navigating ip markets · 2011-10-10 · medical device 3 – 5 % software 5 – 15 % semiconductors...
TRANSCRIPT
Navigating IP Markets
MARQERA © 2011, All Rights Reserved
Technology Valuation Elena Canetti
VP Technology Transfer
Marqera LLC
Course Agenda
What is the right price: Value Vs. Price
Basic Methods of Valuation
1. Back Perspective
2. Around Perspective
3. Pieces Perspective
4. Down Perspective
5. Forward Perspective
6. Dice Perspective:
7, 8 and 9. Auction, Common Sense and Equity Perspective
Conclusions
What is the right price: Value vs. Price
Value
An amount considered a suitable equivalent for something else.
Price
The sum of money or goods asked or given
for something.
Price vs. Value
Licensee’s Ceiling
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Licensor’s Floor
Range of Negotiation
Valuation: a rational process
Without a valuation basis
With a valuation basis You negotiate the basis
You negotiate from emotion
When is Technology Valued?
By litigators, Value established at a point in time.
Adversarial: the outcome is imposed judicially.
By deal makers, Value extracted over time. Prospectively
Retrospectively
Is that enough? How Much is my technology really worth?
Does the technology work in a production setting?
What product development activities will need to be further conducted?
Will there be commercially valuable patents to protect it from copycats?
How much is the end user willing to pay?
What regulatory requirements need to be fulfilled?
Prospective Valuation – The calculation of royalty
The calculation of royalty, depends on:
Technology Scope
Number and scope of patents
Know how
Patent age
Number of potential applications
Stage of technical development
Barriers to market entry
Exclusive or non exclusive rights
The licensing perspective:
1. Back Perspective Costs
2. Around perspective Industry standards, comparables
3. Pieces perspective Ranking/rating
4. Down perspective Rules of thumb
5. Forward perspective Discounted cash flow
6. Dice Perspective Monte Carlo
7. Others Perspective Auction
8. No farther Perspective Common sense
9. Market Perspective Equity
Basic Methods of Valuation
Is cost to develop relevant? Development costs, patent costs?
1. Back Perspective
However it can be useful for: Development costs as a factor in determining value Modified replacement cost to calculate upfront
NO! it is a poor method for pricing.
Also known as the Cost Approach
Theoretical Background: Value is determined by the cost to replace or the cost to recreate
the IP.
Costs include: R&D, Materials, Equipment, Marketing, Advertising, Delayed Market
Entry.
Value of the IP: Fair market value of total investment to replace or recreate the IP.
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NOTE: A licensee will not pay more for the IP than the amount for which the IP could be recreated. However, by licensing IP from others the licensee avoids development costs and minimizes risk
2. Around Perspective: Comparables Approach
Constitutes of looking at sources of comparable transaction data
Internal database
Published surveys
Public announcements
Word of mouth
Litigation
Required disclosure
Royalty Rate Standards
Comments Royalty Product
1 % commodities, 2% processes 1 – 4 % Materials Processes
3 – 5 % Medical Device
5 – 15 % Software
Chip design 1 – 2 % Semiconductors
Composition of materials 8 – 10 % Pharmaceuticals
With clinical testing 12 – 20 %
New entity 4 – 5 % Diagnostics
New methods 2 – 4 %
Processes non exclusive 1 - 1.5 % Biotechnology
Processes exclusive 1 – 2 %
Adapted from Lita Nelsen, Director TLO of MIT
Licensing Executives Society – AU NZ Royalty chart
Avg. Median Max Min No. of Licenses
4.70% 4% 15.00% 1.00% 35 Automotive
4.70% 3.60% 25.00% 0.50% 72 Chemicals
5.20% 4% 15.00% 0.20% 68 Computers
5.50% 5% 17.00% 0.00% 90 Consumer Goods
4.30% 4% 15.00% 0.50% 132 Electronics
5.00% 5% 20.00% 0.50% 86 Energy & Environment
2.90% 2.80% 7.00% 0.30% 32 Food
5.80% 4.80% 77.00% 0.10% 280 Healthcare Products
11.70% 7.50% 40.00% 0.30% 47 Internet
5.20% 4.50% 25.00% 0.50% 84 Machines/Tools
10.60% 8% 50.00% 2.00% 19 Media & Entertainment
7.00% 5.10% 40.00% 0.10% 328 Pharma & Biotech
4.60% 3.20% 30.00% 0.00% 78 Semiconductors
10.50% 6.80% 70.00% 0.00% 119 Software
5.30% 4.70% 25.00% 0.40% 63 Telecom
Comparables Approach Sources
Most valuable tool for determining industry standards is the use of published agreements.
Published Data
• www.knowledgeexpress.com
• http://pharmalicensing.com/public/
Litigation
• Lexis/Nexis www.lexisnexis.com
SEC filing
• SEC EDGAR system www.sec.gov/edgar/
• EDGAR online: pro.edgar-online.com or www.tenkwizard
Databases
• www.recap.com (Deloitte)
• www.rDNA.com • http://www.recapip.c
om • http://www.recaprx.c
om • www.royaltysource.co
m • www.
techagreements.com • Disclosure
Information, Inc. www.thomson.com/financial/fi_partners.jsp
3. Pieces Perspective: The Ranking Method
The ranking method:
Uses data from similar agreements
Uses a rating table to score the deal compared to known prices from comparable deals
The Georgia Pacific Factors:
LICENSING OUT SCORE IMPORTANCE OF FACTOR
4.2 Nature of Protection
4.2 Utility over old methods
4.1 Scope of exclusivity
3.4 Licensee’s anticipated profits
3.4 Commercial Success
3.5 Territory Restrictions
3.7 Comparable License Rates
3.1 Duration of Protection
3.1 Licensor’s anticipated Profits
3.6 Commercial Relationship
2.1 Tag Along Sales
5 = MOST IMPORTANT, 1 = LESS IMPORTANT
Source: Stephen Degnan and Corwing Horton, “A Survey of Licensed Royalties”
Common 5 factor approach
WEIGHTED SCORE
WEIGHTING FACTOR
SCORE OF 1 TO 5
FACTORS
0.4 0.2 2 STAGE OF DEVELOPMENT
0.8 0.2 4 SCOPE OF IP PROTECTION
1 0.2 5 MARKET ATTRACTIVENESS (SIZE)
0.6 0.2 3 SUSTAINABILITY VS. COMPETITIVE TECHNOLOGIES
0.6 0.2 3 INDUSTRY PROFIT MARGINS
3.4 TOTAL WEIGHTED SCORE
Rules of Thumb
The 25% Rule: the Goldscheider Principle: the Licensor should receive 25% and the Licensee 75% of the pre-tax profits from a licensed product.
The second rule of thumb, converts roughly the 25% pre tax profit to 5% royalties
4. Down Perspective: the 25% Rule
25% Rule
Meaning of the Rule:
The royalty in dollars should be 25% of the savings in dollars to the licensee by the use of the licensed technology
The royalty in percentages of net sale price should be 25% of the profit before taxes, enjoyed by the licensee by selling products based on the licensed technology
Discounted Cash Flow/Net Present Value
The method consists of determining future cash flows, then discounting the cash flows for the time over which those amounts are to be received and by the associated risk of receive such cash flows.
When all such cash flows have been discounted they can be added to determine the net present value (NPV)
5. Forward Perspective
Also Named the Income Approach
Theoretical Background: Value is determined by the economic benefit expected from use of
the IP.
Value of IP: Present value of the expected future income stream.
Key parameters: Amount of income stream
Duration of the income stream
Risk associated with the realization of the income
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Note: Two well known methodologies: Excess Earnings and Relief from Royalties.
METHOD OF CALCULATION OF NPV
xxx Sales
yyy Expenses
zzz Depreciation
rrr Royalties
EBT EARNINGS BEFORE TAX
ttt Taxes
EAT EARNING AFTER TAX
ddd Depreciation
iii Investments
www Working Capital
NCF NET CASH FLOW
NPV = Rn/(1+k)n Discount Cash by NPV
Embody risk in k Choose k.
Value: Risk plus timing and amount of future cash flows
Calculation of NPV
Each year cash flow (R in year n) is discounted by dividing each cash flow (R) by the term (1+k)n, where:
k - is the hurdle or discount rate
n – the year from the date in which the projected cash flow occurs
NPV = Rn/(1+k)n
Discount/Hurdle Rates for Start-Ups
Hurdle Risk Stage of Development
Pre-seed funding 100 % Research and Development
New business, seed funding, R&D stage 50 – 70 % Start Up
New business product ready for sale, no R&D required
40– 50% 1st Stage
New product and technology in existing business
30– 40% 2nd stage
New product, existing capabilities, known technology
25 – 30% Mezzanine/IPO
New product for existing manufacturing line and market
15% Low Risk
6. Dice Perspective Montecarlo
Complex Mathematical modeling tools
A basic popular tool is the probabilistic model or Monte Carlo analysis
The tool works by replacing certain numbers in the calculation with a probabilistic value. The model is run hundreds of time to develop a distribution of outcomes
Plus and Minus of Monte Carlo P
LU
S • The model can be run over and over again
with changing assumptions • You get better understanding of the
assumptions and their economic impact • High risk technologies are not punished with
high hurdle rates.
MIN
US
• There is never a right answer • Requires appropriate software and user
experience
About the other perspectives
6. Others Perspective: Auction
Technology auctions are rare, however patent auctions are not so rare
They are used for example in cases of bankruptcy or shut down
7. No farther Perspective:
Common sense
8. Market Perspective:
Equity – what is the value of a similar size, similar technology company in the stock exchange?
IP Value in the Market
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Conclusions
Valuating your technology is an excellent way to prepare for the negotiation of a successful deal (win win)
The Valuation of the technology is an essential part of the technology transfer process
With a valuation you negotiate with a sound economic basis and not from an emotional basis
Valuation of the technology is a way of determining the licensed technology value for the customer (licensee) and not only for the inventors (licensor)
Using more than one valuation method gives you a broader perspective, and accounts for a range of different factors
Thank You!
Elena Canetti, VP Technology Transfer
Marqera LLC.
©, 2011, All Rights Reserved