Transfer and Valuation of Biomedical Intellectual Property

• Author: Cristina Thalhammer-Reyero
• Pages: 603-641

603

Chapter 22

Transfer and Valuation of Biomedical

Intellectual Property

cristina thalhammer-reyero*

A. INTRODUCTION

The subject of technology and intellect ual property (IP) valuation has been

covered in many books and art icles. Be cause t he process of valuing ver y

early-stage technologies is more an art than a science, the objective here

is not to enter into the mathematical or f‌inancial det ails, and only brief

exposures of the most used methods will be presented. Instead, a mosaic

of information, sources, and act ual cases will be provided to il lustrate the

application of valuation of biomedical technology and IP, all in the context

of the interplay between government, academia, and commerce that must

take place to bring products to the market.

Although technologies and IP are frequently developed for internal use,

an organization very frequently does not have the resources or desire to

exploit t heir full commercial value, and there are many ways of technol-

ogy transfer by which additional value and applications can be ext racted.

Each form of transfer provides different types of value to the receiving or-

ganization, from obtaining enabling materials or technologies, to obtaining

legal rights to avoid litigation and penalties for infr ingement, or to get the

right to e xclude others. Each form of t ransfer also carries different obliga-

tions and is associated with different royalty components, and the valuation

* The author wishes to t hank Steven M. Ferguson, M.B. A., Uri Reichman, Ph.D., M.B. A., and

Mark Rohrbaugh, Ph.D., J.D., of the O ff‌ice of Technology Transfer, U.S. National Inst itutes

of Health, for their rev iew and suggestions for this c hapter.

604 cristina thalhammer-re yero

methods for each of them have to ta ke the corresponding bundle of rights

into consideration.

Corporations need to perform valuation of technology and IP in a variety

of contexts, encompassing purposes suc h as for licensing, mergers and ac-

quisitions, loan collateral, investment, tax ation, or reporting. T he objective

for public and non-prof‌it entities, such as government agencies or academic

institutions, is the transfer of technology or IP for commercial exploitation,

and licensing is often the only alternative available. In t he last case, the li-

censed technologies are mainly in an embryonic stage and need substantial

further investment before they can be commercialized.

The biomedical technologies that are the focus of this c hapter support

an important sec tor of the economy and provide fertile g rounds for tech-

nology transfer, l icensing, and other commercial activities. In 2004, the

United States spent on health care US$6,280 per person, or US$1.9 trillion,

which is a 16 percent share of GDP in 2004.1 The f‌igure is projected to reach

18.7 percent by 2014, which is about US$3.6 trillion in 2014. Spending on

prescription drugs is expected to account for 15.5 percent of total health

expenditures by 2013, up from 10.5 percent in 2002.2 In 2003, spending on

prescription drugs in the United States was US$190 billion, while spending

on biomedical research was US$95 billion.3 The latter represents about 5.6

percent of all health related ex penditures in the United States, with 57 per-

cent of the total provided by private industry and 28 percent by the National

Institutes of Health (NIH), an agency of the U.S. Department of Health and

Human Services (HHS).4

NIH is the primary source of biomedical research funding in the United

States and conducts internal research in addition to funding other institu-

tions within the United States and also abroad. NIH and academic scientists

conduct basic research on the biology of diseases and identify compounds,

methods, and chemica l reactions and pat hways that may be of value in

treating diseases. While these scientists may a lso conduct pre-c linical and

clinical test ing of dru gs (Phase I and Phase II trials) under investigational

1 Gross Domest ic Product (GDP) is the total value of f‌i nal goods and services produ ced

within a count ry’s borders in a year.

2 Centers for Medicare & Medica id Services (CMS), “Brief Summa ries of Medicare & Med-Centers for Medicare & Med icaid Services (CMS), “Brief Summ aries of Medicare & Med-

icaid” (1 November 2005), online: w ww.cms.hhs.gov/MedicarePro gramRatesStats/down-

loads/MedicareMedica idSummaries2005.pd f.

3 Hamilton Mose s III et al., “Financial Anatomy of Biomed ical Research” (2005) 294:11 Jour-

nal of the Amer ican Medical Associat ion 1333.

4 HHS has research laboratories at NIH and ot her agencies, including t he Food and Drug

Administr ation (FDA) and Centers for Disease Control and Pre vention (CDC), whose pri-

mary mission is to acqu ire new knowledge through t he conduct and support of biomedical

research to improve the publ ic health.

Transfer and Valuatio n of Biomedical Intelle ctual Proper ty 605

new drug (IND) applications, they do not have manufact uring, processing,

or packing facilities, and therefore they cannot sponsor a new drug applica-

tion (NDA) process through the U.S. Food and Drug Administration (FDA)

or its equiva lents in other countries. As a result, most of their biomedical

inventions are early-stage, and not f‌inal product, and industry is needed to

conduct more ex tensive clinica l trials (Phase III trials), manufact ure, and

market the drugs. T herefore, the technology needs to be transferred under

a licence, whereby the early technology developer and the licensee divide the

future economic benef‌it according to their contr ibutions, as def‌ined by the

terms of the licence agreement. The licensee typically pays for the obtained

rights in the form of milestone payments and royalties, which are usually

important components of a licence.

The NIH Off‌ice of Technology Transfer (OTT) and the correspond-

ing off‌ices at other U.S. research organizations were created in response

to a series of legislative acts related to technology transfer passed by the

U.S. Congress from 1980 through 2000, and broadly referred to as t he

Bayh-Dole legislation.5 This legislation allowed institutions to take title to

inventions and IP developed w ith U.S. federal fu nds, such as grants and

contracts, in exchange for an obligation by those institutions to seek and

protect the commercialization of t hose technologies by the private sec tor.

Furthermore, t he U.S. federal laboratories, including those of HHS, were

given a statutory mandate to ensure that new technologies developed in

these laboratories are transferred to the private sec tor and commercialized

in an expeditious and eff‌icient manner. Interestingly, although this legisla-

tion was passed initially to address the increasing loss of competitiveness

5 In 1980, the U.S. Con gress passed two landma rk pieces of legislation: the Ste venson-Wydler

Technology Inn ovation Act of 1980 (P ub. L. No. 96-480, 94 Stat 2311, wit h subsequent

amendments, 15 U.S.C. § 3701, inc luding the Federal Technol ogy Transfer Act), under whic h

inventions owned by t he government remain under the ma nagement and control of the

agencies that produce t hem, and providing for the dis tribution of royalties to include t he

inventors with the rem ainder retained by the age ncy; and the Bayh-Dol e Act (Pub. L. No.

96-517, § 6(a), 94 Stat. 3019, wit h subsequent amendments, 35 U.S.C. § 200 –212), which

gives small busi nesses, universities, and other non -prof‌it organizations the rig ht to retain

title to and prof‌it from t he inventions arising from the ir federally funded researc h, under a

research and development cont ract or grant, provided they ad here to certain requirement s.

The intent was to promote economic d evelopment, enhancing U.S. compe titiveness, and

benef‌iting t he public by encouraging the comme rcialization of technologie s developed with

federal fundi ng. The Act also contains s everal provisions to protect the p ublic’s interest in

commercializi ng federally funded invent ions, such as a requirement that a contr actor or

grantee that ret ains title to a federally f unded invention f‌ile for patent protect ion whenever

possible (except for research to ols, see online: http://ott.od.nih.gov/polic y/rt_guide_f‌i nal.

html) and makes ef forts to commercialize it. In re turn, the government ret ains the right to

use the IP for government pu rposes without payin g royalties.