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© 2005 Ashley J. Stevens and Richard Razgaitis. All Rights Reserved. Do not copy or modify
An Introduction to Valuing Technology
Dr Kevin Cullen
Director of Research & Enterprise
University of Glasgow
NOTE
This presentation will provide an overview of approaches.
Anyone who wants a detailed knowledge of university
technology evaluation techniques should listen to Ashley J.
Stevens of the University of Boston (like I did). My thanks to him
for use of his materials.
[email address]
I think many people are often confused about why we are interested
in technology commercialization, in nurturing start up companies,
and in facilitating more patents and license agreements.
It is not about the promise of future revenues that might be
generated from this activity.
You heard me correctly. It is not about the money.
Of course, revenue generation serves as an incentive. But first and
foremost, tech transfer must serve our core mission: sharing ideas
and innovations in the service of society’s well-being.
In fact, at Michigan we expect to re-invest institutional gains back
into tech transfer efforts. Revenue generation is NOT the ultimate
goal. It is simply the means by which we can increase the transfer
of new knowledge into the business sector.”
Dr. Mary Sue Coleman, President, University of Michigan
AUTM Annual Meeting 2005
Phoenix, AZ
Yeah, yeah, yeah
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Except at Budget time!
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You don’t want to be the goat who left a million
pounds/euros/dollars dollars on the table.
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You need to have an idea of the value of your technology/offering.
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This session will outline some simple and more advanced
approaches.
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Warning! Some cynical people will suggest that this is a black art
and that we are simply using techniques to justify our own
assumptions….you can decide.
…now valuation versus price.
Valuation
Pricing
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Various techniques
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A negotiation
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Different answers
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One outcome
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An opinion
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A commitment
Valuation
Pricing
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With a valuation basis
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You negotiate the basis
Valuation
Pricing
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With a valuation basis
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You negotiate the basis
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Without a valuation basis
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You negotiate from emotion
Note that both approaches are
legitimate, but it’s easier to defend the
first one to your boss.
Technology Rights
Technology Rights – things that contribute to value
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Scope of license
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Assignment vs. License vs. Freedom to use
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Exclusive vs. Non-exclusive
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Fields of use
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Geographic extent
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How strong are the patents
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What other technology rights are included
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Background rights
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Improvements
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Biological materials
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A prototype
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Clinical data
Different Degrees of Rights Can be Granted
Degree of transfer of rights
Complete transfer
No transfer
Limited transfer
Freedom to
Assignment
License
use
Exclusive by Field
Exclusive
Exclusive by Field
Exclusive by territory
Non-exclusive
Non-exclusive
Exclusive
Exclusive by territory
Degrees of Exclusivity
Characteristics of the Patent
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What does it protect?
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Composition of matter
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Apparatus
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Method of Use
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Manufacturing process
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Formulation
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Does it protect characteristics perceived to be of value by
consumers?
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How broadly does it exclude others? (i.e., how easily is it
avoided?)
“The economic value of a patent depends
fundamentally upon the nature and extent
of non-infringing substitutes”
John Culbertson and Roy Weinstein
“Product Substitutes and the Calculation of Patent Damages”
J. Patent and Trademark Office Society, 70.11, 749-761 (1988)
Risk
Types of Risk – that can detract from value
R&D risk
Manufacturability risk
Marketing risk
Competitive risk
Legal risk
Patent risk
Overall
I in 10,000 drug candidates makes it to FDA approval
1 in 3,000 raw ideas make it to market
33-60% of new product launches fail
….the odds are challenging
Risk vs. Time – Drug Development
Evaluation
Valuation
Risk
Highest
Least
Academic
VC
Biotech
Pharm.
Invest.
Corp. R&D
Co.
Banker
Information available at time of valuation
Therapeutic target
Spec. disease
Indication
Actual sales
Competitive profile
Reg. strategy
Toxicology
Actual profits
Patent position
Man. costs
Value vs. Risk
Risk
Value
Time
The Basic Ways to Approach Valuation
Look up
Policy
Look back
Cost
Look around
Industry Standards – Comparables
Look at the pieces
Ranking/Rating
Look down
Rules of Thumb
Look forward
Discounted Cash Flow
Look to the dice
Monte Carlo
Look to others
Auction
Look to the market
Equity
1. Look up - Policy
2. Look Back -- Cost
Look Back -- Cost
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Cost to develop plus a return
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Is cost to develop relevant?
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Would you want to or be able to sell a used lottery ticket for what you
paid for it?
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Wasn’t the technology developed with a GRANT?
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Cost driven negotiations are relatively straightforward.
Cost Driven Negotiation
Buyer’s valuation
$140
Great Deal
$120
Seller’s valuation
$100
$80
ow
Fair
margin
No Deal
lue of N
$60
Va
$40
ded IP Cost
Cost
Avoi
$20
Cost to do it
yourself
$0
Case A
Case B
Source: Richard Razgaitis
Look Around -- Industry Standards/Comparables
Sources of Comparable Transaction Data
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Probably the most important method for academic
licensing.
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Sources of Comparable Transactions
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Internal database
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Published surveys
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Public announcements
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Word of mouth
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Litigation
Internal Database
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Licenses previously done by your office
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Trends over time
Published Surveys
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Relatively few in number
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None very recent
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Best review:
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Richard Razgaitis in AUTM Licensing Manual, Chapter
VII-4
Word of Mouth
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Techno-l
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Created by Donna Baranski-Walker at MIT
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Moved to SRI International
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Acquired by UVentures in October 1999
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UVentures acquired by UTEK in October 2003
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Free
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Subscribe:
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http://www.techno-l.org/process.cfm?pageID=4&tl=4
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Archives:
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Since 1999 via UTEK:
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http://www.techno-l.org/process.cfm?pageID=3&tl=3
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1997-1999: http://groups.yahoo.com/group/techno-l/messages
Litigation
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Very complete information from patent infringement suits
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Case must go to trial
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Not for the novice
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Sometimes useful information included with complaint e.g.,
• Gatorade Trust agreement
• Stokely Van-Camp license
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attached to University of Florida complaint against the Gatorade
Trust
Recombinant Capital
San Francisco, CA 94104
phone (925)
952-3870
http://www.recap.com/
Two levels of Service
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Recap.com
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$1,000 per year + $100 per extra seat; $500 set up fee
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Half price for not-for-profits
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Database of transactions
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Fee can be applied to individual transaction documents
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$200 per transaction ($300 if first to request)
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rDNA.com
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$6,000 - $26,000 per year depending on number of users
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Access to full text of all deals
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Limited number of “analyzed” deals
Look to the Pieces -- Ranking/Rating
Expert Panels
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Panel of experts reviews technology from various perspectives,
e.g.
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Market size
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Patent protection
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Stage of development
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Probability of success
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Need:
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Scoring criteria
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Scoring system
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Scoring scale
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Weighting factors
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Decision table
Expert Panels
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Pros:
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Prepares for license negotiations
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Allows comparison of technology with others on a common basis
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Cons:
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Need a comparable to which to apply the results
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Highly subjective
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Needs a panel of “regulars” to be effective
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Larger offices have a weekly “triage” meeting
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All review and rate/rank new invention disclosures
Look to your Hand – Rules of Thumb
-- the 25% Rule
A Fundamental Principle of Technology Valuation
The Goldscheider Principle
(aka the 25% Rule)
“ The Licensor should receive 25% and
the Licensee 75% of the pre-tax profits
from a licensed product ”
The 25% Rule
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Relationship of royalty rate to profitability first raised in
Horvarth v. McCord Radiator and Mfg. Co. et al., 100 F.2d
326, 335 (6th Cir. 1938)
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First enunciated by Albert S. Davis, General Counsel,
Research Corporation “Basic Factors to be Considered in
Fixing Royalties” in “Patent Licensing”, Patent Law Institute,
1958
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Robert Goldscheider and James T. Marshall “The Art of
Licensing -- From a Consultant’s Point of View”, 2, The Law
and Business of Licensing 645 (1980)
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Recent review in les Nouvelles “Use of the 25 Per Cent Rule
in Valuing IP” Robert Goldscheider, John Jarosz and Carla
Mulhern, 37 123-133, December 2002
The 25% Rule
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Based on empirical observations
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18 worldwide licenses by Swiss subsidiary of US company
starting in 1959
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Complete IP portfolio - patents, ongoing know-how, trademarks,
copyrighted product materials
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3 year term, so readily replaceable if terms inappropriate
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Licensors made ~20% pre-tax profit, paid 5% royalty; were
either #1 or #2 in their market despite strong competition
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Concluded that the licenses resulted in successful, long term
win-win relationships
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Is actually the 25-33% rule
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Applied to fully-loaded pre-tax profits, not gross margin
Justifications
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It works – Goldscheider and thirty years of experience
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Businesses often require a 3x return to make an investment
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R&D is only ¼ of the way to a new product
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R&D is 39% of pre-tax profits of all US public companies
(Business Week, 1994)
Application
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Expressed as a % of net sales in license
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royalty rate = 25% x expected profit margin
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Starting point for negotiation; tune up or down for
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significance of IP portfolio
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who bears principle burden of risk
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Limited value in academic licensing negotiations because of
uncertainty of ultimate profitability
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Of most relevance when you’re licensing to a new industry
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Major importance in infringement -- reasonable royalties
theory
Look forward –
Discounted Cash Flow/Net Present Value
Time Value of Money
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Getting $1,000 next year isn’t worth as much as getting $1,000
tomorrow
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What would we pay today to receive $1,000 in a year?
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Need to be compensated for:
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Inflation
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Risk the payment won’t be made
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A return on the investment
Net Present Value Calculations
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Takes into account the facts:
• Expenses are certain and early
• Return is later and uncertain
• Product may not succeed
• Market may not be there
A Typical R&D Project
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$10 mm invested over 6 years
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Sales start in year 7
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Peak profits of $15 mm in years 12-14
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Over by year 19
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Total Net Income of $136 mm
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Net Profits exceed expenses by $126 mm
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Looks like a good deal
How it looks at various discount rates
16
0%
14
3%
) 12
m
7%
10
m
$
15%
8
(
30%
6
ow
50%
Fl
4
h
s
2
a
C
0
-2
1
3
5
7
9
11
13
15
17
19
-4
Year
Source: Richard Razgaitis
Issues with NPV Calculations in Academic Licensing
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What will the market be and the profit margin?
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How do you value stock that’s part of the license?
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Extreme uncertainty of the development pathway
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Will the licensee take the product to market or will it be a
sublicensee?
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How much of the development cost will they shift to the
sublicensee?
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What will the licensee’s return from the sublicensee be?
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An extremely useful exercise to look at the value of the
components of the deal and trade-offs between them
Look to Others -- Auctions
Auction Considerations
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Only works for a hot technology – seller’s market
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Need at least 3 bidders
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Technology must be readily understood and evaluated
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If unacceptable bids, technology will be perceived as damaged,
because of visibility of the process
See:
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http://www.ip-auction.eu
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http://www.oceantomo.com/auctions.html
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http://www.ipauctions.com/
“A hot academic technology is one that two
companies are interested in”
(emphasis added)
Lita Nelsen
MIT
1991
Look to the Market -- Equity
“Equity is just cash that hasn’t turned green yet”
Joyce Brinton
Harvard University
1998
How do you get equity in a license?
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to pay early substitute for one or more cash components
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Remember -- “Equity is just cash that hasn’t turned
green yet”
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Generally the upfront fee
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For the technology
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For other value contributed if a start-up you’re helping
create the company
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Can allow milestone payments in stock
Issues with Equity
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Usually on offer in start-up companies.
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Can escalate in value hugely in a way that a licence seldom
can (think Google).
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It’s of no value until liquid
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Can leave you with a pile of old share certificates that
someone needs to keep an eye on.
The value of the equity is as uncertain as the value
of the technology.
….so to summarise and conclude
In Conclusion
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You can attempt valuation based on
- simple approaches (cost, rule of thumb)
- market comparisons (industry standards/ranking/databases)
- calculation (Discounted cash flow/NPV)
- market demand (Auction/equity)
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This has been a skip through some approaches, you can mix and
match to suit your needs.
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Ashley Stevens can give more detail on these and other
approaches.
