Transcript Evalueserve: Intellectual Property Services

IP Valuation
Dr. Rahul Verma,
Assistant Vice President,
Intellectual Property and Legal Support Services
[email protected]
April 2010
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Presentation Plan
IP Valuation Overview
IP Valuation Approaches
Case Study
Appendix
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© 2010 Evalueserve, Ltd. All Rights Reserved - Privileged and Confidential
Presentation Plan
IP Valuation Overview
IP Valuation Approaches
Case Study
Appendix
Slide ‹#›
© 2010 Evalueserve, Ltd. All Rights Reserved - Privileged and Confidential
Biotechnology Industry in India
(1/2)
• The Indian biotechnology industry is estimated to be more than USD 2.6 billion. This accounts for about 3%
of the global biotechnology sector.
• The revenues for the industry have grown from Rs. 2,345 crores in 2002 – 03 to Rs. 12,137 crores in 2008 –
09.
• It can be divided into the following five segments: BioPharma, BioServices, BioAgriculture, BioIndustrial and
BioInformatics.
BioPharma
• Includes medicines
prepared by
recombinant DNA
technology
• Revenue – Rs.
7,883 crores in
2008 – 09
BioServices
• Includes clinical
research, contract
research
organizations and
custom
manufacturing
BioAgriculture
• Includes
manufacturing
commodities for
human and
livestock
consumption
BioIndustrial
• Includes enzyme
manufacturing
• Revenue – Rs. 478
crores in 2008 – 09
BioInformatics
• Includes computer
software tools for
data management,
database creation,
data mining and
data warehousing
• Revenue – Rs.
• Revenue – Rs.
• Revenue – Rs. 220
2,062 crores in
2008 – 09
1,494 crores in
2008 – 09
crores in 2008 – 09
Sources: Link1, Link2, Link3
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Biotechnology Industry in India
(2/2)
• Apart from the above mentioned five sectors of the Indian biotechnology industry, there are other emerging
sectors like Biosimilars, Nanotechnology and Stem Cell Research.
• Biosimilars – This includes biotechnology-based drugs similar to biologic drugs that enter the market after
the innovator drug goes off patent. The biosimilars market in India is expected to reach USD 2 billion in 2014.
• Stem Cell Research – This market is expected reach USD 540 million in 2010.
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No
Technology Outsourcing
Opportunity
Yes
The On-Off Evolution Matrix
Captives
Off-Shore R&D Centers
On/Off-Shore Markets
In-house
On Shore R&D Centers
On-Shore Markets
Technology Scouting
Off-Shore Technology
Partners
On/Off-Shore Markets
Borderless
Innovation
Licensing/Marketing
Partnerships
On-Shore R&D Centers
Off-Shore Markets
No
Yes
Business Outsourcing Opportunity
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The Chindia Story
China
India
• In 2009 – Despite global economic downturn, the Chinese
Patent Office (SIPO) received a total of 976,686 patent
applications, with a growth rate of 18% over the previous
year.
• 20-21% annual increase in patent filing
• IP awareness is spreading among Indian companies
• IPR reforms reflect seriousness of the government
• During 1999 – 2009: About five million patent applications
were filed
• If the current growth rates remain the same, China will
surpass the US in 2012 with respect to the invention patent
application filings
No. of Patent Appls
1,200,000
1,000,000
800,000
600,000
400,000
200,000
40000
35000
30000
25000
20000
15000
10000
5000
0
0
99
'00
'01
'02
Invention
'03
'04
'05
Utility Model
'06
'07
Design
'08
09
Year
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Patenting trends in India
The patent filing in India has been on the rise in the last few years. The Figure below illustrates
the increase in the filing activity in various technical fields of the life science domain over the last
five years.
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India ranks 30th out of 134 countries on Prevalence of Foreign
Technology Licensing
Two Perspectives of Technology Licensing in Indian Context
MNCs partnering with
Indian companies with
innovations
MNCs entering the
Indian market
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Foreign Technology Licensing in India
MNCs partnering with Indian companies
with innovations
MNCs entering the Indian market
• Imtech licensed a new drug molecule to Nostrum
• Evolving Indian market and customer feel the need
Pharmaceutical for USD 3 million in 2009.
• Imtech, a CSIR laboratory licensed a clot-busting
therapeutic protein to US-based Nostrum
Pharmaceutical for USD 20 million in 2006
• Shasun, Indian drug manufacturing firm, sign nonexclusive license with Merck.
• Indoco Remedies Ltd., a Mumbai-based generic
company, announced a technology licensing
agreement to produce generics with Watson
Pharmaceuticals, Inc. Watson will file an ANDA for
US FDA approval.
for advanced and world-class products and
services
• Automatic permission for foreign technology
agreements in a few industries
• CSIR has signed a MOU with San people of South
Africa for commercialization of Hoodia, as a
blockbuster anti-obesity drug.
• Eisai, a Japanese pharma major to set up
manufacturing and research base in India.
• Pfizer entered into licensing agreements with
India’s Strides Arcolab, Aurobindo and Claris
LifeSciences for supply of generic products and
injectibles
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Presentation Plan
IP Valuation Overview
IP Valuation Approaches
Case Study
Appendix
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Growing Importance of IP Valuation
Increased focus of industry and markets on knowledge-based market
Components of S&P 500 Market Value
100%
90%
17%
32%
80%
70%
68%
60%
80%
50%
40%
83%
68%
30%
20%
32%
20%
10%
0%
1975
1985
1995
2005
Years
Tangible Assets
Intangible Assets
• There is an increasing need for shifting research focus from valuing tangible assets to valuing intangible
assets.
Source – Ned Davis Research
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Monetizing IP – Patents
Patent Monetizing Ideas
Aggressive Marketing
of Products
Patents as a Business
Concept
Adobe markets its key
product, Adobe Reader
7.0, with 51 utility US
patents, 4 US design
patents, and patent
pending legal notices
A 2002 study by the
Equipment Leasing and
Finance Foundation
listed the market value of
patent-based licenses at
USD 1 trillion in the US
Portfolio of Stocks
with Strong Patent
Portfolio
Ocean Tomo 300™
Patent Index, the first
equity index based on the
value of corporate IP of
300 diversified
companies, was
launched in 2006; it is
published by Amex
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Context for IP Valuations
Licensing Deals
Small and Medium Enterprises in Hi-Tech Domains
• Pharmaceutical Companies
• Electronics and Computer Hardware Firms
Sale of IP
• IP Brokerage Firms and Medium-Sized Enterprises
M&A Deals
• Consulting Firms
• Investment Banks
• Private Equity Funds
Infringement
Lawsuits
• Infringement Support Law Firms
• Plaintiff/Defendant
Financing/
Securitization
• Banks
• Private Equity Funds
• VCs
Tax/Financial
Reporting
• Any
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Patent Valuation and Product Valuation
Patent Valuation
• Valuation methods, particularly early in the life of a
patentable idea
Product Valuation
• Valuation methods, before launching a product in
the market
• Lifecycle of a patent
• Cost of OEMs
• Future and uncertainties of the technology, e.g.,
• Future and uncertainties of the product market,
new and ongoing research, lifecycle/term of a
patent, and income attributable to a patent
e.g., growth trends, lifecycle of a product and
competing products available in the market
• Legal issues on jurisdictions
•
• The whole world is a potential market
Patent and product valuation go hand in hand. To estimate the value of a patent or product, knowledge
about the related product or patent and the associated market/legal boundaries is helpful.
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Factors for IP Valuations of Biotechnology Invention
Novelty of the technology
Competitive technologies/products in the domain
Benefits of the technology over the competing technologies
IP Landscape in the domain
Regulatory requirements
Efficacy of the product
Target Market
Market acceptance
Cost of the product
Marketing Strategy
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Process Flow in a Typical IP Valuation
Understanding
IP
• Understand how is
the IP different from
other existing IP in
the market
• What are the
competing companies
and technologies
• What does the IP
uniquely add to the
market
• What factors of
market demand does
it satisfy
Assessing IP
Strength
• How powerful is the
IP in terms of the
existing IP
• Will it sustain an
invalidation attempt
by competitors
• How does the IP fare
in comparison with
competing
technologies, in terms
of major
advancement or
minor adjustment
Assessing
IP-Centric Factors
• How broadly does the
IP claim
• In which jurisdiction is
the IP applicable
• What is the remaining
life of the IP
• Are there any risks
associated with
government rules
with the IP
Identifying
Market for IP
• What is the market
for the technical
domain in the specific
jurisdiction
• What is the growth
trend of the market
• What is the lifecycle
Building
Valuation Model
• What is the discount
rate for the DCF
modeling
• How sensitive is the
value on the
estimations used in
the model
of the IP
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Approaches for IP Valuation
Valuation Approaches
Comparable
Approach
Cost
Approach
Income
Approach
Value Estimate
Value Estimate
Value Estimate
Multiples or prices of
market transactions
involving the sale of
comparable IP
Reproduction/ replacement
cost adjusted for
depreciation and
obsolescence
Present value of earnings
attributable to the IP or
costs avoided as a result of
owning the IP
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Comparables Approach
Approach usage rationale
• Comparing the IP to comparable assets recently
exchanged under similar circumstances
Disadvantage
• Finding a comparable asset in same technology
domain as the IP to be valued can be difficult
• Comparing two different IPs, even the ones in the
same domain can be difficult
Advantage
• Comparatively simpler method of valuation
Process
• Establish IP comparability: type of asset, industry
relevance, geographical constraints, timeframe,
financial characteristics of underlying operations
• Locating similar licensing deals
This method is very easy to use and estimates
the value of IP based on past occurrences
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Cost Approach
Approach usage rationale
• Determine the value of patent by aggregating the
costs involved in its development
• Determine ‘Reproduction Cost’ to reproduce the
same asset
Disadvantage
• Cost based approach provides a benchmark for
management to control cost of development and
not a fair value of the IP
• The data is not publicly available
Advantage
• It is a simple method
• It is easy to use
Process
• Collect and analyze IP R&D cost client data
• Review comparable cost data of similar IPs
• Identify direct cost and multiples for allocation of
indirect cost
• Prepare a cost sheet for the IP R&D project
This method is useful in identifying the floor
value of IP
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Income Approach
Approach usage rationale
• Establish ability of patent to generate economic
benefits over the property’s useful life
• When discount rate for the IP can be known with
Disadvantage
• Discounted Cash Flow (DCF) is a static model
• It only captures the expected cash flows and does
not account for uncertainty
certainty but not cash flows
Advantage
Process
• Gives a very objective value of the IP in relation to
• Proportion of the revenue attributable to the subject
the market
IP
• Estimating size and growth rate of relevant industry
• Estimate revenue, risk and growth associated with
the IP proportion of the revenue attributable to the
subject IP
• Application of DCF, Monte Carlo and option pricing
techniques
This method is useful in identifying the intrinsic
value of IP
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Presentation Plan
IP Valuation Overview
IP Valuation Approaches
Case Study
Appendix
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Case Study*: How do we actually value a patent?
What is patented?
• A biosimilar drug molecule for treatment of
autoimmune diseases.
Objective and Need
• You need to present the patented idea to a
pharmaceutical company to sell the patent.
• They are already convinced that there is a market
that can be tapped.
• You need to identify the target market and what
value should you go to the negotiation table with.
What methodology will you follow to
identify the price of the patent?
• Assess the strength of IP and the competing IP in
the space
• Identify market targeted by the IP based on IP
centric parameters
• Identify licensing amount
*: Indicative numbers have been used in this case study
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Market Parameters for Valuation
(1/2)
• The market size was calculated to be more than USD 9 bilion in 2013. The calculation is based on the market
for the original drug of which biosimilar has been invented.
• The market figures were confirmed by surveys with Subject Matter Experts or secondary sources in the
biosimilar market and forecast status of market.
• The market penetration and price discount was calculated on the basis of a report by CAGW on target market
penetration and price discount for biosimilar.
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Market Parameters for Valuation
(2/2)
• Based on IP analysis, and competitive intelligence you can determine if your new drug is a high-range,
medium-range or low-range drug.
• Assuming it to be a medium-range biosimilar, you can expect a market penetration of 3% in the year of
launch and 40% after 6 years.
• Again for a medium-range biosimilar the price of the product will also be reduced based on price discount
• The market share for intermediate years was calculated on the basis of S-curve.
• The cost of conducting clinical trials for FDA approval will require approximately USD 25 million over the next
4 years.
• The average royalty rates on sales in the pharmaceutical sector have been found to be 6%.
• The discount rate has been assumed based on the industry standard for pharmaceutical sector. This has
been confirmed by the risk assessment matrix or the SWOT analysis of the technology.
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IP Parameters for Valuation
• IP Landscape analysis was conducted to identify relevant IP in the domain. Intensive IP analysis, such as
broadness of claims, details of office actions can help in identifying the share of the market that can be
attributed to current technology.
• Active companies in the technology domain were identified as they can influence the market captured by the
current biosimilar.
• Both these parameters have been factored in the risk assessment matrix while calculating the discount rate
that can be offered.
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Risk Assessment/SWOT analysis
Parameter
Level 1
Level 2
Level 3
Level 4
Level 5
Demand Level
No existing
demand
Spurious demand
Low demand
Medium demand
High demand
Customer
Segment
Unidentifiable
Identified and
growing slowly
Identified and
small size
Identified and
moderate size
Identified and
huge size
Technology
New and not
tested
New and tested
but with marginal
results
New but positive
results
Existing and
growing rapidly
Existing and well
established but not
growing rapidly
Product
New and not
tested in the
market
New and tested
but with marginal
results
New but positive
feeling
Existing
Old product, relaunch
Substitute
Products
Numerous and
very good
Number fairly high
Few and very
good
Few but with old
technology
No substitutes
Strength of the
patents
Low;
Clustered domain
of patents
Moderate;
Numerous other
patents
Moderate; Few
patents in the
domain
High; Few patents
in the domain
Very High; Are key
patents
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Life Cycle Analysis
S-Curve Analysis for Market Penetration
45%
40%
35%
Percentage
30%
25%
20%
15%
10%
5%
0%
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
-5%
Market Penetration
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DCF Valuation Model
(1/3)
Current
(Amounts in USD million)
Forecasted
Values
2010
2011
2012
2013
2014
2015
Overall Market Size
0
0
0
9516
10372
11300
Market Penetration
0%
0%
0%
3%
12%
22%
Price Discount %
0%
0%
0%
20%
29%
34%
Target market
0
0
0
228
883
1668
Market Share of invention
0
0
0
91
353
667
Royalty Earnings
0
0
0
5.5
21.2
49.2
Licensing/Milestone payments
2.5
5
7.5
10
6.7
8.9
11.2
2.8
9.2
10.7
Market Share
10%
Royalty Rate
6%
Discount Rate
25%
Present Value
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DCF Valuation Model
(2/3)
Forecasted
(Amounts in USD million)
2016
2017
2018
2019
Terminal Value
Overall Market Size
11532
11760
12002
12239
24,475
Market Penetration
31%
36%
40%
43%
Price Discount %
37%
39%
40%
41%
Target market
2226
2612
2879
3073
6146
Market Share of invention
890
1045
1152
1229
2458
75.0
93.5
107.0
117.0
233.3
22.5
23.5
22.3
20.3
33.8
Market Share
Royalty Earnings
Licensing/Milestone payments
Royalty Rate
Discount Rate
Present Value
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DCF Valuation Model
(3/3)
Pre-Tax Net Present Value
117.84
R&D Success Probability (FDA approval Probability)
60%
Post Tax Net Present Value
USD 52 million
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Presentation Plan
IP Valuation Overview
IP Valuation Approaches
Case Study
Appendix
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Structure of IP Valuation Curriculum
Highlights various
parameters on which IP
valuation can be dependent,
such as jurisdiction for legal
protection, duration of
protection, market
attributable to an IP, and risk
factors involved
Intellectual
Property
Programs
Financial
Programs
Help in understanding the
various parameters for
modeling a valuation
solution, such as forecasting
revenue streams, royalty rate
estimations, accounting for
risk premiums in discount
rate calculations, sensitivity
analysis, real-option pricing,
and Monte Carlo Simulations
IP + Finance
Intersection of Intellectual Property and Finance Programs
• Valuation of IP requires knowledge of both IP and finance
• Knowledge of IP helps in determining the parameters that affect revenue streams, volatility, and other risk
factors
• Important to understand IP factors as they play a crucial role in determining financial parameters that affect
valuation
• Knowledge of finance necessary to identify the number associated with the IP factors
• Combination of IP and finance also helps in understanding how real option pricing and Monte Carlo
Simulations can be used to assess the impact of estimations on valuation
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Existing Curriculums
The National Law University, Jodhpur, is the first university in India to offer Masters Degree, and
Honors and Distance Education Programs in IPR. IPR Honors program has eight papers, one of which
is IP Valuation.
The PSB Academy, an institute in Singapore, offers a one-day lecture-cum-enhanced learning through
case studies training program–Intellectual Property Management for Enterprise Managers. Their training
on IP Valuation comprises purpose of intangible asset valuation, commonly-used IP valuation
approaches, and IP asset valuation criteria.
Bournemouth University, Center for Intellectual Property Policy & Management, specializes in
copyright, industrial design, patents, trade marks, law & policy, IP exploitation, and legal education. It
offers Customized IPR Short Courses—a half-day, a one-day and a two-day course, including IP
licensing and IP valuation.
Telestrat Education is a worldwide leader in continuing education seminars. It provides a half-day
course on IP Valuation, which includes valuation basics, valuation methods, discount rate, and cost of
capital knowledge.
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Research Topics and References
• Estimating growth rate of revenue streams from an IP by using SWOT analysis based on IPspecific risk parameters
• Accounting for IP parameters, such as FDA approvals in the case of a biotech IP, as risk
Research Topics
premiums
• Estimation of royalty rates for IP in various technical domains
• Real-options and binomial approach—when treating patents as an asset with an option of
creating products based on the patents now or later
References
• Strategies for Investing in Intellectual Property by David S. Ruder
• Essentials of Licensing Intellectual Property by Alexander I. Poltorak, Paul J. Lerner
• Intellectual Property Assets in Mergers and Acquisitions by Melvin Seminsky
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Thank you
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