Evaluate, Then Valuate


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Presentation about evaluating IPs and/or early stage technologies given for a class

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  • I want to talk about a model of using evaluation and valuation model based on data obtained from patent analysis as a way of doing market analysis for either business development or new drug development As a consequence of that I want to talk about some economical concepts or models that I have been reading about as way of moving patent analysis as preliminary step to doing market research/analysis. I want to mention here that I have no former education about economics and the concepts I am going to talk about are spoken with the understanding that I am no expert in the field. Economical models deal extensively in the issue of scarcity. The Following are a few comments on scarcity. Scarcity influences price When demand is greater than supply than increases in prices ensures that product goes where it is most needed Scarcity determines value When demand is greater than supply than intrinsic value of the product is increased Scarcity creates a need to make a choice In an area of abundance resources are wasted Demand creates scarcity When demand is greater than supply than there is a scarcity of product Pricing the products greater than the demand creates abundance
  • Resource-based View Cyclical-approach to business development and as away of creating prolong competitive advantage [briefly go through the various components and focus on Barriers to Entry] One of the key assessment is to determine the barriers to entry into a market Here are a list of some, but the key one I like is the minimum efficient scale, which is the minimum amount of product that needs to be produce to minimize production cost. Based on that number, determine how much of the product needs to be sold and what portion of the market size does those revenues represent (Large MES number means that in the market will be competing vary heavily to increase there market share and gain market dominance = harder for you to get into the market)
  • There is a sizable literature examining patent citations as means of: Determining patent quality Determining knowledge spillover Determining business strategies I want to focused on the use of patent citations as away of fulfilling the resourced-based view approach to business development
  • Here is a patent citation done by Ocean Tomo consulting group. In this case, they have two patents that do not directly cite each other, but they want to know the over-lab of citation between these two patents as a way of determining the likely infringement of one over the other I believe that similar scan can be ran with one patent as a way of determining various market analysis issues: [read off the list]
  • Here is another situation by Ocean Tomo patent citation strategies. In this instance that are looking at ‘prior art’ citation to determine so called hot patents based on the number of citations they have. If that patent citing the hot patent and have a strong relationship with other patents citing the hot patent it is considered to be a patent within the next generation of technologies coming out. This is a way of getting an idea of where the market is going, who is in the market, and who is the market leader and/or the potential of being the market leader
  • In summary: Using patent analysis due diligence in market analysis for business development and/or new product development can be done
  • Evaluate, Then Valuate

    1. 1. Evaluate, then Valuate: An Economical Approach to Building Biotechnology
    2. 2. Patent Analysis Market Analysis Evaluation Valuation Is there a scarcity/demand in the targeted technology area? Scarcity creates a need to make a choice Demand creates scarcity Scarcity determines value Scarcity influences price
    3. 3. Resource-Based View: <ul><li>Barriers to Entry </li></ul><ul><li>Government regulations </li></ul><ul><li>Patents/IP </li></ul><ul><li>Asset Specificity </li></ul><ul><li>Economy of scales (minimum efficient scale) </li></ul><ul><ul><li>Robert M. Grant. The Resource-Based Theory of Competitive Advantage (1991) California Management Review 33: 114-135 </li></ul></ul>Porter’s 5 forces
    4. 4. Patent Citations used to: <ul><li>Determine patent quality/value </li></ul><ul><li>Determine business strategies </li></ul><ul><li>Determine knowledge spillover </li></ul>
    5. 5. What can we learn from Patent Citations? <ul><li>Potential partners </li></ul><ul><li>Potential competitors </li></ul><ul><li>Licensing opportunities </li></ul><ul><li>Surrounding technologies </li></ul><ul><li>Potential Infringements </li></ul><ul><li>Potential market direction </li></ul><ul><li>Hot/Cold technologies </li></ul><ul><li>IP barriers to entry </li></ul><ul><li>New markets </li></ul><ul><li>Focused Patent landscape analysis based on patent counts </li></ul>
    6. 6. Co-citation Provides a Natural Clustering Mechanism 5862322 5848248 hot patents 6170002 6256664 6263362 6298352 6279125 6279042 6298457 6370567 6219668 6442594 next generation citing patents Connie K. N. Chang Director, Ocean Tomo Federal Services, LLC Collaborative Expedition Workshop #71 National Science Foundation Ballston, Virginia March 18, 2008
    7. 7. Comparison to related patents Comparison to rivals Assessing rival products Determining key markets & assessing market pull Determining rivals, rivals’ market share, & anticipate technologies that rivals are securing Assessing current innovations & probable direction of the market Patent Analysis Resource-based view
    8. 8. “ Nothing can have value without being an object of utility” Karl Marx “ Everything is worth what its purchaser will pay for it.” Publilius Syrus Valuation <ul><li>Patent Legal Factors </li></ul><ul><li>Economic value of the market protected by the patent </li></ul><ul><li>Economic value of the technology </li></ul>Value patent based on three factors: Qualitative!!! <ul><li>Quantitative: </li></ul><ul><ul><li>Market-based approach (comparable approach) </li></ul></ul><ul><ul><li>Asset-based approach (cost approach) </li></ul></ul><ul><ul><li>Income-based approach (discounted cash-flow) </li></ul></ul>“… demand cannot be known without prices” Ludwig Von Mises
    9. 9. Infringements Market Share Innovation
    10. 10. “ The first lesson of economics is scarcity: There is never enough to satisfy all those who want it. The first lesson of politics is to disregard the first lesson of economics.” Thomas Sowell “ When a management with a reputation for brilliants tackles a business with a reputation for bad economics, it is the reputation of the business that remains intact. Warren Buffett. evaluation Management Environment/Politics valuation An Economical Approach to Building Biotechnology
    11. 11. <ul><li>The ULR contract market overcomes the inefficiencies of traditional bilateral licensing by providing: </li></ul><ul><li>Contract standards </li></ul><ul><li>Efficient distribution model </li></ul><ul><li>Market transparency </li></ul><ul><li>Price discovery </li></ul><ul><li>Consistency in enforcement strategy </li></ul>Financial Exchange Focused on Intellectual Properties
    12. 14. Scarcity: <ul><li>Q Ratio (Tobin's Q ratio) </li></ul><ul><li>What Does Q Ratio (Tobin's Q ratio) Mean? A ratio devised by James Tobin of Yale University, Nobel laureate in economics, who hypothesized that the combined market value of all the companies on the stock market should be about equal to their replacement costs. The Q ratio is calculated as the market value of a company divided by the replacement value of the firm's assets: </li></ul><ul><li>Investopedia explains Q Ratio (Tobin's Q ratio) For example, a low Q (between 0 and 1) means that the cost to replace a firm's assets is greater than the value of its stock. This implies that the stock is undervalued. Conversely, a high Q (greater than 1) implies that a firm's stock is more expensive than the replacement cost of its assets, which implies that the stock is overvalued. This measure of stock valuation  is the driving factor behind investment decisions in Tobin's model. </li></ul>
    13. 15. By examining the characteristics of patents that were renewed relative to those that were abandoned, one can begin to make certain predictive assessments about the quality and likely value of other patents that share statistically similar attributes. The Ocean Tomo Relevance Engine determines the most closely related patents and identifies their current owners based on USPTO Assignment records. This allows decision makers to quickly and objectively obtain information regarding relevant patents, technologies, potential partners, acquisitions or other strategic targets based on Patent information.
    14. 16. <ul><li>IPXI has qualified the following companies as having especially strong intellectual property, including patents, copyrights, and trademarks. In order to be included on this list of qualified equities, a company must meet at least one of the following criteria: </li></ul><ul><li>OT300 Top Quartile </li></ul><ul><ul><li>The company is rated in the top quartile of companies listed in the Ocean Tomo 300® Patent Index </li></ul></ul><ul><li>Appraised Value </li></ul><ul><ul><li>The value of the company's intellectual property, as determined by an independent, third-party appraiser, exceeds $1 billion </li></ul></ul><ul><li>Innovation Ratio </li></ul><ul><ul><li>The Innovation Ratio (IP value/book value), as determined by an independent, third-party appraiser, exceeds 25% </li></ul></ul><ul><li>Licensing Revenue </li></ul><ul><ul><li>Licensing revenue from intellectual property exceeds 15% of total revenues or 50% of earnings </li></ul></ul>
    15. 17. Shows the citation relation between two patents: 1 st generation = direct citation (i.e. they both cite the same patent); 2 nd generation = they are linked via on patent citation removed; etc. (1 st generation has 2 path between P1 and P2; 2 nd generation has 3 paths betw P1 and P2, and etc. The determined count of citational relationships at each generation 2-5 are provided as input predictor variables (independent variables) to a multi-variate probit regression model. The regression model is formulated and optimally adjusted to predict the existence or absence of a first generation citational relationship between documents P 1 and P 2 (whether such relationship actually exists or not) and/or some other objective relationship based on some or all of the input predictor variables provided. The resulting probability score (and/or a mathematical derivation thereof) is an objective and repeatable probabilistic quantification of the likely relevance between documents P 1 and P 2.
    16. 18. Market Share    =    Firm's Sales  /  Total Market Sales <ul><li>Easy to enter market if: </li></ul><ul><li>Common Technology exist </li></ul><ul><li>Little brand franchise exist </li></ul><ul><li>Large access to distribution channels </li></ul><ul><li>Low scale threshold (minimum efficient scale; MES) </li></ul><ul><li>Difficult to enter market if: </li></ul><ul><li>Patented or proprietary know-how is involved </li></ul><ul><li>Difficulty in brand switching </li></ul><ul><li>Restricted distribution channels exist </li></ul><ul><li>High scale threshold (MES) </li></ul><ul><li>Easy exit, if there are: </li></ul><ul><li>Salable assets </li></ul><ul><li>Low exit costs </li></ul><ul><li>Independent business </li></ul><ul><li>Difficult exit, if there are: </li></ul><ul><li>Specialized assets </li></ul><ul><li>High exit costs </li></ul><ul><li>Interrelated businesss </li></ul>