Transcript Leveraging Patents to Finance Life Sciences Companies Geneva, July 20, 2006 World Intellectual Property Organization Roya Ghafele, e-mail: [email protected].

Leveraging Patents to Finance
Life Sciences Companies
Geneva, July 20, 2006
World Intellectual Property Organization
Roya Ghafele, e-mail: [email protected]
IP Finance
Chart 2
The Main Take Away
While Life Sciences is a crucial sector of the economy, it currently is not
financed to its full extent. How can that paradox be explained?
IP is key in innovation, however due to historically evolved practices it has
not been given full attention in the investment process.
On the investor’s side little knowledge about IP, paired with even less
experience in valuing IP can be seen as key obstacles. The situation is
further hampered by inadequate accounting standards.
On the borrower’s side many firms seeking funding do not have an
adequate IP strategy and often lack managing their intangible assets.
To overcome this market failure there is a need for a cohesive approach
including regulatory reform, awareness raising and training.
At the borrower’s level firms need to better align their IP to their overall
business strategies. At the lender’s level investors should seek to get
better information about IP.
Source:
R.Ghafele
IP Finance
Chart 3
AGENDA
Hypothesis: IP is crucial for Innovation
However most investors lack the IP view
Why?
 Inadequate IP Accounting
 Confusion with IP Valuation
 Lack of IP strategies among borrowers
What are possible solutions?
Source:
R.Ghafele
IP Finance
Chart 4
IP is an intangible asset, ...
Knowledge Content
Transferability
Background of users &
context determine relevance
of IP to business
IP is transferable to a new
or similar business context
Perishability
Over time IP may
become outdated,
e.g. technology cycles
Nature
of IP
Spontaneity
Source:
R.Ghafele
Successful IP creation is
risky since there is a creative
& a business element to it
Non Rivalry in
Consumption
IP can be used
simultaneously
by different people
without diminishing
in its worth
Partial Excludability
IP guarantees a firm exclusivity and
freedom to operate in the market
IP Finance
Chart 5
… which is key in Life Sciences
R&D
IP
• Risky
• Uncertain
• Costly
• Explorative
• Complex
Source:
R.Ghafele
• Hedges against risk
• Rewards discovery
• Attributes ownership
• Facilitates knowledge
trade
• Codifies knowledge
IP Finance
Chart 6
Ignoring IP means giving up strategic
choices
• Owner decides what to do with research:
IP can be gifted, donated, sold, licensed
• Both basic and advanced research may
be promoted
IP protected
Innovation
Source:
R.Ghafele
• Research
Findings are
available for free
• Basic Research
may not get
further
developed
IP Finance
Chart 7
AGENDA
Hypothesis: IP is crucial for Innovation
However most investors lack the IP view
Why?
 Inadequate IP Accounting
 Confusion with IP Valuation
 Lack of IP strategies among borrowers
What are possible solutions?
Source:
R.Ghafele
IP Finance
Private and public investors are available.
Chart 8
Who are Potential investors?
P
R
I
V
A
T
E
P
U
B
L
I
C
Source:
R.Ghafele
Family, Friends

Informal, key is borrower’s network and social
capital.
Business Angels

Informal, key is to convince a high net worth
individual to invest.
Venture Capital/
Private Equity Firm

Joint
Ventures/Licensing

Formal, key is borrower’s will and ability to sell part of
an early stage business. PE invests in late stage
business, e.g. Leveraged Buyouts (LBOs)
Formal, key is mutual interest of licensor and
licensee in the technology.
Research Foundation

Formal, key is borrower’s academic potential.
Profitability is not core, rather scientific novelty
Stock Exchange
(IPO)

Formal, key is growth and critical mass of revenues,
late stage business.

Formal, traditionally are hesitant to invest in
innovation.

Formal, key is borrower’s potential to demonstrate
positive socio-economic impact of his/her project.
Use entire variety of financial tools.
Commercial Banks
Intergovernmental
Development Banks
& National
Governments
IP Finance
Chart 9
Types of investors differ by business maturity stage and perceived
risk.
Investors by risk and stage
High
perceived
Risk
Founder
Friends
Family
Business Angels
Private
Venture
Equity Firms
Capital Firms
Joint Ventures, Licensing
Governments, Development Banks,
Research Foundations
Low
perceived
Risk
Stock Exchange
Commercial
Banks
Seed
Source:
R.Ghafele
Start-Up
Early
Growth
Established
IP Finance
Chart 10
Who is ready to invest on the basis of IP?
Degree of readiness
to invest on the basis of IP
Family, Friends/
Business Angels
Venture Capital
Private Equity/Stock
Exchange (IPO)
Commercial Banks
Intergovernmental
Development Banks/
National
Governments
Research
Foundations
Source:
R.Ghafele
+ + +
+ + + +
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+ + +
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Role of IP
in valuation
Use of common sense, guts feeling, IP can
matter if lenders are (made) IP aware.
Look at IP potential and actual IP of early
stage business. In biotech and life
sciences owning a patent can be key
In late stage business IP can be
evaluated: The value of licensing
agreements, royalty fees or the
competitive advantage of owning IP.
Conservative investors, rather look at
historical data. Tend to ignore IP in
valuation mainly due to lack of awareness.
Recently started to take IP as collateral.
Look at promotion of an innovative culture.
In early stage projects look rather at IP
potential than existence of formal IP.
Innovation, Creativity, Originality of
research are key.
++++
ready
+++
rather ready
rather not ready
IP Finance
Financing methods split in debt and equity financing.
Chart 11
Main financing methods don’t give
enough credit to IP
Debt Financing
Loans Leasing Factoring
Source:
R.Ghafele
Equity Financing
Venture
Capital
Business
Angels
Capital
Private
Equity
Capital
IP securitization
IP Licensing
IP as collateral
IP in the business plan
IP Finance
Debt financing differs significantly from equity financing.
Chart 12
Description of financing methods
Debt finance
The investor borrows money at the cost of the
borrower’s rated risk (is above the risk free rate,
meaning money investor would earn e.g. by
buying US treasury bonds).
The money has to be repaid within a certain time
horizon. The cost of borrowing that money is the
“interest rate”. According to how rating agencies
(e.g. Standard and Poor’s) judge the quality of the
borrower’s willingness and ability to pay back the
money, the cost of borrowing (interest rate) will be
high or low.
Profit lies in the interest s/he earns on lending the
money. Collateral is asked for as a guarantee and
legal recourse in case of bankruptcy.
Equity finance
The investor “buys” parts of the company,
usually for a time horizon of 5-10 years.
S/he makes a profit on the spread between
the price at which s/he bought the company
and sold it. (historically aim at 20-30% of
investment)
It is possible to have several “rounds” of
investment.
The borrower does not have to pay any
interests for the money, but gives up part of
his/her self determination on running the
business.
“high risks, but high profits”
The investor has no involvement in the
management of the company.
Source:
R.Ghafele
“less risks, but less profits”
Equity investors are VC, Business Angels,
Investment Banks, Private Equity Firms
IP Finance
Chart 13
AGENDA
Hypothesis: IP is crucial for Innovation
However most investors lack the IP view
Why?
 Inadequate IP Accounting
 Confusion with IP Valuation
 Lack of IP strategies among borrowers
What are possible solutions?
Source:
R.Ghafele
IP Finance
Chart 14
Accounting finds it difficult to grasp IP
Rationale behind Accounting
• Historically evolved to report
tangible assets/liabilities
• Quantitative stock of
performance
• Documentation of past
financial position
• Factual, precise, objective,
comparable information
• Determines perception of a
firm’s management and other
market participants
Source:
R.Ghafele
Impact on Type of Language
developed for IP
• Silence about a lot of a
firm’s IP due to inherent
definitions and
assumptions in
accounting
• Internally and externally
generated IP is treated
differently
• Goodwill
IP Finance
Chart 15
This Seriously Impacts Business...
Concept
Internally Generated IP
is immediately expensed,
Acquired IP is valued at its acquisition cost,
amortized or subject to an impairment test
Fair value: “Amount at which an asset could
be bought or sold in a current transaction
between 2 willing parties, other than a
liquidation.”
Intangible Asset: “… identifiable, controlled by
an enterprise as result of past events & should
generate future economic benefits for the firm.”
Goodwill: “price a market participant is ready to
pay in excess of the value of a firm’s tangible
assets.”
Source:
R.Ghafele
Impact
The same IP may be
perceived to be
worth nothing or
100 Mn $
Implies a benchmark,
yet worth of IP
depends also on context
& background
Much IP won’t
qualify since it has
an indirect impact
on cash flows
Difficult to make
worth of IP explicit &
compare Goodwill
of different firms
IP Finance
Chart 16
… However Explicit IP accounting gains
Momentum — Comparison of different Accounting Standards —
German HGB
Recognition of
IP
Acquired IP
Internally
Generated
IP
Source:
R.Ghafele
IAS/IFRS
US-GAAP
• Forbidden: § 248/2
HGB
• Exception: acquired
IP
• Recognition of IP if
IAS criteria are met:
IAS 38
• Recognition of IP:
Novel approach under
FAS 141 &142
• Recognition of
acquired IP:
§ 255/4 HGB
• Recognition of
acquired IP if IAS
criteria are met:
IAS 38
• Purchase Price
distributed across all
items: FAS 141
• Impairment Test of
Goodwill: FAS 142
• Immediately expensed
• Immediately expensed
• Immediately expensed
Trend towards the explicit recognition of IP increases
IP Finance
Chart 17
IP valuation criteria
Potential Returns
• expected returns of IP protected business segments
• expected risks of IP protected business segments
• size of investment needed to generate IP
Market
Business Viability
• market share/growth for IP
protected business segments
• market opportunity for IP
• competitive threat through IP
ownership of competitors
• entry barriers through IP
• product differentiation through IP
IP
VALUE
Management Skills
• expertise in managing IP
Source:
R.Ghafele
• experience in managing IP
• prior investments in the IP protected business
segment (“sweat equity”)
• motivation to enhance value of the IP
• is IP protected product/service
viable in the marketplace
• competitive advantage through IP
• clear development plan/financials
for generation of IP
Legal Scope of the IP
• level of protection granted by the IP
• possibility to invent around the IP
• possibility of infringing the IP of others
• legal viability of the IP
• duplication of IP due to inadequate
patent search done by the IP office
IP Finance
Different valuation emphasis for different investors.
Chart 18
IP valuation in relation to overall business
valuation
Business Angels
Confidence in management is key.
Angels invest in “what they know” & often
seek to boost the local economy ( “hometown
loyalty”). Informal valuation, no systematic
approach.
IP may matter if Angel has personal interest
or the borrower can communicate the value
of the IP. IP will be valued according to its
potential to generate future cash flows.
Source:
Source:
R.Ghafele
Roya Ghafele
Venture Capital/Private Equity Firm
Exit possibilities are key. This is how the VC/PE
makes money. Often no “science” available to
assess early stage business since no historical
company performance available. Quality of
management team, benchmarking with what is
already in the market matters.
“Gut feeling”. IP is an important factor in the
valuation. VCs look at the legal viability of the IP &
how it relates to the business strategy.
Inter/Governmental Investors
Research Foundations
Look at macroeconomic, social and cultural
spillovers. May show more tolerance
towards profitability since are not under the
same market pressure as private investors.
Funding has a “development” touch.
IP plays a marginal role in the valuation
process. Early stage technology funds do
not value explicitly at IP. The connection
between IP and technology is not sufficiently
made.
Academic track record, references, innovation,
originality, societal impact, fit in foundation's
research portfolio and orientation.
Want innovative research does not necessarily
have to have practical relevance. Company
funded research can be biased by the sponsor’s
interest.
IP plays a marginal role in the valuation
process. Even early stage technology funds do
not value explicitly IP. The connection between
IP and technology is not sufficiently made.
.
IP Finance
Chart 19
Approaches to IP Management
• Key Questions
How does IP relate to the bottom line of your business?
How do you make money and what role does the IP play in it?
• Relate your income streams to IP
What were the returns from IP protected business segments?
Does the IP help you to gain market share or profits?
• Relate IP to your position in the Market
How did IP give you an advantage over competitors?
Do you have freedom to operate & exclusivity in the market?
• Demonstrate your managerial skills
How determined are you to extract revenue from IP?
What experience do you have in managing IP?
Source:
R.Ghafele
• Understand the legal scope of the IP rights
What level of protection does your IP guarantee you?
Is there a risk that you infringe the IP of competitors or that competitors
(legally) steal your IP?
IP Finance
Chart 20
AGENDA
Hypothesis: IP is crucial for Innovation
However most investors lack the IP view
Why?
 Inadequate IP Accounting
 Confusion with IP Valuation
 Lack of IP strategies among borrowers
What are possible solutions?
Source:
R.Ghafele
IP Finance
Chart 21
F
O
R
Source:
R.Ghafele
IP Management improves a firm’s
position in the market
M
A
N
A
G
E
R
S
• Communicates the value of IP to investors
• Shows what IP the company owns
• Puts a value to the IP
• Explains how the IP relates to business segments
F I
O N
R V
E
• Get information on how IP drives growth
S
• Receive adequate inputs for earnings/sales forecasts
T
• Can better estimate risks/revenues of an investment
O
• Can better understand the nature of a business
R
• Increases predictability while decreasing volatility
S
IP Finance
Chart 22
Successful investor communication on IP bridges information
asymmetry.
IP investor communication
Business plan
What investors look for in a
business plan
Executive Summary
What’s the growth and profit potential and the
management’s capability to achieve the target?
How does the IP help to achieve to that target?
Body of the Plan
• Company Overview :
How a do you want to make money?
Is the management capable of
growing the business?
Have they done it before?
Does the team understand how to
penetrate the market?
• Management Team:
Why are you the right people?
• Products/Services:
How does the IP enhance the value?
Is the product unique?
Will it meet consumers’ demand?
Is the market potential huge enough?
Are there entrance barriers?
• Market Analysis:
How does the landscape look like?
What IP have competitors?
• Funds requested:
How much money do you need?
• 5 Year financial projections:
What’s the growth potential?
Source:
R.Ghafele
What’s in it for me?
Can I sell it profitably?
What’s the financial potential?
Grab readers
attention,
make him/her
curious of the
business.
How much money is needed?
What are the exit possibilities?
IP Finance
Chart 23
Public Policy Choices
Human capacity building
• Need for a Master Program providing IP training from a legal, business
and technological point of view.
Awareness Raising, Training at the Business Level
• Fully integrate the IP view in policies aiming at increasing the overall
level of innovation, e.g. the Lisbon Agenda
Harmonize Regulatory Guidelines on IP valuation
• Recommendations on standardized approaches would help
Standardize the Reporting of IP
• Important steps have been made, but more needs to be done
Integrate the IP dimension in publicly funded projects
• Where appropriate IP should be part of the selection process
Source:
R.Ghafele