Technology Valuation Methods

11,217 views

Published on

A presentation on different technology valuation methods for early stage discoveries. Presentation given as part of an ASEAN-USPTO Program on Technology Transfer, July 2, 2009

Published in: Business, Technology
1 Comment
3 Likes
Statistics
Notes
No Downloads
Views
Total views
11,217
On SlideShare
0
From Embeds
0
Number of Embeds
34
Actions
Shares
0
Downloads
532
Comments
1
Likes
3
Embeds 0
No embeds

No notes for slide

Technology Valuation Methods

  1. 1.  Environment of TTO valuations  The key to valuation  Valuation approaches › Rules of thumb › Comparables › ‘Scientific’ approaches
  2. 2.  Section 9 of IP Handbook › http://www.iphandbook.org/handbook/ch09/  Anything written by Richard Razgaitis
  3. 3.  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
  4. 4. 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
  5. 5.  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
  6. 6.  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
  7. 7. Technology  Patents Know-how Expertise Exclusivity  Yes / No Confidentiality  Yes / No Licence Back  Yes / No What Plan?  Spin-off Licence Other
  8. 8.  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?
  9. 9.  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?
  10. 10.  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
  11. 11.  Start-up Companies  Internal use  Traditional licensing: › Rules of thumb › Comparables › ‘Scientific’ or ‘B School’ approaches
  12. 12.  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?
  13. 13.  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
  14. 14.  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
  15. 15.  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?
  16. 16.  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
  17. 17. 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
  18. 18.  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
  19. 19.  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
  20. 20.  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
  21. 21.  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
  22. 22.  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?
  23. 23.  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
  24. 24.  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).
  25. 25.  Discounted Cash Flow (DCF) and Net Present Value (NPV)  Real options theory  Auctions  But first some arithmetic!
  26. 26.  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!
  27. 27.  Using probability distribution, which is best estimate of discount (interest) rate? σ = small
  28. 28.  Using probability distribution, which is best estimate of discount (interest) rate? σ = large
  29. 29.  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
  30. 30.  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!
  31. 31.  Based on possible cash flows during life of technology › Usually patent life  Likely distribution:
  32. 32.  Create Annual Cash Flows › Market size › Percentage of market › Product price › Royalty rate (or CGS)  Then need to establish the appropriate discount rate
  33. 33.  Relationship between rate of return and risk: 0 return Company Ave Cost of Capital Risk-free rate – T-bills + Inflation: ~7% risk
  34. 34.  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?
  35. 35.  Superimpose NPV at, say, 15%
  36. 36.  Sensitivity Analysis at 7%, 15% and 30%
  37. 37.  Cumulation at 15%  Note break-even point
  38. 38.  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?
  39. 39.  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
  40. 40.  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?
  41. 41.  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
  42. 42.  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
  43. 43.  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.
  44. 44.  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?
  45. 45.  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?
  46. 46.  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.
  47. 47.  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 !
  48. 48. Marcel D. Mongeon +1 (905) 390 1818 marcel@mongeonconsulting.com

×