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

Best Practices and Trends in Royalty Monetization 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.

Best Practices and Trends in Royalty Monetization 3 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

Best Practices and Trends in Royalty Monetization 4 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

Best Practices and Trends in Royalty Monetization 5 Stakeholders Technology Transfer Finance/Investments General Counsel Trustees/President/Provost/Department Chairs Inventors

Best Practices and Trends in Royalty Monetization 6 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

Best Practices and Trends in Royalty Monetization 7 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

Best Practices and Trends in Royalty Monetization 8 Key Members of Transaction Team Internal –Business (Tech Transfer) –Financial (Finance/Investments) –Legal (General Counsel)

Best Practices and Trends in Royalty Monetization 9 Key Members of Transaction Team External –Investment Banker (depending on deal size) –Consultant (maybe) –Outside Counsel

Best Practices and Trends in Royalty Monetization 10 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

Best Practices and Trends in Royalty Monetization 11 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

Best Practices and Trends in Royalty Monetization 12 Analyze License Agreement Assignment restrictions Confidentiality sections Royalty payments/term/stacking provisions/deductions Ambiguities Required consents

Best Practices and Trends in Royalty Monetization 13 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

Best Practices and Trends in Royalty Monetization 14 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

Best Practices and Trends in Royalty Monetization 15 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

Best Practices and Trends in Royalty Monetization 16 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

Best Practices and Trends in Royalty Monetization 17 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)

Best Practices and Trends in Royalty Monetization 18 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 weeks (Maybe longer depending on complexity of transaction / need to obtain consents)

Best Practices and Trends in Royalty Monetization 19 Indicative Timing First Round Bids Analysis of First Round Bids 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 weeks (Maybe longer depending on time needed to prepare for sale)

Best Practices and Trends in Royalty Monetization 20 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