Method of creating a derivative..

The present invention relates to a methods of creating derivatives of patents and other items of know how and more particularly to methods of reducing an owner" s risk that a flow of income under a patent or other item of know how will terminate early.

BACKGROUND OF THE INVENTION

The credit derivative market is now relatively mature being about ten years old. As such it is now a $12 trillion dollar annual business. There is always a risk that a debtor will default in repayment of a loan. Regulations exist which limit the amount that a creditor (e.g a bank) can lend as a function of the bank" s capital so the bank has adequate reserves to cover the risk of default in its loans. Credit derivatives were conceived to pass to a third party a creditor" s risk of default in its loans. In return for a sum of money a third party will assume a creditor"s risk of default in that creditor"s loan. If there is default in the loan the third party will pay compensation to the creditor which will roughly make good the creditor" s losses as a result of the default in the loan. That third party entity can assume similar default risks from a number of different creditors and can then bundle these risks and pass fractions of the bundled risks on to forth, fifth and yet further numbered parties. In consideration of the forth, fifth and yet further numbered parties assuming a fraction of the default risk the third party entity will pay a suitable sum of money to each further party. If there is default in one or several loans in the bundle each forth, fifth or yet further numbered party will pay compensation to the third party in accordance with the fraction of risk it has assumed. These receipts by the 3rd party will roughly make good the losses to the third party as a result of a default in one or several of its loans. As a result the risk of loan default is spread widely. A write up on credit derivatives is published in the "FT Weekend" section of the Financial Times of Saturday March 25/ Sunday March 26, 2006

Similar risk problems exist for patent holders. A patent is a limited monopoly which can be used by a patent owner to prevent 3rd parties from performing certain acts in relation to the patent during the term of the patent e.g. performing a method covered by the patent. As a result a patent owner can make monopoly profits during the term of the patent monopoly. In some industries huge profits can derive from a single patent. For example it is not unusual for a pharmaceutical company to be able to make profits of around $ 1 billion per annum from sales of a successful medicament that is covered by a patent. Such profits would materially decrease if the patent were to terminate early since 3rd parties could begin to make and sell the medicament as competitors to the original patent holder.

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Patent usually last for a term of 20 years from the filing date of the corresponding patent application. Patents can however end early for a number of reasons including a court holding that the patent is invalid. It would be desirable for patent holders to be able to pass on to third parties a risk of early termination of a valuable patent in a similar way that banks can pass on to 3rd parties a risk of default in a loan. As a result a patent owner could effectively guarantee a flow of income under a patent for its full term. U.S. Patents can have their term extended if an application for such term extension is filed soon after a marketing authorization is received to put a pharmaceutical covered by the patent on the market. This invention covers the derivatives of such extended term patents. It also covers the approximately 269 days of market exclusivity that a generic manufacturer can achieve for being first to receive permission to market its generic following expiry of a corresponding patent.

Again similar risk problems exist for other owners of other items of property which are subject to regulatory refusal such as owners of patent applications and owners of potential new drugs, potential new foods etc which are soon to be or have been entered into a regulatory process. Concerning patent applications as is well known to those skilled in the art heavy investment can be put into a potential new invention even before a patent application is written. Years of research work can be involved. Then the patent application process can take years and involve multiple applications in different countries and all this can end in one or several refusals with the applicant having little or nothing at the end. Likewise certain products to be used on humans or animals for example certain medicines, certain foods, certain health supplements need to receive permission from a regulatory body before they can lawfully be put on the market. Securing this regulatory approval again can be a long and/or complex and/or expensive process. For example considering a medicine for use on humans typically this process will involve trials of the product on animals followed by trials on one or several different groups of humans both trials testing for the effectiveness of the medicine for a stated type of human treatment and/or for the safety of the medicine for human treatment. Usually the test on humans will be a blind type of test such that either the donor (eg physician) or the recipient (eg the patient) of the medicine or both are unaware whether they are dealing with the medication under test or a dummy medication (e.g. a sugar capsule made up to look similar to the actual medication under test). The process will also typically involve a formal application to a regulatory body which can result in either a permission to market the medicine or a refusal. Many potential new drugs are tested in this way. Often these are withdrawn from testing before any physical application for regulatory approval is made for example because the animal or human tests have shown results suggesting a health risk in using the medication on humans. In many cases much expense will have been incurred before any withdrawal from the test. Even more money will have been spent if a new drug gets to the stage of being the subject of a physical application for a marketing approval and is then refused. In the case either of a withdrawal or a refusal much money will have been wasted. Every time a potential new drug is put into one of these regulated safety/efficacy procedures which can result in a refusal there is a risk of loss of money as a result of a refusal. The subject invention allows a risk of loss of money because of a refusal to be spread widely and therefore reduced for the regulatory applicant. Any risk of refusal can be covered where money (preferably much money) has been invested in a corresponding application. Examples of such applications are patent and

trademark applications, planning applications for the building of real estate (eg freedom tower) and applications for permits to market new drugs. As such this invention can be used to create one or more virtual entities eg one or more virtual pharmaceutical companies where part or all of the risks of one or more real pharmaceutical companies are derivitized into one or more virtual pharmaceutical companies.

SUMMARY OF THE INVENTION

It is an object of the present invention to provide a method of overcoming the risk to a holder of a valuable patent that the patent will terminate before its full term.

It is a further object of the present invention to spread the risk of the early termination of a valuable patent widely.

It is yet a further object of the present invention to provide a method of reducing the financial cost of a refusal to an applicant for any regulatory permission or any regulatory approval or any regulatory grant of rights where money has been invested in the application process before any refusal.

Preferably it is an object of the present invention to provide a method of reducing the financial risk to a holder of certain new applications that the desired grant and/or approval and/or permission will be refused, where the applications are selected from patent applications, trademark application, planning applications (for real estate building), new drug applications, and other applications of a similar type.

DETAILED DESCRIPTION OF THE INVENTION

This invention spreads the risk of the early termination of a valuable patent widely , thereby more or less indemnifying a patent owner against losses resulting from an early termination of one of its patents. Patents can be owned by any owner capable of owning a patent, such as companies or individuals. Often patents are owned by companies.

If a company owns a patent covering a process or a composition that is in demand it can secure monopoly profits on the use of the process or on the sale of the composition during the patent term. Considering sales of a composition covered by a patent, once sales of the patented composition have built up to a high level at a time during the term of the patent, the company has hopes that those high sales will continue until the end of the normal term of the patent. However there is a risk that all or part of the income flow from the sales will end early either because the full protection covered by the patent ends early or because the patented composition covered by the patent is withdrawn from the market because of regulatory concerns. For example this invention can protect a patent owner from the financial consequences of having a compulsory license awarded against it. It is desirable for companies to be able to guarantee their level of income going forward. Put another way it is not desirable for a company to suffer a sudden and unexpected fall in its income from one period of time to another. Such a sudden fall in income can result if for example a patent owned

by the company suddenly terminates. This invention also spreads the risk of a loss of money from loss of investment preferably loss of heavy investment in an application for something where that application is refused after much investment. Examples of such applications are patent applications, trademark applications, planning applications (for real estate building), and new drug applications.

Rights in these types of application can be owned by any owner capable of owning them, such as companies or individuals. Often these applications are owned by companies.

It is not desirable for a company to suffer a refusal following heavy investment in a corresponding application process.

This invention is directed broadly to spreading refusal risks widely. Such refusal risks can be refusal risks for any of the applications mentioned above and others. As used herein refusal means termination of any process leading up to any grant and/or any permission and/or any approval at any time after commencement of the process, either early or late and/or before or after the filing of any physical application for the grant and/or permission and/or approval. For the purposes of further exemplification we will consider the risk of a refusal in a new drug application (NDA refusal risk). The original owner of a NDA refusal risk would be the entity performing the animal and/or clinical trials etc sometimes referred to herein as the NDA applicant. An NDA refusal could occur early (even before the physical filing of a NDA application) or late in an NDA application processs with consequent waste of money invested up to the refusal date.

In accordance with the method of this invention the risks are derivitized as explained below. Any 3rd party entity capable of owning risk e.g. a special purpose entity (SPE) can exist or can be set up. The SPE can assume the risk of early termination of patents (e.g. by marketing itself for this purpose). Over time the SPE can assume the risk that a number of patents, preferably many valuable patents, will terminate early. Each time the SPE assumes a risk that a particular patent will terminate early it can enter into a contract with the patent owner under which it guarantees to indemnify the patent owner for loss of monopoly profits under the patent for reasons to be agreed, preferably as a result of its early termination. That is to say if for example the patent owner is making $ 1 billion per annum through sales of a composition covered by a single patent and the patent has 6 years until normal expiry the patent owner has a legitimate expectation of making $ 6 billion dollars before the patent ends. If the patent ends five years early then the patent owner suffers a notional loss of $ 5 billion dollars. The SPE can assume this risk so that if the patent ends five years early the SPE pays the patent owner 5 billion dollars. In consideration of the patent owner insuring its risk in this way the the patent owner pays the SPE a sum of money which can be paid in a lump sum or periodically but is usually paid in a lump sum. The price of the assumption of the risk by the SPE can be any price that a patent owner is willing to pay to have its risk covered, but can be set using techniques known in the credit derivatives (risk of default in loans) art. Preferably the SPE assumes the risk from many patent owners that their patents will end early and in consideration of this receives money payments.

The SPE can then spread the early termination risk it has assumed further. In order to do this it can form bundles of the risk it has assumed. For example the SPE can form a bundle of 20 patents where it bears the risk of early termination. For the purposes of exemplification we will assume that one patent in the bundle of 20 is the $ 1 billion per annum patent discussed above.

Fractions of the total risk in such a bundle of patents can then be assumed by further (eg 4th, 5th 6th etc parties ) in consideration of which the SPE pays a sum of money to each further party. In the event of default each 4th, 5th 6th etc party pays the SPE a sum of money corresponding to the fraction of risk that the further party has assumed from the SPE. For example assume the $ 1 billion per annum patent discussed above terminated five years early but the balance of 19 patents in the bundle did not. Assume 5th party above assumed 0.1% of the risk of early termination of any one or all patents in the bundle. Other numbered further parties assumed the balance of the risk. On early termination 5th party pays SPE 0.1% of $5 billion or $5million. The further party holders of the balance of the risk pay SPE in accordance with the risk they have assumed so that SPE is paid $5 billion. SPE then pays $5 billion to patent owner. The price to be paid by SPE to each further party for its assumption of each fraction of the total risk in the bundle can be any price that each further party is willing to accept to assume its share of SPE" s risk but can be set using techniques known in the credit derivatives (risk of default in loans) art. An advantage for the original patent owner is that it can effectively guarantee its monopoly profits on a patent up to the normal end of the patent thereby avoiding the need for making provision in its accounts for early patent termination. Other methods well known in the derivatives art can be used to derivitize the above risk. Basically any contractual terms can be agreed between the parties whereby the rights are derivitized so the risks of financial loss are acquired by a 3 ^rd party in consideration of the 3 ^rd party receiving financial compensation. In the case of a NDA refusal the risk is derivitized as explained below. Any 3rd party entity capable of owning risk e.g. a special purpose entity (SPE) is set up. The SPE assumes the NDA refusal risk (e.g. by marketing itself for this purpose). Over time the SPE assumes the NDA refusal risk for a number, preferably many NDAs. Each time a refusal occurs the original owner of an NDA refusal risk will suffer much loss of money invested, often being left with virtually nothing. Each time the SPE assumes a risk that a particular NDA refusal will occur it enters into a contract with the original owner of the NDA refusal risk under which it guarantees to pay the original owner of the NDA refusal risk an agreed sum of money on the occurrence of the refusal. The agreed sum can vary depending on the estimated total cost of the whole NDA application and on the time in the NDA application process when the refusal occurs and can be physically paid at any time in any way. For example if a refusal occurs during animal trials an initial sum is agreed. If a refusal occurs later for example during stage 1 human clinical trials a larger sum is agreed. If a refusal occurs after the filing of a physical regulatory application a yet larger sum is agreed etc etc. Alternatively it can be agreed that the actual sum lost can be reimbursed. For example it can be agreed that if the refusal occurs during animal trials the SPE pays to a NDA applicant $5 million on refusal and it can be agreed that if the refusal occurs during stage 1 clinical trials the SPE pays to the NDA applicant $15 million on refusal and so on with a different compensatory amount being agreed depending on the stage in the process where the refusal occurs. Higher compensatory amounts can be agreed if a refusal occurs later. In consideration of the NDA applicant having its risk insured in this way the NDA applicant pays the SPE a sum of money which can be paid in a lump sum or periodically but is usually paid in a lump sum. The price of the assumption of the risk by the SPE can be any price that an NDA applicant is willing to pay to have its risk covered,

but can be set using techniques known in the credit derivatives (risk of default in loans) art. Preferably the SPE assumes the risk from many NDA applicants that there will be refusals and in consideration of this receives corresponding money payments as agreed.

The SPE then spreads the refusal risk it has assumed further. In order to do this it can form bundles of the risk it has assumed. Different types of risk can be bundled eg bond default risk, NDA refusal risk , patent application refusal risk etc. Alternatively the same types of risk can be bundled. For example the SPE can form a bundle of 20 NDA refusal risks. For the purposes of exemplification we will assume that ten NDAs in the bundle of 20 are refused at the $5 million stage discussed above. Fractions of the total risk in the bundles can then be assumed by further (eg 4th, 5th 6th etc parties ) in consideration of which the SPE pays a sum of money to each further party. In the event of default each 4th, 5th 6th etc party pays the SPE a sum of money corresponding to the fraction of risk that the further party has assumed from the SPE. In our example 10 NDAs are refused at the $5 million stage as discussed above but the balance of 10 NDAs are granted. Assume 5th party above assumed 0.1% of the refusal risk of any one or all 20 NDAs in the bundle. Other numbered further parties assumed the balance of the risk. On refusal of 10 NDAs at the $5 million price 5th party pays SPE 0.1% of $50 million or $50K. The further party holders of the balance of the risk pay SPE in accordance with the risk they have assumed so that SPE is paid $50 million. SPE then pays each NDA applicant who had a refusal $5 million. The price to be paid by SPE to each further party for its assumption of each fraction of the total risk in the bundle can be any price that each further party is willing to accept to assume its share of SPE" s risk but can be set using techniques known in the credit derivatives (risk of default in loans) art. An advantage for any regulatory applicant is that it can effectively insure against a refusal i.e. obtain compensation for a refusal.