This document discusses various approaches and considerations for valuing technology transfer opportunities (TTOs). It begins by outlining key environment factors and valuation approaches like rules of thumb, comparables, and scientific methods. Examples of specific technologies are provided for demonstration. The challenges of long-tail distributions for valuations are discussed, emphasizing that most valuations will be wrong and money comes from outliers. Process control and negotiations are addressed. Uncertainty in assumptions is a major limitation for valuation precision.

2.  Environment of TTO valuations
 The key to valuation
 Valuation approaches
› Rules of thumb
› Comparables
› ‘Scientific’ approaches

3.  Section 9 of IP Handbook
› http://www.iphandbook.org/handbook/ch09/
 Anything written by Richard Razgaitis

4.  Three examples of technologies:
› US 6,684,702 – Flow Duct Obstruction
› US 6,386,217 – Axillary Crutch
› US 6,048,850 – Method of Inhibiting
Prostaglandin Synthesis in a Human Host
 For each example:
› Patent abstract, diagrams, claims
 Each is a real TTO valuation issue

5. 100.00
90.00
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
0.00
-10.00
McMaster University FY97 to FY06, Net
Revenues/Disclosure over Disclosures, Max revenue=100

6.  What happened to Pareto?
(80/20)
 More likely:
› Long Tail distribution (98/2)
 Valuation implications
› Do we make any money except
on a home run?
› Most valuations will be wrong
› A lot of money in thin lines
› But watch out for the expenses

7.  Process control
› Want to concentrate on big winners
 Help with subsequent negotiations
› Knowledge of the market
› Good valuations = Good deals
 Helps set targets
 Classic Definition of Valuation
› Between willing buyer and seller
› Having full possession of all relevant facts

8. Technology  Patents
Know-how
Expertise
Exclusivity  Yes / No
Confidentiality  Yes / No
Licence Back  Yes / No
What Plan?  Spin-off
Licence
Other

9.  Key to value: the Market
› The ‘value’ proposition
 Who decides to buy?
 e.g.: who decides on choice of a
specific drug for a condition?
 Q: For an example, what are our
relevant markets?
 Q: Are there other markets we should
consider?

10.  Before anyone can buy product, what
still needs to be done?
› Regulatory approvals
› System creation
 Q: for an example, which will require
approvals? Will approvals be
maintained?
 Q: what still needs to be done to
generate revenues?

11.  Very common belief that research $$
spent is the value
 Economics analysis
› Value of sunk costs?
› If there is no recovery on
research costs value is ZERO
 Costs can create a
real expectations
problem

12.  Start-up Companies
 Internal use
 Traditional licensing:
› Rules of thumb
› Comparables
› ‘Scientific’ or ‘B School’ approaches

13.  e.g.: VC invests $20M in seed capital in
company based on technology; subsequently
company generates $50M on an initial public
offering (IPO)
 What is value of technology?
 Analysis:
› What does university get out of the company?
› What do inventors get?
› Does university still share with inventors?
› Is there sponsored research coming in from
company?

14.  Depends on each individual negotiation
› Is there a double dip? (i.e. both shares and a
royalty)
› Only real determinant is post dilution
percentage left
 Some suggestion that technology value
may be as little as 1 or 2% pre-IPO

15.  Two types:
› Institution wants to sell a product
› Technology to be added to defensive portfolio
 Sales
› Isolated situations
 e.g.: Isotope sales;
Medical instruments
› What to do with sharing
formulae?
 How to calculate expenses

16.  Technology will be added to portfolio to
enable some other technology or to overcome
‘patent thicket’
 Good situation is ‘patent pooling’
› See: Parish and Jargosch, AUTM Journal 2003
› e.g. of MPEG pool
› Future of bio: Patenting to permit use; e.g. SARS
 Bad situation is where company wants to use it
defensively
› Q: Can university even do this type of deal?
› What is appropriate price?

17.  Rules of Thumb
› Usually based on specific industries
› May be confused with comparable rates
 Most used Rule of Thumb:
› The Razgaitis Rule aka The Rule of Quarters
 Need to be able to analyze what is the ‘incremental’
margin before G&A
 Rule suggests that ¼ of that increment should be
licensors
 In practice see anywhere from 10 to 50%
 Best suited to clear commercial products

18. Before After
Sales – $100 $200
CGS – $50 $70
Margin – $50 $130
G&A – $20 $20
Net profit $30 $110
Incremental Margin $80; therefore, royalty would
be $20 or 10% of Sale Price

19.  Q: of 3 examples, which is (are) suited to
‘Rule of Quarters’ analysis?
 How to price the royalty?
 The realities of the target industry
 More information on this: LES

20.  The 50% Rule:
› At point of product introduction, 50% of total
risk remains
› IF inventing org brings product to
introduction stage, entitled to 50% of profits
› Therefore, if commercializing org does part
of product introduction entitled to more than
50% of profits
 More a starting position for discussions

21.  Some industries have ‘standard’ rate
› Shrink-wrap software in 25 to 50% range
› Some types of pharmaceuticals
 What is the base?
› Stacking royalties problem
 How to get information on comparable
rates?
› Colleagues
› Subscriptions to Newsletters

22.  More similar deals is better
 But are the deals the same?
› Industry segments; Margins; Use of IP
› Licensing terms: exclusive; non; options
 Risk analysis
› What is usual risk profile of our technologies?
Compared to industrially-generated
technologies?
 Certainty analysis
› Similar to risk but one component separate:
certainty of measurement

23.  Different types of Risk
› Technology: can we develop the
technology as envisaged
› Market: will the market adopt the
technology
› IP issues: will our IP protection hold up
› Societal Norms: will our technology
continue to be accepted?

24.  Internet: Publicly-filed information like SEC
and SEDAR information
› www.sec.gov (look for EDGAR)
 Court and other public records
› http://pacer.psc.uscourts.gov/
 Specialty information
› www.10kwizard.com
› www.fda.gov
 Company’s own websites and competitors

25.  Leading Fed Ct decision
 Court established factors to consider in
establishing a ‘reasonable’ royalty
 15 Factors include:
› Existing royalty rates for licensor and licensee
› Exclusivity; territory; field of use
› Practice in licensing; relationship between
parties; potential related sales
› Duration and term of patent
1: Georgia-Pacific Corp. v. U.S. Plywood-Champion Papers, 318 F. Supp. 1116, (S.D.N.Y.
1970), modified, 446 F.2d 295 (2d Cir. 1971).

26.  Discounted Cash Flow (DCF) and
Net Present Value (NPV)
 Real options theory
 Auctions
 But first some arithmetic!

27.  What are assumptions that go into a DCF or
NPV calculation?
› Market size
› Percentage of market
› Product price
› Royalty Rate
› Discount (interest rate)
 How precise is any of these five
assumptions?
› The lowest of these is the most precision our
answer can have!

28.  Using probability distribution, which is
best estimate of discount (interest) rate?
σ = small

29.  Using probability distribution, which is
best estimate of discount (interest) rate?
σ = large

30.  How much is 2 ± 3 times 5 ± 5 ?
› -1 x 10 ( -10) to 5 x 10 (+50)
 More importantly, how much is:
times = ??
 More simply: is the result the fat or skinny
distribution?
› Answer: it is an even broader distribution

31.  If you’re lucky you have maybe 1 digit of
precision in your answer!
 The best you are likely to get in precision is
order of magnitude
› i.e. $106 vs. $107
 Any sensitivity analysis going to result in very
broad spread for the answer
 Put both of these conclusions together:
› Value for just about anything is going to be
somewhere between minus $106 and plus $108!

32.  Based on possible cash flows during life of
technology
› Usually patent life
 Likely distribution:

33.  Create Annual Cash Flows
› Market size
› Percentage of market
› Product price
› Royalty rate (or CGS)
 Then need to establish the appropriate
discount rate

34.  Relationship between rate of return and risk:
0
return
Company Ave Cost of Capital
Risk-free rate – T-bills + Inflation: ~7%
risk

35.  Need to know appropriate average cost of
capital
 Then add risk factors:
› Technology: can we develop the
technology
› Market: will the market adopt the
technology
› IP issues: will our IP protection hold up
› Societal Norms: will our technology continue
to be accepted?

36.  Superimpose NPV at, say, 15%

37.  Sensitivity Analysis at 7%, 15% and 30%

38.  Cumulation at 15%
 Note break-even point

39.  Discount rate is market driven
 AUTM TTM (Part X, Ch. 2)
› Low risk rates (known product): 15 to 20%
› New product, known manufacturing ability: 25% to
35%
› New product, new manufacturing, known business:
30% to 40%
› New business, product ready (no R&D): 40% to 50%
› New business, product needs R&D: 50% to 70% and
up
 Q: for three examples, what discount rate?

40.  Despite name not a ‘bet the bank’
strategy
 Uses probability distributions to create a
new probability distribution
 Hand calculation difficult
 Software implementations:
› Crystal Ball: www.crystalball.com
› @RISK: www.palisade.com

41.  Based on Black-Merton-Scholes options
analysis
 Best example is stock market options
 Why pay anything for an Oil future at $200
per barrel 12 months from now?

42.  Actual formula:
 Time sensitive
 Also depends on volatility
› Volatility related to risk
› Risk up  Volatility up  Option value up
 More information: Black-Scholes on
Wikipedia

43.  Theoretically, the best way to obtain the
highest value
 Depends on exposure to largest number of
potential buyers
 cf. success of eBay
 In patent field:
› Ocean Tomo – Summer 2009 IP Catalogue online
› Results from last auctions not like an Art Auction
 Will grow over time as bidders understand process
 Prediction: will become a larger force as
business understands IP better

44.  You have prospects for
sales efforts
› From brainstorming markets
› From comparables research
 You’re ready to negotiate
› You have ideas on:
 Field and Territory of Use
 Exclusivity or not
 Comparable rates
 etc. etc.

45.  Richard has spent $500,000 developing a
new way of arranging an electric steel-
making furnace which increases the
efficiency. R approaches UniSteel about
licensing the technology.
 UniSteel is interested and figures that they
will save about $100,000 per year in costs.
 What issues would you consider in valuing
the technology?

46.  M University has been asked by a new faculty hire, Professor Roe,
to take on the commercialization of a technology developed by
Professor Roe previously. The technology is currently 100% owned
by R Inc. which is, in turn, 100% owned by Prof. R and his wife. M is
being offered shares in R Inc. to take on the project.
 The technology is a new means of measuring someone’s blood
alcohol level by a skin testing device. A prototype has been
developed by R Inc. at a cost of $50,000. It is expected that it
might cost $2,000 per unit to build a production model. The
current number of units of breathalyzers sold in North America is
4,000 per year at a retail cost of $2,500. There are two major
competitors.
 What is an appropriate percentage of shares in R Inc. that M
Univ. should receive? What other information would you like to
receive? How would you obtain it?

47.  You have heard that patent law’s ‘first sale doctrine’
does not allow you to collect ongoing royalties from
a machine that you sell outright.
 You have invented a new patented machine for
conducting laser eye surgery. The machine has a
useful life of 10,000 operations which normally sell (by
the eye surgeon) for $900 per operation. The
machine costs you $175,000 to build and $40,000 per
year to maintain for the 10 years useful life of the
machine.
 Discuss an appropriate sales or licensing strategy
and pricing model to maximize your financial returns.

48.  Valuation is not an exact science!
 Valuation can be a good start in getting
information you will need at various
stages of process
 Remember the ‘long tail’!
 The answer is likely going to be between
-$105 and $108 !

49. Marcel D. Mongeon
+1 (905) 390 1818
marcel@mongeonconsulting.com