Supreme Court New South Wales Medium Neutral Citation: Nguyen v Northern Sydney Local Health District [2024] NSWSC 1299 Hearing dates: 9 October 2024 Date of orders: 18 October 2024 Decision date: 18 October 2024 Jurisdiction: Equity Before: Parker J Decision: See [98] Catchwords: EVIDENCE — opinion evidence — opinions based on specialised knowledge — scientific discovery of new medical technology subject of multinational intellectual property portfolio — admissibility of expert report valuing portfolio — whether reasons were given for expressed opinions — Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705 — "basis rule" — permissibility of delegation by expert to material prepared by third parties — overarching relevance of report — non-compliance with Makita requirement to provide reasons — report inadmissible Legislation Cited: Evidence Act 1995 (NSW) Cases Cited: ASIC v Rich [2005] NSWSC 149 Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588 HG v The Queen (1999) 197 CLR 414 Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705 Paric v John Holland (Constructions) Pty Ltd (1985) 59 ALJR 844 Rhoden v Wingate [2002] NSWCA 165 Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL (1994) 179 CLR 332 Spencer v Commonwealth (1907) 5 CLR 418 Texts Cited: Nil. Category: Procedural rulings Parties: Principal proceeding Tommie Tue Gia Nguyen (Plaintiff) Northern Sydney Local Health District (First Defendant) State of New South Wales (Third Defendant) Representation: Counsel: D Larish/ J A McKenna (First and Third Defendants) Solicitors: Wotton Kearney (First and Third Defendants) Self-represented Tommie Tue Gia Nguyen File Number(s): 2021/38818 Publication restriction: Nil JUDGMENT 1. The trial in this matter has been fixed for hearing before me next month. This judgment concerns an application for a preliminary ruling pursuant to the Evidence Act 1995 ("EA"), s 192A, on the admissibility of an expert report which has been served as evidence in the proceedings. Background and procedural history 1. The plaintiff in the proceedings is Tommie Tue Gia Nguyen. Dr Nguyen is a research scientist. Relevantly for present purposes he worked for the Northern Sydney Local Health District ("NSLHD") from 2005 until to the end of August 2016. Although his work was undertaken under the auspices of the NSLHD, he was in fact employed by the State Department of Health, known as "NSW Health". 2. The proceedings concern a scientific discovery to which Dr Nguyen contributed during his work with NSLHD. The discovery concerned therapeutic uses of certain antibodies in the treatment of diseases affecting or involving the operation of the immune system. 3. According to Dr Nguyen's statement of claim, agreement was reached in 2008 between the individuals who were responsible for the discovery (and, I assume, the NSLHD) under which those four individuals were to share a one third interest in any intellectual property ("IP") derived from it. Dr Nguyen was recognised as the principal contributor to the discovery and was allocated 55% of the one third interest. Professor Jonathan Morris, who, it seems, was the head of the working group, received 15%. Two other researchers also received 15%. 4. Applications were made (I assume by NSLHD) to obtain patents for the IP in various jurisdictions. Those jurisdictions were: Australia; the European Union; the United States of America; and Canada. As I will describe below, patents were ultimately granted in all four jurisdictions. 5. According to Dr Nguyen's statement of claim, in February 2012, he entered into a contract styled as a Deed of Agreement with NSLHD concerning the commercialisation of the IP. The contract, to which I will refer as the "Commercialisation Agreement", provided for Dr Nguyen to transfer his share of the IP to NSLHD and to undertake to assist NSLHD with its commercialisation. NSLHD was then to use its best endeavours to commercialise the IP over a three-year period. If, after three years, NSLHD had not succeeded in obtaining a suitable commercialisation of the IP, it was to be "re-assigned" back to Dr Nguyen and the other creators (I say "re-assigned" in inverted commas because, according to my understanding of the statement of claim, the creators had only originally held a one third share). 6. Dr Nguyen's statement of claim does not expressly say so, but I assume that the other creators were also party to the Commercialisation Agreement, or entered into contracts in similar terms with NSLHD. 7. The Australian patent application was successful in 2013 and the EU patent followed in 2014. Both patents last until 2027. 8. The three-year commercialisation period expired in February 2015. It seems that no suitable commercialisation arrangements had then been reached. But NSLHD did not "re-assign" the IP to the creators. Instead, it seems, some efforts to commercialise the IP continued. The US patent was granted later in 2015. It expires in 2030. As already noted, Dr Nguyen remained an employee of NSW Health, working for NSLHD, until August 2016 when his then current employment contract expired and was not renewed. Meanwhile, the other two creators of the IP are said to have assigned their interests in the IP to Dr Nguyen and Professor Morris, leaving them with 70% and 30% respectively of the creators' one third share. 9. At some point in 2017 the Canadian patent was granted. That patent lasts until 2027. In the same year, however, it seems that NSLHD ceased to pursue, at least itself, the commercialisation of the IP. According to Dr Nguyen's statement of claim, NSLHD assigned the IP to a company named AIGD Biotech Pty Limited ("AIGD"). Professor Morris is said to have been a shareholder in that company. The statement of claim does not say whether the assignment to AIGD took place before or after the grant of the Canadian patent. 10. The proceedings were commenced Dr Nguyen in February 2021. Originally, Dr Nguyen was legally represented in the proceedings, but he now represents himself. 11. NSLHD is the first defendant in the proceedings, and State of New South Wales (the legal entity for NSW Health) is the third defendant. They are commonly represented. For simplicity, I will, in what follows, refer only to NSLHD and not refer to the State as a separate defendant unless it is necessary to do so. 12. AIGD is the second defendant. Professor Morris was initially joined as the fourth defendant, but the proceedings against him have been discontinued or dismissed and he has been removed as a party. 13. Dr Nguyen's principal complaint in the proceedings is an allegation that NSLHD breached its contractual obligations under the Commercialisation Agreement. The result, it is alleged, is that from February 2015 onwards, Dr Nguyen was entitled to have his share of the IP "re-assigned" to him. It is also said that from this date he became the "beneficial owner" of that share of the IP. Dr Nguyen further alleges that AIGD received the assignment of the IP from NSLHD in 2017 with notice of Dr Nguyen's interest in it, and, as a result, holds that interest as constructive trustee for him. 14. The statement of claim alleges that, as from February 2015, Dr Nguyen was the beneficial owner of "at least 70%" of the IP. There is an apparent chronological difficulty with this allegation, in that the transfer which increased Dr Nguyen's share from 55% to 70% is only alleged to have taken place in December 2015 and to have been confirmed by deed poll in August 2016. The statement of claim alleges that Dr Nguyen is now entitled to 100%, apparently as a result of a deed poll executed by Professor Morris, also in August 2016. It is, however, unnecessary to go further into the extent of the alleged interest and when it arose for the purpose of this judgment. 15. The trial has been fixed for eight days and is to begin on 4 November. In accordance with my usual practice, I held a pre-trial directions hearing on 18 September. The directions hearing was attended by Dr Nguyen as well as counsel for NSLHD. There was no appearance for AIGD. 16. Dr Nguyen's statement of claim includes, in the prayers for relief, a claim for damages against NSLHD for breach of contract. It also includes a claim for "specific performance" of NSLHD's alleged obligations under the Commercialisation Agreement, namely to transfer the IP (now represented by the four patents), or at least a 70% share of it, to Dr Nguyen. 17. At the directions hearing, I asked the parties about the claim for specific performance. I was told by counsel for NSLHD that arrangements had recently been entered into between NSLHD and AIGD for AIGD to assign the patents back to NSLHD. NSLHD was therefore in a position to assign them to Dr Nguyen and was prepared to do so without charge. 18. Dr Nguyen, however, made it clear that he did not want them. As will be seen, this is because the continued maintenance of the patents will cost money and Dr Nguyen is now of the view that it will not be possible to commercialise the patents (if at all) within sufficient time before their expiry to make that worthwhile. His claim is now confined to a claim for damages. 19. No order has been made for the separate quantification of any damages to which Dr Nguyen would be entitled if he succeeds in his claim against NSLHD of breach of contract. The damages are therefore to be assessed at the November hearing, and both parties have filed evidence on the question. 20. Dr Nguyen's evidence on damages includes a report from Lee Gordon Goldstein, who is a business broker and valuer. The report addresses the value of the IP the subject of the proceedings (effectively, the four patents which I have described). It attributes a range of values to that IP, the high end of which is $1.114 billion. For convenience, I will refer to it as an "expert report", although Mr Goldstein's status as an expert for present purposes is in dispute. 21. The solicitors for NSLHD have given notice that Mr Goldstein's report is objected to, and, if it is admitted, that he will be required for cross-examination. It is unclear whether Dr Nguyen will be able to produce Mr Goldstein for cross-examination as it appears that he is unwilling to attend the hearing and may even be overseas. At the directions hearing, Dr Nguyen foreshadowed an application to rely on the report in Mr Goldstein's absence. However, there is no point in debating this question if the report is inadmissible anyway. 22. Counsel for NSLHD therefore asked me to make a preliminary ruling under EA s 192A as to its admissibility. There was no objection to this course from Dr Nguyen, and it was plainly a convenient one in the circumstances. Directions were made for the parties to provide written submissions, and an oral hearing took place on 9 October. 23. Dr Nguyen also indicated at the directions hearing that he did not propose to pursue the claims for relief against AIGD, which included an account of profits derived from the patents since 2017. Since then, he appears to have resiled from that position. At the s 192A hearing, Mr Collins, the solicitor for AIGD, appeared and told me that his client contends that an enforceable agreement had been reached to resolve the proceedings as between it and Dr Nguyen. That, however, is disputed by Dr Nguyen and it is not necessary to say any more about it for the purpose of this judgment. The admissibility issue which was the subject of the s 192A hearing does not affect AIGD and Mr Collins did not participate in the argument. Admissibility of expert report 1. Mr Goldstein's report was presented on the letterhead of an organisation called "Business Report and Values" ("BRV"). The report itself is undated but was commissioned in January 2022, and bears "an effective date" of 20 February 2022. 2. The report was an annexure to an affidavit affirmed by Mr Goldstein in June last year. Mr Goldstein identified himself as a "qualified business valuer" and the "principal and owner" of BRV. He also identified himself as the author of the report. 3. Mr Goldstein's report was commissioned by the then solicitors for Dr Nguyen in January 2022. A copy of the commissioning letter was attached to Mr Goldstein's report. As is conventional, the letter set out a series of factual assumptions which Mr Goldstein was asked to make, and which were said to have been provided by Dr Nguyen. 4. The letter also advised Mr Goldstein that he was obliged to comply with the Expert Witness Code of Conduct. It continued: … Please make note of it in your report if either of the following apply: i. You consider that your report may be incomplete or inaccurate without a qualification or note to something in the report. ii. You are unable to form a conclusive opinion because of insufficient research or insufficient data or for any other reason. To ensure your report is admissible pursuant to the principles of Makita (Australia) Ply Limited v Sprowles (2001) 52 NSWLR 705, please ensure: Your report clearly sets out the facts and matters assumed by you, and those asserted as a matter of opinion, to enable a differentiation between firstly, assumed facts and observed facts, and secondly, those facts asserted on the basis of experience and the particulars field or expertise or as the product of the exercise of expert reasoning. If reliance has been placed upon learned writing (such as textbooks, articles, monograph, and so forth) these must be identified to readers so they can cross check same. If Australian Standards or other standards or guidelines are relied upon then these must be fully cited and disclosed. 1. Also attached to Mr Goldstein's report was a two-page document headed "Projected Cost of [sic] Development Costs of a New mAb Drug by Industry Published Data". I will refer to this as the "development costs document". It appears to have been prepared by Dr Nguyen and given to Mr Goldstein for the purposes of his report, but is not referred to in the solicitors' commissioning letter. 2. In the introductory section of the report the following appears: The Principal of [BRV] Lee G Goldstein has been involved in the valuing and sale of businesses since 1986. He holds a Post Graduate Diploma in Property (Valuation), a Double Major Degree in Accounting and Finance, the Advanced Certificate of Business (Real Estate) and the Advanced International Certificate in Intellectual Property. He has been the Triennial Certificate holder and Licensee of a business broking company since 1992. 1. A curriculum vitae of Mr Goldstein was annexed to the report, which relevantly stated: Professional Qualifications: Advanced Certificate of Business Advanced International Certificate of Intellectual Property Double Major Degree in Accounting and Finance Graduate Diploma in Property (Valuation) Key Expertise: Business and Company valuations Intellectual Property valuations. Corporate strategy and advice, training of organisations. financial investigations, insolvency issues, litigation support services and financial analysis. Relevant Career Specialisations: 28 years experience in business broking working predominately in the corporate area, specialising in mergers and acquisitions. Commenced own business broking company in 1988. Employed 14 business brokers with responsibilities for training and development, financial analysis and negotiation skills. Started BRV in 1992. BRV has produced over 650 valuations, worth over $1.5billion covering business and company valuations and intellectual property valuations. Over 80% of all valuations produced are for court proceedings, with requirements to act as expert witness numerous times, in the: District Court Supreme Court Family Court 1. The body of the report began with a description of the IP the subject of the report which was apparently taken verbatim, or almost verbatim, from instructions set out in the commissioning letter. 2. The IP was described as follows: The [IP] the subject of these proceedings is the method and the use of anti-lgD monoclonal antibody ("m Ab") as a disease-modifying therapeutic drug to treat human autoimmune diseases, chronic inflammations and allergic conditions. The IP is an Anti-lgD mAb biologic antibody drug that binds specifically to immunoglobulin D ("lgD") ("Anti-lgD mAb"), a molecule that is primarily expressed on the cell surface of B cells (immune cells that are responsible for production of antibody after vaccination) but not by other immune cells. Thus, therapeutic anti-lgD mAb directly targets B cells via lgD. 1. The "current stage of development of the IP" was described as follows: The IP technology is currently in early stage of development but has completed pre-clinical studies in various animal models of human diseases and demonstrated the proof of concept (the therapeutic effects and mechanism of action) of anti-lgD mAb as a therapeutic drug treatment in these animal models. These findings have been published in peer-reviewed scientific journals and have been confirmed by other independent studies, …. Since 2016, there has been increasing body of published literature corroborating these findings and supporting proof of concept demonstrated in various animal models. Still required is to produce a humanized prototype of anti-lgD mAb to carry out toxicology and pharmacokinetic studies in primates and in human Phase I clinical trial. 1. The report then addressed the questions posed in the commissioning letter. Question one asked Mr Goldstein to identify the different methods of valuation which could be used to value "a portfolio of patents". 2. In response, Mr Goldstein identified three methods. The first method was what he described as the "Income Approach". This involved using a discounted cashflow ("DCF") method to value future cashflows from the IP. 3. The second method was described by Mr Goldstein as the "Cost Approach". This involved determining how much the IP cost to produce. Mr Goldstein commented that the approach had the advantage of being "relatively easy to calculate". But the disadvantage was that the approach "has little or no relationship to market value". 4. The third method was referred to as the "Market Approach". This involved identifying what others have paid for comparable assets in arm's length commercial transactions. Mr Goldstein commented: … The market approach works very well when market data is readily available. Market information is often available about commodities and in some places about real property, e.g., the price of houses in many countries. The market approach does not work well when this information is not available or not analogous to the asset being valued, which is often the case with intellectual assets. In fact, the biggest hindrance to widespread application of the Market method is the absence of an abundance of accurate and readily accessible data for comparable transactions. 1. Question two asked Mr Goldstein what was "a reasonable valuation of" the IP on two bases: 1. at "the present date"; and 2. "assuming that market and regulatory approval of the IP is given for [its use] as a therapeutic drug". 1. Mr Goldstein provided a separate figure for the value of the IP on each basis. I will refer to these as the "at-present valuation" and the "if-approved valuation". 2. For the at-present valuation, Mr Goldstein stated: The only valuation approach that can be applied to the IP at the present day is the Cost Approach. The cost-based method uses the costs incurred by the business in the creation and development of their IP. It also considers the potential cost of recreating such an IP asset or developing a product that is similar in nature. … The concept behind the cost method of valuation is that a business purchaser will not have to incur these costs if they buy the IP. Furthermore, in doing so they would not have to suffer the financial and/or operational consequences of failing to successfully develop their own IP, or deal with the potential difficulties in protecting it if they did develop their own. One of the downsides of this method of valuation is that potential future profits are not incorporated into the calculation it is based solely on the costs incurred, which does not take account of possible future success in the marketplace. Under section 8 of [Dr Nguyen's development cost document] it is estimated that the cost of the R&D at this stage is AU$2.5M, the patent and filling costs are AU$250,000 and a further AU$50,000 is assumed for executives' salaries. This results in the valuation of the IP at the present day being a total of AU$2,800,000. 1. Mr Goldstein derived his if-approved valuation using his Income Approach (that is, a DCF calculation to determine the present value of expected future income and expenditure). There were relevantly five steps involved in the calculation. 2. Step one was to determine the amount of future income from the approved drug. Mr Goldstein dealt with this in a single sentence. He wrote: Dr Nguyen has projected the annual sales of the [approved] drug to be USD $1 billion in annual sales. 1. The report did not expressly identify the projection by Dr Nguyen to which Mr Goldstein was referring. The assumptions in the commissioning letter included (emphasis added): The Potential Value in Annual Sales of the IP Technology of anti-IgD mAb (i) According to a recent market report by Allied Market Research, the combined market value of treatments of autoimmune diseases and allergic condition is forecasted to reach US$ 150 billion (b) in global annual sales by 2025. (https://www.alliedmarketresearch.com/autoimmune-disease-therapeutics-market). (ii) 5 of the top 10 of "blockbuster drugs" (>US$ 1b in annual sales) are of the same technology (therapeutic mAb) and work by the same mechanism of action (B-cell depletion) and targeting the same Immune cell (B cells) as therapeutic anti-IgD mAb. These therapeutic mAb include: antl-CD20 mAb B-cell depletion (Rituximab, US$7b), antl-TNFa mAb (Humira, US$19b, Infliximab, US$5.9b; Ustekinumab, US$5b), antiBAFF mAb B-cell depletion (Belinumab, US$0.5b), anti-lgE (Omalizumab, US$ 3 billion). The combined values in global annual sale of these blockbuster therapeutic mAb drugs exceed US$ 50b a year (Lu et al, Journal of Biomedical Science [2020]; Elvin et al, International Journal of Pharmaceutics [2013]). (iii) Despite the advances in the therapeutic efficacy of these mAb drugs, up to 40% of all patients do not respond or develop resistances to many of these "blockbuster drugs' (Rider et al, International Journal of Cell Biology [2016]; Lai and Dong, International Immunology (2016]) and many have considerable long-term side effects. This means that there remains a significant unmet medical need for these these autoimmune diseases and allergic inflammations. (iv) Antl-lgD mAb has the potential to address this significant unmet medical need. Addressing even a fraction of those unmet medical needs has a potential to generate significant revenue. … Comparable Current Technologies (B-cell Targeted Therapies) In the Market (i) Rituximab (antl-CD20 mAb) - Approved for Rheumatoid Arthritis and MS, works by depleting B cell … generates $US 7b in annual sales. (ii) Ocrlizumab (anb-CD20 mAb) - Approved for Multiple Sclerosis, works by B-cell depletion, generates $US 0.2b in annual sales. (iii) Belunam (anti-BAFF mAb)- Approved for Lups, works by depleting mature b cells by blocking the effect of BAFF … generates $US 0.5b in annual sales. (iv) Polatuzumab (anti-CD79b mAb) – Approved in 2020 for chemo-restraint diffuse large B-cell lymphoma, a toxin drug-antibody conjugate that act like a guided missile to deliver chemodrug directly and specifically to cancerous B cells expressing cell-surface molecule CD9b which is a molecule, together with CD79a, that anchors IgD on the cell surface of B cells, is forecasted to generate up to $US 0.5b in annual sales. 1. Although these passages in the commissioning letter provide sales figures for various specified drugs, at least some of which are said to work in a way comparable with the IP in the present case, it remains unclear how the "projection" of US$1 billion in sales was calculated. Dr Nguyen's written submissions on the present application indicated that the affidavit he has served in the proceedings may shed some light on the question. That affidavit also, it seems, attached a copy of the article by Lu and others referred to in the commissioning letter. However, neither the affidavit nor the article was in evidence on the hearing before me. 2. Step two was to deduct the production costs of the approved drug. Mr Goldstein did this by determining a figure for earnings before interest depreciation and amortisation (EBITDA) as a percentage of the gross sales of the $1 billion determined in step one. He wrote: In the article by Ledley FD, McCoy SS, Vaughan G, Cleary EG. Profitability of Large Pharmaceutical Companies Compared with Other Large Public Companies, the authors state the following From 2000 to 2018, 35 large pharmaceutical companies reported cumulative revenue of $11.5 trillion, gross profit of $8.6 trillion, EBITDA of $3.7 trillion, and net income of $1.9 trillion, while 357 S&P 500 companies reported cumulative revenue of $130.5 trillion, gross profit of $42.1 trillion, EBITDA of $22.8 trillion, and net income of $9.4 trillion. 1. As a percentage of sales revenue ($11.5 trillion), EBITDA ($3.7 trillion) was 32.17%, which Mr Goldstein applied to the US$1 billion gross revenue figure (step one) to obtain net revenue. 2. Step three was to determine the period of time over which the DCF calculation was to be undertaken. Mr Goldstein provided the following general explanation: New drugs typically get patented early in the process - usually during animal trials in the pre-clinical phase, when it will typically still take 8-10 years until the drug actually reaches the market, so that actual "protected" revenue phase may be only some 10 years long. Post patent expiry, the price deterioration in the drug is typically swift and significant … The remaining legal life of a patent indicates the limit of its economic life. An assessment as to whether the economic life of the patent is shorter than the legal life should include consideration of: the quality of the patent claims as reflected by the prosecution history and any legal challenges the ease of designing around the patent claims the market position and performance trends of any products or processes using the invention that is the subject of the patent the technology life cycle and barriers to entry within the industry in which the patent is used and measures of commercial interest in the patent such as recent licences and the extent of forward citations. An assessment of the useful life of trade secrets should include factors such as: the legal framework within the relevant jurisdiction(s) time restrictions to any supporting non-disclosure or non-compete contracts the strength of procedures used to maintain confidentiality the degree of difficulty for competitors to reverse-engineer the confidential information or create equivalent know-how the technology life cycle within the related industry and if the trade secrets result in a customer-facing benefit, the extent of the resulting product differentiation, the extent of consumer appeal and the product life cycle. The economic life of a tech asset consisting of a bundle of complementary patents and trade secrets can extend beyond the legal life of certain constituent patents. However, the extent of protection afforded to the tech-IP, and its earnings potential, may diminish as a result of the expiry of a constituent patent. 1. In his calculation, Mr Goldstein used a period of six years (apparently calendar years) from 2022-2027 inclusive. His explanation for the six year period was: The DCF calculation will project the income over 6 years which I will take as the mean of the number of years left on the patents. The reason 6 years is used is because of the rapid decline in revenues once a patent reached expiry [referring to data on sale prices once a generic substitute is available]. 1. Step four was to amortise the costs of developing the drug in its saleable form over the income period in question (six years, as per step three). Mr Goldstein addressed this as follows: In the article Wouters OJ, McKee M, Luyten J. Estimated Research and Development Investment Needed to Bring a New Medicine to Market, 2009- 018. JAMA. 2020;323(9):844 853. doi:10.1001/jama.2020.1166, the authors state: The mean cost of developing a new drug has been the subject of debate, with recent estimates ranging from $314 million to $2.8 billion. For the purpose of this valuation the lower figure of $314 million will be utilised … 1. Step five was to determine the discount rate to be applied in undertaking the DCF calculation. Mr Goldstein addressed this as follows (emphasis added): The discount rate used is generally the appropriate Weighted average cost of capital (WACC), that reflects the risk of the cashflows. The discount rate reflects two things: 1) The time value of money (risk-free rate) - according to the theory of time preference, investors would rather have cash immediately than having to wait and must therefore be compensated by paying for the delay. Typically, in Australia the 10-year day Treasury Note is used as a risk-free rate. This rate was 2.25 % as at 18th February 2022. 2) A risk premium - reflects the extra return investors demand because they want to be compensated for the risk that the cash flow might not materialize after all. This risk rate has been determined at 11%. Adding the risk- free rate gives the total risk rate at 13.25%. 1. The risk component in the discount rate (11%) was derived from a table in an article taken from a site on the internet named "alacrita.com", to which Mr Goldstein referred earlier in his report. The relevant part of the report was: Assuming that market and regulatory approval of the IP is given removes a substantial amount of risk attached to the project. As can be seen from the table below, risk decreases substantially at the completion of each stage. 1. Taking the EBITDA figure derived from steps one and two and deducting the development cost amortisation (step four) resulted (after applying the February 2022 exchange rate) in net income of $374.4 million per annum for the six year period of Mr Goldstein's calculation. Performing the DCF calculation using a 13.75% discount rate (step five) then yielded a present value of $1.114 billion which Mr Goldstein adopted as his if-approved valuation. 2. Questions three, four and five were supplementary to question two. They do not require separate consideration. 3. Question six asked what additional information Mr Goldstein would "need, if any, to increase the certainty of [his] valuations". His response was: The additional information to increase the certainty of the valuation would consist of actual financial information detailing the costs expended to date, to confirm the cost approach. The only information that would increase the certainty of the income approach valuation is the actual costs and the actual sales of the product. One way of measuring the value of an asset is to estimate the expected future economic benefits that can be generated by the asset. The more reliably those benefits can be measured or estimated, the more precise is the valuation. It is important to note that IP assets do not have an absolute value they may have different valuation results depending on how they can or will be put to commercial use and by whom. There are a number of factors that play a key role in IP valuation: the expected economic benefit is usually influenced by legal factors (for example, will the IP right be granted by the patent office), technological uncertainties (for example, is the technology ready to be commercialised) and market forces. 1. Question seven was: "Is some degree of uncertainty inherent in the valuation of such IP and can you explain how you account for these uncertainties". Mr Goldstein gave the following answer: Valuing early stage, technology-based intellectual property assets is challenging, in large part due to the difficulty in incorporating the effects of risk and uncertainty inherent in these assets into their valuation. Accounting for risk is particularly difficult in the very common situation when technology-based IP assets are valued prior to any (or significant) commercialisation success; i.e., when the assets are "early stage." These uncertainties are accounted for by the discount rate which incorporates the risk factor. The present day valuation is straightforward, as the cost approach is utilised, and the costs provided are assumed to be correct. The Income approach is somewhat more uncertain, but assuming regulatory acceptance, a considerable amount of uncertainty and doubt is removed. Using the discount rate provided by "alicrita" on page 13 coupled with the ten year treasury note rate should remove any further uncertainty. 1. The objection argued by counsel for NSLHD focused specifically on the opinions expressed in Mr Goldstein's report about the value of the IP. But counsel submitted, and I did not understand this to be in dispute, that if the objection to those opinions was upheld, there was no point in admitting any other part of the report. 2. Counsel's objection was that the opinions in question did not satisfy the requirements for admissibility imposed by EA s 79. In particular, counsel contended that they fell foul of the requirement which has been identified by the courts that experts give reasons for their opinions. That requirement is often labelled as the "Makita" requirement, after the leading decision in Makita (Australia) Pty Limited v Sprowles (2001) 52 NSWLR 705 (as it was in the instructions given by Dr Nguyen's solicitors to Mr Goldstein: see [28] above). 3. EA s 79 provides: If a person has specialised knowledge based on the person's training, study or experience, the opinion rule does not apply to evidence of an opinion of that person that is wholly or substantially based on that knowledge. 1. In Dasreef Pty Ltd v Hawchar (2011) 243 CLR 588, at [37], the High Court stated that it is "ordinarily the case" that, quoting from Makita, "the expert's evidence must explain how the field of 'specialised knowledge' in which the witness is expert by reason of 'training, study or experience' and, on which the opinion is 'wholly or substantially based' applies to the facts assumed or observed so as to produce the opinion propounded". 2. Evidence of opinion is, by EA s 76, generally inadmissible. It follows that, if opinion evidence is to be admitted, the onus lies on the party propounding the evidence to demonstrate that it falls within a relevant exception, in the present case, EA s 79. Usually, and the present case is an instance of this, the court only has the report itself to go on: HG v The Queen (1999) 197 CLR 414, at [39]. 3. Counsel submitted that neither of Mr Goldstein's valuation opinions satisfied the relevant conditions of admissibility. In neither case, counsel submitted, was the valuation figure supported with reasoning which demonstrated that it was based on relevant "specialised knowledge" of Mr Goldstein (if, indeed, he had any such knowledge). 4. In developing this submission with respect to the if-approved valuation, counsel referred in particular to the figure of US$ 1 billion per annum in gross sales (step one). Counsel submitted that, on the face of the report, Mr Goldstein had brought no expertise whatsoever to bear on the process of coming up with that figure. There was no reason at all for selecting it other than it had been proposed by Dr Nguyen. Similarly, counsel pointed out that the reasoning, if any, behind the selection of 11% as the "risk" discount factor (step five) was completely unexplained. 5. In his written submissions, Dr Nguyen first addressed the merits of the if-approved valuation. Apparently accepting that he was the source of the $1 billion annual sales revenue figure which was the starting point of the valuation, he submitted that he himself was a scientific expert in the relevant field and that his "statement or opinions relevant to these specific areas" ought to be considered as expert opinion under s 79 "or at least qualified or reasoned opinion". 6. Dr Nguyen also submitted that the "scientific evidence and industry data" in the report came from published material which could be verified by an online search (perhaps a reference to the article by Lu and others). In turn, the statements and opinions expressed in those documents were made by research scientists, experts and "professional officials of their field" with specialised knowledge and ought therefore also to be considered expert opinion for the purpose of s 79. He submitted that the US$1 billion figure was justifiable having regard to figures he gave for the costs of developing other allegedly similar drugs. 7. Dr Nguyen also referred in his submissions to the case law on the assessment of damages for loss of a valuable commercial opportunity (see in particular Sellars v Adelaide Petroleum NL; Poseidon Ltd v Adelaide Petroleum NL (1994) 179 CLR 332). He submitted that NSLHD had deprived him of exactly that type of opportunity. His submission was that the scientific evidence "provides a compelling case and scientific evidence that the [IP] even at its pre-clinical stages was a highly valuable commercialisation opportunity with a reasonable to high probability of human approval success and not a speculative and negligible opportunity". 8. Dr Nguyen then submitted that the report met the criteria for admissibility under EA s 79 according to the Makita requirement. He noted that Mr Goldstein had himself stated in his report that he had prepared it in accordance with the Expert Witness Code of Conduct. Dr Nguyen submitted that Mr Goldstein's qualifications in accounting and finance, and as a certified professional business valuer, made him an expert for the purposes of EA s 79 and that his report disclosed a process of rational reasoning to support his conclusions. 9. Dr Nguyen noted that NSLHD had qualified its own experts who had provided reports for the purposes of the proceedings (although these were not in evidence before me). He stated that no alternative method of valuation had been proposed by those experts. 10. In his oral submissions, Dr Nguyen relied on two propositions which he had taken from the Civil Trials Bench Book published by the Judicial Commission. 11. The first proposition (citing the decision of the Court of Appeal in Rhoden v Wingate [2002] NSWCA 165 at [86]) was that an expert opnion: is admissible even if the proof of factual basis for the opinion is controversial and the issue related to this factual basis cannot be resolved until the end of the trial, the opinion evident is admissible if there is evidence capable of establishing the truth of that assumption. I will refer to this as the "disputed factual basis proposition". 1. The second proposition (citing the decision of Austin J in ASIC v Rich [2005] NSWSC 149 at [329]) was that: an expert need not amass all of the factual data on which the opinion is to be expressed; the task can be delegated to another, but it is necessary for the expert who is the author of the report to apply his or her mind to the analysis and reasoning that any subordinates have developed, so that, when the report is finalised, the whole of the reasoning and conclusions it contains have been adopted as the expert's own reasoning and conclusions. I will refer to this as the "delegation proposition". 1. Dr Nguyen argued that, while Mr Goldstein might have used the research provided to him in the commissioning letter and the development costs document, that was permissible in accordance with the delegation proposition. He submitted: I guess as an expert, he must have practised his professional or ethical conduct and if we give him some outrageous claim, unsupported claim, then he would say "I reject this information, I won't use it in my report". At-present valuation 1. The $2.8 million figure adopted by Mr Goldstein as the cost of the IP was clearly not based on his own assessment. It was expressly taken by Mr Goldstein from Dr Nguyen's development costs document. As such, it was effectively a factual assumption made by Mr Goldstein. A dispute about its accuracy would not, as such, affect the admissibility of his opinion. 2. But such an analysis focuses attention on the opinion actually expressed by Mr Goldstein. The question to him was stated in terms of "valuation" of the IP. In the context, "valuation" must have its ordinary legal meaning, namely the price which would be paid to a willing but not anxious seller by a buyer at arm's length: Spencer v Commonwealth (1907) 5 CLR 418 at 432. 3. On the face of it, one would think that a market would exist for the IP in question, and that seems to have been the assumption behind the Commercialisation Agreement itself. Presumably, the potential buyers would be large pharmaceutical companies, or perhaps venture capitalists operating as intermediaries. In these circumstances, Mr Goldstein's use of the cost method instead of the market method required justification, especially when Mr Goldstein expressly conceded that the cost of the IP did not necessarily bear any relationship to its market value. 4. Implicitly, Mr Goldstein seems to have been saying that he could not conduct a market method valuation because sales data was not available to him. That may well have been so. But all that means is that in the present case the valuation task required a valuer with experience of, or access to accurate information about, commercialisation transactions of the relevant type. Lack of such experience, or access to such information, could not justify adopting a method of valuation which had no apparent relevance to what participants in the market would actually pay. In such circumstances, the proper answer for Mr Goldstein to have given, in accordance with the terms of the Code of Conduct, would have been that he was unable to determine the value, if any, of Dr Nguyen's IP. 5. The appropriateness of Mr Goldstein's valuation approach was directly raised by question six. But his answer (quoted at [55] above) did nothing more than gloss over the difficulties I have mentioned. Nor were they addressed elsewhere in the report. If there was some legitimate justification for adopting the cost method, Mr Goldstein did not explain what it was. In my rule, his at-present valuation fails to satisfy the Makita requirement and is inadmissible for that reason. If-approved valuation 1. The submissions by Dr Nguyen on the merits of Mr Goldstein's if-approved valuation (above at [64]-[65]) are not relevant. The question before the Court is one of admissibility of Mr Goldstein's opinions, and that must be judged according to the experience or other "specialised knowledge" which Mr Goldstein has brought to bear. 2. Dr Nguyen's reliance on the disputed factual basis proposition (above at [70]) is also not relevant for present purposes. To explain why this is so requires some explanation of the background to that proposition in the case law. 3. The proposition is linked to what has been referred to as the "basis rule". That rule was identified in Dasreef as a rule "by which opinion evidence is to be excluded unless the factual bases upon which the opinion is proffered are established by other evidence". The source of the rule will be addressed further below. For the moment, it is sufficient to note that it was subject to at least two practical limitations. 4. The first is that the opinion need not be based on assumptions which precisely correspond to the facts ultimately proved. In Rhoden, at [38], the Court of Appeal quoted from the following passage in the judgment of the High Court in Paric v John Holland (Constructions) Pty Ltd (1985) 59 ALJR 844: It is trite law that for an expert medical opinion to be of any value the facts upon which it is based must be proved by admissible evidence … . But that does not mean that the facts so proved must correspond with complete precision to the proposition on which the opinion is based. The passages from Wigmore on Evidence cited by Samuels JA in the Court of Appeal … to the effect that it is a question of fact whether the case supposed is sufficiently like the one under consideration to render the opinion of the expert of any value are in accordance with both principle and commonsense. As Wigmore states (at pp 941-2, Chadbourn Rev), 'the failure which justifies rejection must be a failure in some one or more important data, not merely in a trifling respect.' 1. The second qualification is the disputed factual basis proposition derived by the Judicial Commission from Rhoden, at [86]: When assessing the admissibility of expert opinions, it is not the case that an opinion is only admissible if at the close of the case of the party relying on it the evidence establishes each of the assumptions on which it is based on the balance of probabilities. The primary evidence relating to those assumptions might be controversial. Which parts of the primary evidence are to be accepted, and what the correct conclusions from the primary evidence are, are matters for the trier of fact at the end of the trial. The opinion evidence may be admitted if there is evidence which, if accepted, is capable of establishing the truth of the assumptions… 1. Prior to 2011, there was a debate in the case law about whether, following the codification of the common law of evidence, the "basis rule" became one of the requirements of s 79: see, for example, ASIC v Rich at [320]-[325]. It seems to me, however, that the "basis rule" can be explained as a particular application of the rule that, to be admissible, evidence must be relevant (see now EA s 55), and recourse to s 79 is unnecessary. That, I think, is quite consistent with Rhoden: in the passage quoted from [86] which is reproduced above, the Court of Appeal clearly accepted that if there was no evidence before the Court which, even contestably, might be capable of establishing the assumptions on which an expert's opinion is based, the opinion is inadmissible. Presumably, this is because it is incapable of supporting the plaintiff's claim and is therefore irrelevant. 2. In Dasreef the High Court referred to the debate but did not find it necessary to resolve it. The Court stated that its conclusion that the evidence in question was inadmissible (at [41]): … does not seek to introduce what has been called "the basis rule" .... Whether that rule formed part of the common law of evidence need not be examined. ... What has been called the basis rule is a rule directed to the facts of the particular case about which an expert is asked to proffer an opinion and the facts upon which the expert relies to form the opinion expressed. The point which is now made is a point about connecting the opinion expressed by a witness with the witness's specialised knowledge based on training, study or experience. 1. The same is so in the present case. The objection by counsel for NSLHD is based on the Makita requirement to give reasons, which is quite separate from any "basis rule" (whether incorporated in s 79 or not). I will, however, return to the question of relevance below. 2. It is also immaterial that NSLHD has retained its own experts to express opinions on the relevant question. NSLHD is not obliged to lead that evidence. The fact that it has been obtained cannot make Mr Goldstein's report admissible. 3. I turn to step one in Mr Goldstein's valuation, namely the US$1 billion in gross sale revenue. The figure was not identified in the report as an assumption for Mr Goldstein to make. But on the other hand, I do not accept that the figure was a product of any expertise brought to bear by Mr Goldstein. In my view, the proper interpretation of the report is that Mr Goldstein simply adopted a figure that had been provided to him by Dr Nguyen. 4. The reasoning behind the figure, as Dr Nguyen's submissions to me on the merits made clear, was Dr Nguyen's not Mr Goldstein's. It is not evident that it was based on any "specialised knowledge" of Mr Goldstein. Even if it had been, no reasons were given by Mr Goldstein which would show that, in adopting the figure, he brought any such knowledge to bear. 5. Nor is it a case of legitimate delegation (see [71] above) by Mr Goldstein. There is nothing to show that Dr Nguyen's analysis was undertaken at Mr Goldstein's request. Even if it had been, Mr Goldstein would have needed to give reasons to show why the resulting opinion could properly, notwithstanding delegation, be regarded as his opinion. 6. Similar comments apply to other integers of Mr Goldstein's calculations: the determination of net revenue (step two); the figure for development costs to be amortised (step four); and the "risk" component of the discount to be applied in the DCF calculation (step five). In particular, no explanation whatsoever was given for why Mr Goldstein selected the figure at one end of the range of development costs which he cited (leaving aside whether that range provided any real guidance as to the cost of commercialising Dr Nguyen's IP). And the chosen figure for the "risk" component of the discount factor was similarly opaque. The question-begging response to question seven, which concerned the uncertainties in Mr Goldstein's valuations (see [56] above), only made his lack of reasoning more conspicuous. 7. Mr Goldstein's if-approved valuation fails on multiple grounds to comply with the Makita requirement for supporting reasons. His opinion is inadmissible for that reason alone. 8. In passing, however, I should refer to another admissibility question which arose in the course of argument. The if-approved valuation was based on the assumption that drug approval had already been granted. The valuation was given in February 2022 and assumed that income was to be derived from 2022 onwards. That did not in fact occur. Obviously, having regard to the sort of time periods mentioned in Mr Goldstein's report for undertaking the necessary trials, it will not now happen, as there would be insufficient time to commercialise the IP before the expiry of the relevant patents. 9. When I put this to Dr Nguyen in the course of his oral submissions, he readily accepted that it was so. He indicated, consistently with his written submissions made about "loss of a chance", that his real case was one of being deprived of an opportunity to commercialise the IP at an earlier time, when there was sufficient time left in the patents to make such commercialisation viable. 10. According to Dr Nguyen, the opportunity arose on the 10 March 2015, one month after the three-year period expired under the Commercialisation Agreement. The reason for the one month delay was not explored in argument. Nor did Dr Nguyen specify for how long after March 2015 commercialisation remained viable. Although, if 8-10 years were required to get the invention to market, and most of the patents expired in 2027, the period might have been quite short. 11. Dr Nguyen made it clear that the assumption behind the claim was that he would have formed a company, described by Dr Nguyen as a "start-up", and assigned the IP to that company. With venture capitalist assistance, the start-up would have negotiated a royalty arrangement with a large pharmaceutical company for the commercialisation of the IP. In return, the start-up would have received royalty payments, and perhaps also "milestone" capital payments as each stage of commercialisation passed. In turn, Dr Nguyen personally would have benefitted as a shareholder from dividends paid by the start-up company. 12. Obviously, this general description left many critical details unanswered. What percentage shareholding of the start-up would Dr Nguyen have been able to negotiate to entice venture capital into it? What sort of deal could have been struck with a pharmaceutical company to exploit the IP once assigned to the start-up? Dr Nguyen expressed confidence that he would have had 50%, at least, of the start-up, but did not specify any particular figure. One notable factor is that, as already noted, in March 2015, Dr Nguyen could only have been entitled to 55% of the IP. The formation of the start-up company, the assignment of the IP to it, and the conduct of negotiations with venture capital providers would, at that time, apparently have required the participation of Dr Nguyen's co-inventors. The implications of this were left unexplored in the argument. 13. It is, however, unnecessary for present purposes to pursue these questions any further. The important point is that Dr Nguyen's case hypothesises a shareholding interest in a "start-up" company which in turn would have been entitled to royalty payments from a pharmaceutical company actually exploiting the IP. What Mr Goldstein did was based on the income which the pharmaceutical company might derive from the IP. On the face of it, the difference appears to me to be so fundamental that Mr Goldstein's figures, even if properly reasoned, would have been irrelevant to the valuation required by Dr Nguyen's case. Orders 1. My orders are: 1. I rule that the affidavit of Lee Gordon Goldstein dated 12 June 2023, including the annexed report dated 20 February 2022, is inadmissible in evidence at the trial of these proceedings. 2. I list the proceedings for further directions at 9:30am on 21 October 2024, or such other date as may be arranged between the parties and my Associate. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 18 October 2024