position, and license costs. In the 1997 analysis, the patent rights associated with the Phykitt second-generation soluble aspirin products technology, based on a 17-year patent life (i.e., assuming a three year pendency of the corresponding patent application) with the overall market in years 6-17 assumed to be flat, for analysis purposes, and profitability assumed to be that of year 5 with a continuous improvement of 3% per year based on the anticipated market penetration and sales revenues, and a 15% capitalization rate, the then-total present value determined for the second-generation soluble aspirin products patent rights in the 1997 analysis was $30,926,980. The 1997 analysis therefore incorporated the Income Approach, the third major valuation technique, in which the patent owner: (a) generates a cash-flow projection of incomes and expenses over the life-span of a license, and (b) determines the net present value (NPV) of the profit stream, based on a selected discount factor. The Income Approach more closely realizes the true value of intellectual property patent assets when there is a reasonable projection of income and expenses (particularly with and without the intellectual property), predictable profit information, and reasonably computable market data. For these reasons, we are utilizing a modified Income Approach, factoring in an assumed scope of market share dominance8 along with a standard pricing scheme for the stated share of the market rates.9 The underlying predicate of this modified Income Approach is that the value of a patent asset should directly correlate to the value of the prospective additional profit obtainable from fully exploiting the invention claimed in the patent application and resulting patent, as compared with profits obtainable without patent protection. Here, the current market is taken as $30 million in the powder segment, approximately the same as in 1997 for such segment, and as $100 million for the Alka-Seltzer segment, for a total of $130 million. In the Alka-Seltzer segment, current online prices for 36 tablet boxes, containing 18 two-tablet packets of Alka-Seltzer, are available online at prices ranging from $5.65 to $10.67 per box, including prices by online Canadian pharmacies. Competitive pricing, based on a packet of the Aquaprin™ product, relative to the $5.65/box/18 packet competition, corresponding to a unit (packet) price of $0.313 for Alka-Seltzer, suggests an Aquaprin™ product resale price of $0.30 supported by aggressive advertising and promotional activities to be reasonable, consistent with a wholesale unit cost of $0.20 and manufacturing unit cost of $0.14, as an assumed structure providing a 30% margin. A five-year time horizon is posited for achievement of market capture, following which sales would continue to grow albeit more slowly. This time horizon is selected because the basic composition patent would be issued at that point in time and additional patents 8 Market share would be a percentage of the whole. 9 As an alternative to sales of product to the market, licenses are another means to effectuate control over a greater share of the market. This analysis assumes a royalty rate from licenses would be equivalent to that profit realized from products that are regularly sold, as factoring the costs incurred by licensees. 9 of 10 would be pending to build out the intellectual property position, and the advantages accruing to patent-protected products early in their lifecycle would be most compelling. A year 5 capture of 25% of the $130 million powder + Alka-Seltzer market would provide annual sales revenue of $32.5 million at the retail level for the Aquaprin™ product, and corresponding PSP sales for Aquaprin™ on the order of $22 million, and[/quote] pretax net profit of $6.7 million. The Insta-prin™ applicator product, by contrast, is sui generis, and has no established market, and its sales would be significantly smaller than the Aquaprin™ product, particularly since it is an emergency dose product, and therefore intended for emergency use. Since emergency dose products have a substantial longitudinal replacement time, with shelf-life being the primary determinant in the absence of emergency deployment, the market for the Insta-prin™ product will be created in a trailer fashion from the successful commercialization of the Aquaprin™ product, and therefore is posited to contribute only about 10% of the amount of the revenues attributable to the Aquaprin™ product. In the case of the fifth year PSP sales of Aquaprin™ product being $22 million and pretax profit of $6.7 million, as above calculated, the corresponding sales revenue and pretax net profit for the Insta-prin™ applicator product would be $2.2 million and $0.67 million, respectively, and the total revenues and pretax net profit attributable to the Aquaprin™ product and the Insta-prin™ applicator product would be $24.2 million and $7.37 million, respectively. Since the 1997 analysis had posited a fifth-year pretax net profit of $7,172,699, the current analysis fifth-year pretax net profit of $7.37 million is remarkably close to the valuation of the profit opportunity analysis conducted in 1997. Inasmuch as the current fifth-year pretax net profit value of $7.37 million is roughly 3% above the fifth-year pretax net profit value of the 1997 analysis, and the revenue profile of the Aquaprin™ product and the Insta-prin™ applicator product are expected to yield a conforming trajectory to that of the earlier analysis, it is reasonable to assume the total present value of $30,926,980 obtained in the earlier analysis to the correspondingly increased by about 3%. A corresponding total present value of the prospectively patent-protected Aquaprin™ product and the prospectively patent-protected Insta-prin™ applicator product is $31,854,789, or approximately $32 million in rough terms. This total present value of $32 million is determined to be the value of the intellectual property rights associated with the Aquaprin™ product and the Insta-prin™ applicator product, since in the absence of the intellectual property applicable to these products, commercialization would not be viable, and there would be no barrier to entry to far larger competitors with correspondingly larger resources. The exclusionary rights associated with the proprietary patent position of PSP, together with the branding trademarks, and substantial know-how of Howard Phykitt, provide a reasonable basis for such valuation. We therefore conclude that the intellectual property rights relating to the Aquaprin™ product and the Insta-prin™ applicator product are fairly valued at $32 million. 10 of 10 HULTQUIST IP Steven J. Hultquist Chapel Hill, North Carolina May 6, 2011
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