Hans H. Feindt, Ph.D. Chief, Monitoring & Enforcement Branch Office of Technology Transfer

1. License Monitoring / Auditingby NIH Hans H. Feindt, Ph.D. Chief, Monitoring & Enforcement Branch Office of Technology Transfer National Institutes of Health U.S. Department of Health & Human Services FLC MAR – 9/20/2006 301-435-5467 feindth@mail.nih.gov

2. NIH Office of Technology Transfer OTT’s mission is to evaluate, protect, monitor, and manage discoveries, inventions, and other intellectual property originating in the FDA and the intramural research programs of the NIH’s 27 institutes and centers. http://ott.od.nih.gov

3. FY2005 Statistics for OTT • New invention disclosures received 388 • New U.S. patent applications filed 186 • New U.S. patents issued 66 • License agreements executed 313 • No. of active licenses ~1300 • No of licenses paying royalties 841 • Total royalties collected $98.2 MM

4. Types of NIH Licenses / Agreements • Exclusive / Co-exclusive Patent Commercial • Non-exclusive Patent Commercial / Internal Use • Biological Materials – Commercial / Internal Use • Software – Commercial / Internal Use • Commercial Evaluation • Inter-Institutional Agreements • Memoranda of Understanding (MOUs)

5. NIH OTT - Organizational Chart Office of the Director, OTT Division of Technology Development & Transfer Division of Administrative Management Division of Policy Cancer Branch Infectious Disease Branch General Medicine Branch Monitoring & Enforcement Branch (MEB) Technology Transfer Service Center

6. What is Monitoring? • Reviewing license obligations for compliance • Collecting overdue royalty payments • Performing royalty audits • Reviewing progress reports • Addressing other royalty issues • Identifying and settling patent infringements • Settling license disputes

7. Why Monitor ? • Assure licensee is complying with license terms • Determine what licensee is doing with the technology • Assure all technology users are licensed • Determine if any royalties are overdue & collect them • Determine if royalties have been properly paid • Assure all licensees are treated fairly • Assure inventors are treated fairly

8. NIH Licensee Obligations • Royalty payments • License execution fees • Minimum annual royalties • Milestone payments • Earned royalties • Sublicense considerations • Patent costs • Reporting obligations • Commercial development progress reports • Milestone achievement notification • Sales & earned royalty reports • Sublicensing notification & request for approval • License assignment notifications & request for consent • Notification of license termination • Return or destruction of licensed materials

9. License Compliance Review • Are royalty payments up to date and accurate? • Are sales & earned royalty reports correct? • Are progress reports up to date? • Have performance benchmarks been met? • What is licensee doing with the technology? • Have new patents issued or existing patents expired? • Has the license expired? • Have any sublicenses been granted?

10. Examples of Non-compliance • Failure to pay royalties owed by due date • Failure to submit obligatory reports by due date • Underreporting sales of licensed products • Errors in calculation of earned royalties due • Failure to report Benchmarks/Milestones achieved • Failure to achieve Benchmarks/Milestones on time • Failure to submit sublicense agreements for review • Failure to seek consent for license assignment

11. Other Reasons for Non-compliance • Incorrect or outdated licensee contact information • Failure to notify NIH of changes (name / address) • Turnover of company personnel / inadequate staffing • Merger / acquisition / license assignment • Financial difficulties • Technical problems stalling development • Misunderstanding or disagreement about license terms

12. Options for Achieving Compliance • Inform / educate licensee of their obligation(s) • Set deadlines for receipt of royalties / reports owed • Negotiate amendment to restore license to compliance • Threaten or impose “additional royalties” • Suspend other licensing until owed royalties are paid • Threaten with debt collection, credit bureau reporting, • & excluded parties listing • 90-day notice of license termination

13. Tools/Resources Used in Monitoring • TechTracS Database • Communication with licensee (phone / e-mail / letter) • Progress and sales reports submitted by licensees • Press releases, information on company websites, • SEC filings, etc. • Information provided by licensees or inventors • Legal advice from NIH Office of General Counsel • U.S. Attorney’s Office located near licensee

14. TechTracS Database - Overview • Relational Database • Modular design – integrated system • Customized tables for data entry & data view • Data entered in one table may be used in others • Customized business rules for handling data • & generating new data points (e.g. follow-up dates) • Variety of search, selection, relate, find by, and • query features • Custom and pre-formatted reports may be • generated • Electronic documents may be attached to records Address Book Tech Transfer Action/Work Order Patent License Application Royalty Admin Monitoring Infringement Prosecution Admin CRADA Marketing

15. TechTracS Database – Overview Monitoring Royalties License Applications Technologies Invoice Contact Applicant Info. Benchmark Terms Financial Terms License Terms Sales Reports Sales Reports Actions Progress Reports Distributions Distributions Royalty Income License Recap Royalty Income Royalties Log Monitoring Log Lic. Application Log Related Lic. Appl. Technologies Financial Terms Sublicenses

16. Performing Royalty Audits • Desk audit or audit by outside firm? • Identifying licenses for audit by outside firm • - Annual earned royalties > $100,000 • - History of late or variable payments • - Sales reported differ from that reported by others • Royalty Audits must include: • - Gross sales by product number • - Testing of gross sales by invoice comparison • - List & review entire licensed product line • - List & review of all countries where product is sold • - Review of adjustments made to obtain net sales

17. Royalty Audit Findings • Licensee errors (deliberate or inadvertent?) • - Some forms of product assumed to be exempt • - Sales in some countries assumed to be exempt • - Certain types of sales assumed to be exempt • - Claims in pending patents assumed not to apply • - Royalties paid on wholesale not retail price • - Royalties paid on transfer or imaginary prices • - Additional payments for product not included • - Improper deductions taken from gross sales • - Product specifications not understood

18. Royalty Audit Costs • Average audit by outside firm costs about $25,000 • Cost Factors • - Complexity of license agreement • - Distribution/promotion agreement complexity • - Multiple sublicensees selling licensed product • - Location of accounting records • - Cooperation of licensee’s accounting staff

19. Collecting Overdue Royalties • Find responsible person at licensee • Establish reason(s) for non-payment • Settle any problems/disputes holding up payment • Use an effective collection letter • Follow-up frequently until payment is sent • Verify receipt of payment by bank

20. Identifying Potential Infringements • Complaints from licensees • Inventor complaints • Routine web searches • Biotech / pharma press releases • Review of FDA information

21. Settling Patent Infringements • Investigate and establish that product infringes • Get the infringer’s attention and offer to license • Forgive interest/penalties for prompt settlement • Remind them of potential for shareholder lawsuits • Notify distributors/customers of infringement liability • Initiate infringement suit

22. Settling License Disputes • Investigate licensee’s complaint in detail • Separate contract law from patent law issues • Offer a compromise solution if dispute is valid • Seek outside opinion if dispute persists • Offer a solution consistent with outside opinion • Discuss offer in person, if necessary • Amend license to correct the problem; collect royalties • Or - terminate license; collect unpaid royalties

23. Impact of Monitoring Efforts • Total FY2005 Royalty Collections for NIH = $98.2 MM • Monitoring & Enforcement efforts brought in : • $4.9 million in collection of overdue royalties • $2.5 million from new agreements & settlements • $0.4 million from 3rd party audits • = $7.8 million (7.9% of total FY05 royalties)