Transcript HIGHBURY LTD. - AGH University of Science and Technology

PAYMENTS AND ROYALTY RATES
February 2008
Christi Mitchell, IP Director, Highbury
Ltd
Christi Mitchell
IP Director
• Human Genetics, Molecular Biology, Marketing
and Business Degrees
• Past President Licensing Executive Society (LES)
Britain &Ireland; current Board Director
• International Chairman, Life Sciences LESI
• International licensing experience over 25 years
• International Biotechnology and Healthcare start
up and university spin-out company experience
• Venture Capital experience
[email protected]
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VALUATION
• KNOWLEDGE BASED INDUSTRY – CENTRAL TO THE
UK ECONOMY
– Innovative ideas leading to IP rights and wealth creation:
• Improved products
• New brands
• Creative expressions
This process is being increased by the erosion of Global trade barriers
[email protected]
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Outline.
Valuing
Some
Key
technology
valuation methods
financial terms
–royalties
[email protected]
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Market due diligence
• Establishing the market potential
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potential for viable revenue streams,
cost of independent development
costs of commercialization
impact of previous attempts to commercialize
• Market sector review including macro factors and
market trends
– consumer awareness
– government constraints
[email protected]
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Build Financial Model
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Forecast market size and growth
Forecast sales – value & volume
Forecast market share (competitor due diligence)
Review price structures across all territories
Review take to market costs, including:
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sales & marketing
IP implementation
Further R&D
Regulatory requirements & hurdles
• Review distribution chain – risks & costs
[email protected]
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Other Due Diligence
• Due Diligence leads to Financial Data
– IP due diligence
– Product due diligence
• Forecasts, markets, timeframes, need, take to market route
– Partnering costs (legal, other support, time factors,
deal implementation)
– Corporate due diligence
• Stability, margins, ethics, reputation
[email protected]
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Project Process Overview
Diagram indicates how Highbury adds value to, and manages the
technology/Intellectual Asset commercialisation lifecycle; from idea through to
deal implementation.
Manage and
enhance the
invention
protection
Organisation/
inventor with
Idea
Undertake due
diligence and
market research
Protecting the
invention
Develop
business
strategy
Planning
commercialisation
Develop
commercialisation
strategy
[email protected]
Identify suitable
partners
Implementation
Manage deal
construction and
implementation
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Financial assessment
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valuation of products / technologies
simple financial models
risk assessment
financial impact of different deal structures
royalties
[email protected]
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Some valuation methods
• REMEMBER: Agreement on IP valuation is the
most difficult hurdle in the negotiation.
– Seller focuses on reward
– Buyer focuses on the risk
• Generally made up of lump sum plus royalty ( lump
sum/milestone payment scheduling varies across the world)
[email protected]
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Valuation Insecurity
• Value depends on
1. Ability of licensee to successfully implement it
as a process or product
2. Dependant on a specific market that may be seen
differently by the 2 parties
3. The ability to prevent infringement
4. Ability to access licensors know how
[email protected]
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Simple financial models
Valuation methods are based on:
Cost
–for
early technology
Potential
–when
Market
income
application is evident
data
when the technology is
developed
–
[email protected]
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Cash Flow Analysis
• what will the investment cost?
• how much cash will it generate each year?
• To calculate Cash Flow:
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Define the value of the investment
Calculate the size of the benefits
Determine the timing of the benefits
Quantify the uncertainty of the benefits
Do the benefits justify the investment ??
• Remember – cash flow is not profit
[email protected]
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Risk Adjusted Discount Rate
• This is an adjustment for the time value of money
and the inherent risk
• Calculated risk :
– Cost Of Capital + a fudge factor = The Hurdle rate
– used to discount future cash flows back to today.
• The result of summing the Discounted current and
future cash flows = The Net Present Value (NPV)
• +ve NPV = likely good investment (it adds value
to the company)
[email protected]
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Risk assessment/sensitivity
analysis
Methods to assess risk:
• Add risk factor to discount rate or create ‘hurdle’
rate e.g.20%
• Determine sensitivity of model to various
unknowns by calculating different scenarios, e.g.
- lower price or market share
- development costs are higher
- development takes longer
- cost of goods are higher than forecast
[email protected]
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Other valuation methods
• DCF (Discounted Cash Flow)
– Problem,“The future cash flows of raw technology are
uncertain”
• Monte Carlo
– A mean estimate of cash flows, and statistically modelled
range of expected cash flows.
– Produces an unbiased distribution of present values where the
mean can be taken. (objective method)
• Capital Asset Pricing Model (CAPM)
– Adjust the “Hurdle Rate” based on the amount of “systemic
risk” = Risk Adjusted Discount Rate (RADR)
– This allows degrees of risk to be incorporated
[email protected]
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Key financial terms
• Equity investment
– control
• Upfront payments
– commitment
• Milestone payments
– risk sharing
• Other payments
– e.g. manufacturing facility, research, patent or clinical costs
• Royalties
– profit sharing
[email protected]
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Most important factors affecting
Royalty Rates
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Strength of IP
Market sector (expected norms)
Degree of exclusivity (field of use restrictions)
Licensor/Licensee characteristics
Economic factors
Phase of development
Duration and scope of license
Commitment to ongoing research
Negotiating skills
Degree of need
[email protected]
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Generic IA Biotech Value Drivers
• Value Drivers
– Market
• Reached peak?
• Growth rate
• Market share
• Risk Drivers
– Internal risk
• Strategic fit or dilution
– Substance risk
• Safety
• Efficacy
• availability
– Cost
• Operating
• development
– Time
– Competitor risk
• In class
• Out of class
• Patent life
• Proof of concept
– Option
– Commercial risk
• Strategic
• operating
• Image
• Economics
[email protected]
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Royalty rates: Industry Norms
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What are they?
What don’t they tell us?
Are they useful?
How can we use them?
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Royalty rates: Industry Norms
Franklin Pierce Law Centre
Industry
Chemical
Royalty Norm
1-5%
Computers
3-5%
Consumer Products
2%
Electronics
<1-5%
Pharmaceuticals
4-15%
[email protected]
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Industry Norms
What don’t they tell us?
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the range of royalty values
the stage of development
to what the royalty rate relates
what other financial components exist
– Down payments
– Milestone payments
– Equity etc.
• any other aspects of the deal
– Exclusivity
– Timing of payments etc.
[email protected]
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Financial negotiation
• market estimates
– establish a baseline
– share market data
– agree top line figures
• openly discuss key assumptions
• identify corporate drivers
– fixed hurdles - NPV / IRR
– turnover of £ X m
[email protected]
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Risk verses Reward
• Licensee prefers royalty
– Allows them to limit the consequence of uncertainty
• Licensor prefers (dp) downpayment
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Quicker rate of return
Will not share licensees implementation risk
Avoids royalty mismanagement by licensee
Requires less enforcement/monitoring than royalty
Dp raises negotiation cost (requires greater due
diligence to get the price right)
[email protected]
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Timing
• early payments
– carry high risk to the licensee
– have high impact on NPV
• late stage payments
– are paid on specific target achievements
– carry lower impact on NPV
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Agreement provisions
• clear payment terms
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timing and delivery
currency exchange provisions
late payment
CIF/FOB
• manufacturing / QC
• royalty audit provisions
[email protected]
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Conclusions
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Relating risk to reward is difficult
There are many valuation methods
IP values are not static
Industry norms only tell part of the story
Patents lapse, value may not hold into perpetuity
Use a mix of valuation methods
[email protected]
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Contact
• Christi Mitchell:
– Intellectual Property Director
• Direct Tel: +44(0)1462436894
• [email protected]
• Elizabeth McNabb:
– International Business Development Director
• Direct Tel: +44(0)20835556989
• [email protected]
• Anne Wight:
– Business Development Director
Highbury Pacific
• Direct Tel: +64(0) 21432424
• [email protected]
[email protected]
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