expectation gap'

The most recent e-news bulletin of Technology Transfer Tactics reports that early-stage biotech investor Carl Weissman (President and CEO of Seattle-based venture firm Accelerator) has been criticising both venture capitalists and university tech transfer offices their complaints that there is a lack of access to early-stage funding. The funding gap, he says, is non-existent -- but what there really is is an "expectation gap". He points to the era of easy money in the late 1990s as fomenting unrealistic expectations as to what constitutes technology worthy of funding. He comments:

"Academic investigators need to face facts. If you have a great technology, with reasonable and lucid proof-of-concept, addressing a significant unmet need, and that can be protected as proprietary; and, if -- and this is the big IF -- you have reasonable expectations in terms of valuation and risk-sharing, then you will be able to attract venture funding. Plenty of it".

Weissberg points to his own experiences and track record in support of this and adds:

"If you are an academic and you cannot get someone to back your idea, do three things: take a hard look at your technology (or even ask someone else to do so); take a hard look at your expectations; and, take a hard look in the mirror. Honest assessment in these three efforts will tell you why...".

The 'expectation gap' is a useful concept. Although it has probably always existed, it is bound to be more fully appreciated, and properly dealt with, now that it has a catchy name.

IP Valuation - the basics!

Jason Lessard put together this article for the readers of his Uroip site. It is quite a useful summary of the basics of IP Valuation. Thanks Jason.

"The growing importance of Intellectual Property Rights (IPRs) in business has created a need for equating the cost of obtaining these rights with the value they add to the business. A decision to invest or not to invest in patent protection, or indeed any IP registration, should be subjected to similar criteria as tangible assets.

However, IPR valuation is complex and the results can be meaningless if the wrong methodology is used to carry out the analysis. For this reason, all too often the decision of whether or not to file a patent application is based on intuition and experience. This is clearly not an ideal approach to decision making.

As with the evaluation of any investment, estimating the projected value of the resulting asset and comparing this estimate to the projected costs of obtaining and/or maintaining it will allow you to make more educated investment decisions. A well thought out and consistent approach to valuation will give you both an indication of value and a means for comparing the relative value of your innovations to decide how your R&D budget should be allocated.

Two of the more popular methodologies are the market approach and the income approach, each of which comes with its advantages and disadvantages.

The market approach is based on IP transactions involving similar technologies which have taken place in similar markets. This valuation method usually reflects more accurately the actual amount that a third party would be willing to pay for the asset. However, it is generally difficult to obtain accurate information as the results of such transactions are rarely published.

The income approach is based on an estimation of future income attributable to the particular IP asset in question. The relief-from-royalty method is a subset of the income approach, wherein the value of the IP asset is calculated based on notional royalties that the company is relieved from paying as a result of owning the assets. The royalty rates can be estimated based on industry standard ranges in the relevant field of technology, but these should be adjusted using pre-defined criteria indicative of, for example, the strength and/or scope of the IPR in question. This will provide more accurate and consistent results.

While this approach is somewhat superficial, the value obtained by this methodology is reasonably accurate in most cases. More importantly, it is a consistent indicator which allows you to compare relative values for decision making purposes."

US internet radio royalties hit further obstacles

In a feature carried by Lexology ("Does the Copyright Royalty Board exist? Internet radio appeal proceeds and new issues arise"), David Oxenford (Davis Wright Tremaine LLP) reviews the current role of the US Copyright Royalty Board in the light of its position on the royalties paid for the use of sound recordings by internet radio stations. In an appeal against one of its decisions the Department of Justice (which represents the Board before the Court of Appeals) maintained that the submissions of the webcasters -- who naturally wish to minimise their exposure to copyright royalties -- had provided insufficient factual basis upon which to establish that the Board's decision was arbitrary, capricious or otherwise contrary to law.

The Board's constitutional status has however now been called into question by Royalty Logic (which seeks to establish itself as an alternative collection agency to SoundExchange). If the Court of Appeals decides to hear that issue and agrees that the Board was not properly appointed, we can expect re-appointments, fresh hearings and possibly even legislative intervention, all of which seriously delays the ability of rights holders to factor their royalty income into their business plans.

US patent licensors face $4 billion loss in Brazil

Bloomberg's Carlos Caminada reports on a situation that may be hugely adverse to the financial interests and cash-flow expectations of patent licensors and concerning which they may be quite powerless. In anticipation of the condemnation by the World Trade Organization of the subsidies paid to US cotton farmers, the Latin American cotton-growing giant proposes to retaliate by pursuing a $4 billion grab against US patents and business services. The piece reports that Brazilian officials from several ministries are already considering which patent payments to suspend and which services may face restrictions.

Viewed from Brazil's point of view, the patents are just "US patents". But each is an integral part of a business strategy that was conceived at the R&D stage in the distant past and from which the patent licensors expect a predictable royalty flow. Does any reader of this weblog know (i) what steps a licensor of technology into Brazil might take in order to minimise damage and (ii) whether patent licensors have resort to the law in the US in order to recoup any losses suffered?

Will risk aversion stymie R&D into new drug development?

Risk aversion from investors is posing a serious threat to drug development according to the Biotechnology Report 2008, brought out by giant UK-based patent and trade mark attorneys Marks & Clerk under the direction of Dr Gareth Williams. The research identifies unique challenges currently facing the biotech sector which adversely affect investment, stemming in particular from growing caution in the granting of marketing approval for new drugs by the US Food and Drug Administration (FDA). This caution places added pressure on the patent life. The report suggests that drug modification or late-stage development will become increasingly popular, at the expense of genuine innovation.

The international research is based on the views of 484 executives across the biotechnology and pharmaceutical sectors, principally in the US and UK markets as well as Europe and Asia. 83 per cent of respondents feel that the pressures currently facing biotech make it less attractive in the eyes of many investors. 90 per cent believe secondary and further funding will become increasingly difficult to secure as market conditions deteriorate, and that investors will focus on less risky, latter-stage drug development in a bid to limit their exposure to risk. Correspondingly, 83 per cent think that biotech companies will themselves focus increasingly on drug modifications as well as more mature drugs in the pipeline.

Where capital is available, the terms for funding may become simply uneconomic. 80 per cent of respondents believe key investors will either take a greater equity stake, or may seek to secure their capital against the drug-makers’ IP assets. This reflects a trend gathering momentum within the industry where investors focus increasingly on the strength of IP rights. Overall, 78 per cent agree that the climate for enabling biotechnology innovation has deteriorated within the past year, and 89 per cent believe some small and/or early stage companies will either fail or be bought out at unattractive levels.

The genesis of the funding issue is not solely attributable to current economic fragility. A much more cautious attitude from regulatory bodies (specifically the FDA), is making it considerably harder for biotechs to get the marketing approval they need for drug development. This, in turn, is affecting investor sentiment. 68 per cent of respondents believe that the drug approval process must become much less risk-averse if investment levels are to be maintained, with 72 per cent viewing this as essential to the delivery of future drug pipelines.

One of the most important consequences of sluggish drug approvals is its impact on the lifetime under which a new drug is protected by its patent. 91 per cent of respondents feel that the time it now takes for drugs to get through the system is eating into the time those drugs enjoy the rewards of patent protection. 78 per cent warn that there is a danger of biotech companies bringing more "me too" drugs to market, rather than investing in real innovation, if the threshold for approving new drugs is set too high.

The patent system emerges as a key tool in overcoming the barriers faced in the current crisis. 84 per cent believe that recognising secondary patents is an important means of encouraging and rewarding drug development. This “evergreening” process helps shore up new patent protection for later modifications to an existing drug, and may cover anything from dosage to form. Extensions to the existing patent term are also advocated by 73 per cent of respondents to promote more R&D investment, whilst 88 per cent would like to see patent approvals secured more quickly.

The research finds that perceived weakness in foreign intellectual property systems and the difficulties posed by competition, are adding to concern about profit margins. Whilst 72 per cent agree that investors and biotech companies see a lot of potential coming from new super-economies, 85 per cent believe weak IP protection in the world’s largest emerging markets (China and India) is a threat to future margins.

Price reduction on a global scale is viewed as a “serious threat” as a result of parallel trading – the importing of drugs at a cheaper price from a lower-cost area. 79 per cent view parallel trading as a “significant” or “very serious” threat to the industry, with 91 per cent believing this threat will only increase as global trade continues to grow. 73 per cent think it likely biotech companies will reduce the availability of drugs in some territories if parallel trading begins to threaten profits in key, high-margin markets.

The report also finds that biotech margins are facing certain pressure as generic competition emerges among the biotechnology sector. 76 per cent of respondents believe that the enforceability of patents against generic competitors is proving much harder than in the past, although 58 per cent feel confident about the validity of patents being upheld in the courtroom. 89 per cent feel that the promotion and approval of cheaper copies of biologics, or copycats, is likely to result in more “me too” drugs coming to market. Yet 74 per cent recognise that competition will have a positive impact on drug affordability.

Copies of the report may be obtained from Marks & Clerk (London office), via Joanna Colton, +44 (0) 207 420 0000.

Audio books: is there a brave new world after DRM?

Also in World Media Law Report is an analysis by Monica P McCabe and Krista Sirola (DLA Piper US LLP, New York) of the suitability of the digital rights management (DRM) model for audio books -- a genre of recorded work which consumers have so far been more reluctant to acquire via new digital technologies than sound recordings and films.

The authors note that several major US book publishers have announced that they plan to abandon DRM as their IP exploitation model in an effort to boost consumer interest and sales. Sales of audio books have continued to rise, with downloads accounting for 14% of audio book sales in 2006. However, piracy levels are substantially lower than for recorded music and movies.

Those who write the content of audio books have commented very little on the DRM issue, though they have much to gain or lose if the business model for the exploitation of that content goes wrong. In contrast with the music industry, where performers and composers may derive less income from royalties than from other revenue streams, authors’ income is typically closely tied to the number of books sold. To this end, Random House -- which is abandoning DRM for a DRM-free business model -- promises to continue offering DRM at the request of its authors. How this will work out in practice is however open to conjecture.

Levy, first-sale price or DRM? What the MBG wants

Writing in World Media Law Report this week Frank Jennings (DMH Stallard) discusses the call of the informal UK-based Music Business Group (MBG) for the government to couple format-shifting with a levy to compensate rights holders, following Denmark, France and Germany. This levy is available as an option under the EU Directive on Copyright and the Information Society, which empowers EU Member States to introduce a system that ensures fair compensation for rights holders.

Jennings reminds readers that the 2006 Gowers Review rejected the imposition of any levies for consumers on the assumption that rights holders can include in the sale price the economic cost of the right to copy. Conventional sales are however in sharp decline. UK retailer Woolworths has stopped selling CD singles altogether, pointing out that just 8 million CD singles were sold in the United Kingdom in 2007, compared with 55 million in 2000. Meanwhile in 2007 over 20 million MP3-capable portable devices were sold in the UK; additionally, over 90% of music on the average MP3 player has been copied.

Jennings predicts that a format-shifting exception is likely to be introduced in the UK in order to legitimize consumers’ existing activity, to which the music industry has already turned a blind eye (as Gowers observed). However, the proposal to introduce a levy on blank media has not found favour with the UK government. He suggests therefore that the solution lies in copy-protecting music, allowing rights holders to charge more accurately for the use of their music.