Technology Valuation Approaches TTO Experience Tools Ken by yaohongm


									 Technology Licensing,
Valuation and Exits in the
 University Technology
    Transfer Context

     David N. Allen. Ph.D.
 Associate VP for Technology
  University of Colorado TTO

  Knowledge | Innovation | Technology
  CU Technology Transfer Over the Past
               Six Years

Fiscal Year             00-1 01-2   02-3   03-4   04-5   05-6

Invention disclosures   79    121   124    147    177 198
Patent apps filed       46    59    82     100    139 125
Options and licenses    13    26    34     47     59   57
Revenue in $M*          2.2   2.1   3.1    5.8    21.7 20.6
Start-up companies      3     3     6       9      9   10

* does not include revenue derived from legal settlements which
               in FY2003-4 amounted to $28.1M,
           in FY2004-5 $6.7M and in FY 2005-6 $.7M
        What is Driving This Growth?
 Strong base of discovery-oriented research
 Institutional priority: patience & financial commitment
 Funding model that will produce a sustainable, financially
  self-sufficient enterprise
 Best practice operations: IP policy, licensing procedures
  and performance evaluation
 Administrative accountability and faculty oversight
 Adequate size staff with business/legal/IP/scientific
  acumen, understanding of university culture and a service
 Active and meaningful engagement from the technology
  enterprise business community
 Adequate technology maturation funds
 Understanding and deal responsive early-stage VCs and
  business angels
              Bayh-Dole Act
Patent & Trademarks Law Amendment of 1980

A recognition by Congress that:
– Imagination and creativity are a national resource
– The patent, not copyright, system is the vehicle
  for delivery of the resource to the public
– Stewardship best managed by contractors,
  e.g. universities
– Existing federal policy was placing the nation in
  peril at a time when IPR and innovation were
  becoming the preferred currency in foreign affairs
                     Bayh-Dole Objectives
It is the policy and objective of the Congress to use the patent system to promote the
     utilization of inventions arising from federally supported research:

•    to encourage maximum participation of small business firms;

•    to promote collaboration between commercial concerns and nonprofit
     organizations, including universities;

•    to ensure that inventions made by nonprofit organizations and small business
     firms are used in a manner to promote free competition and enterprise without
     unduly encumbering future research and discovery;

•    to promote the commercialization and public availability of inventions made in
     the United States by United States industry and labor;

•    to ensure that the Government obtains sufficient rights in federally supported
     inventions to meet the needs of the Government and protect the public against
     nonuse or unreasonable use of inventions; and

•    to minimize the costs of administering policies in this area.
        Bayh-Dole Act Regulations
• Applies to all federally-sponsored research, in
  whole or in part
• Researchers are obliged to disclose inventions
• University must disclose to agency within 2
• Election of ownership within 2 years
• File a patent within 1 year
• Indicate government support in patent
• Provide confirmatory license to US
                 Bayh-Dole Act
                  Regulations (cont)

• Report periodically regarding utilization
• For exclusive licensees, US sales requires US
  manufacture (waivers available)
• Licensing preference offered to small business
• Assignment is not permitted (waivers available)
• Revenue must be shared with inventors, net
  revenue to support research or education;
  Funding agencies may retain title;
• March-in rights if no practical utilization within a
  reasonable time.
  IRS Revenue Procedure 97-14
    Internal Revenue Code of 1986
Private use of public facilities
– Corporate-sponsored research at a
  tax-exempt institution is allowed
– Resulting technology may be licensed
  exclusively to sponsor
– Sponsor must pay competitive price
– CU practice provides for conditional royalties
              Basic Tenets of
            Regent Patent Policy

• Presumption that University owns IP created by
  employees, or by use of CU facilities

• Narrow circumstances create a few exemptions to this
  presumption, e.g. students enrolled in CU courses and
  IP outside of area of Investigator’s University work
• Acknowledges cooperation between inventor and TTO
  is necessary for success
• Faculty Oversight Committee created
• Division of income stipulated – 4 x 25
 The Technology Transfer Process
            Research (creation of the idea)
     Pre-disclosure and completed disclosure form
 IP assessment (protection, technical and commercial
  IP protection (typically a patent application and its
            Marketing and Proof of Concept
    Existing Company       or      Start-Up Company
                 Option or License
                 Product Development
             Commercial Sales by licensee
 Revenue to CU (royalty, milestone payments, equity
Revenue distribution (inventors, their labs, Campus and
         Licensing Arrangements

• Exclusive versus nonexclusive rights
• Field(s) of use – geographic, market
• Economic terms – royalty, sublicense royalty,
  performance payments, annual fees and/or
• Diligence terms – development and commercial
• Rights to future intellectual property prescribed
• Patent prosecution and control
• Warranties, termination and dispute resolution
• Others… (see our web site)
      What Do Faculty Want from
  Technology Licensing Arrangements?
• An alternative approach to create professional
  and societal impact beyond instruction and
• Minimal intrusion into direction of basic research
  and ability to publish results
• Experiences that produce competitive advantage
  to attract the best students and research support
• Sources of funds that are not otherwise available
  – discretionary research and personal funds
• Opportunities to participate in development and
 What Does CU Want from a Licensee?

• A true commitment to further develop and
  eventually commercialize the technology.
• An understanding of university values and
  constraints, e.g., publication and Bayh-Dole.
• A fair price, uncomplicated royalty terms and an
  opportunity to share in the upside.
• Reasonable terms for acquiring new IP.
• A role for the faculty inventor.
• To retrieve the IP if licensee doesn’t produce.
How We Assess Technical Feasibility?
• Maturation of the technology – where is it in
  the reduction to practice to market ready
• What does the data say? - from suggestive to
  proven in fact.
• What do non-biased experts say?
• Can it be validated and replicated, in what
• What is the product? How long will it take to
  develop and at what cost?
   Assessing Technical Feasibility

• How complete is the technical asset? What is
  necessary in the production and product
  infrastructure so it can work?
• Can it scale to the size necessary for
  economic success?
• What are the technical alternatives, and their
  IP, economic and market implications relative
  to the subject IP?
How Do We Assess Commercial Potential?

 How can a licensee make money from this IP?
• Need to have a sense of the product and the
  context in which it could be used.
• Is it a continuous innovation vs. discontinuous
• What is the value proposition for the product –
  replacement and benefit economics? Some call
  this the “pain threshold”, what pain will it cause a
  competitor and relief to a user?
• How do you extract economic value for the
  pain/benefit, i.e., what are the transaction points
  where value is attributed and exchanged?
Assessing Commercial Potential (cont’d)

 • How much money can a licensee make?
    – This is a market size issue.
    – Three primary factors – numbers of users,
      frequency and intensity of need
    – What may impinge on market entry and/or
      growth? Typically regulation, standards or
      acceptance patterns.
 • How does CU make money from the licensee?
 • We do a broad-aim analysis of commercial
   potential to determine if we want to patent
   and who might adopt
              Valuation Approaches
•   Market Approach
    – Comparables, databases, articles, TTO experience
•   Cost Approach (set up-front fee)
     – Research $
     – IP Prosecution $
     – Discount Factor
•   Income Approach
     – Discounted sum of future cash flows, i.e. NPV
     – Option pricing, Black-Scholes formula, decision
        points increase value relative to NPV
     – Rule of thumb – 25% Rule
                    Discount Factors
Risk level         Discount rate Description

Nearly Risk Free   10-18         Existing product
Very low risk      15-20         Improved existing product
Low risk           20-30         New product, wu technology,
                                 existing market
Moderate risk      25-35         Same as above with competition

High risk          30-40         New product, nwu technology,
                                 existing market
Very high risk     35-45         New product, new technology,
                                 new market
Extremely high     50-70         New company, unproven
                                 technology, new market
                                     Product Life Cycle
                 Licensee would like to neglect research costs and risk,
                 and emphasize development cost and risk
                 Solution is to analyze mature operation; if consider
                 development costs, then amortize over the product life
           Sales, Cost & Profit

Research                          Expenses                      Sales Revenue


                 *                Loss
                                                  Cash flow


           Introduction                  Growth   Maturity        Decline “cash cow”
                   25% Rule
      A fair return is 25% of Operating Profit
          = revenue less cogs less overhead

• Empirical
• Retrospective study indicates 25-33% of
  profit is commonly observed across
  licenses in many markets (university
  royalties 2 to 3 fold lower than corporate)
• Robert Goldscheider (late 1950s)
• Starting point for courts in infringement suits
                   Valuation Variables
                 Georgia-Pacific V. US Plywood
      Relevant factors for determining a reasonable royalty

1. Established royalty            10. Benefits
2. Infringer comparable royalty   11. Extent of infringing use
3. Degree of exclusivity          12. Industry-accepted rate
4. Licensor’s established position 13. Infringer comb. credit
5. Degree of competition          14. Expert opinion
6. Synergistic value              15. Hypothetical negotiation
7. Patent life
8. Established profitability
9. Market advantage
 University License Equity Holdings, Inc.
• ULEHI [a 501 (C) 3, non-profit corporation exists solely
  for the benefit of CU
• It’s primary purpose is to hold private equity for CU that
  was received as partial consideration for the license and
  to manage/liquidate that equity
• Consistent with this purpose, ULEHI also holds the
  convertible debt notes received from Proof of Concept
  investment (POCi) Program company recipients
• ULEHI’s Board approves all stock and debt transactions
• The equity portfolio is composed of the following:
   – Equity in 30 ongoing private companies
   – Warrants in two public and two private companies, and
   – $100K+ convertible debt in seven private companies
• Six liquidations in past three years
             A Typical Deal Example
• During the process of assessing and creating a commercial
  strategy, a business person with financial backing steps up
• An option is executed and about six months later a license
• A term of license consideration is CU ownership, which
  comes from a stock subscription or LLC membership
• ULEHI typically receives X% of $Y financing, then dilution
• Four of five companies require additional capital – in the
  form of two to five investment rounds
• Equity held until liquidation - acquisition or IPO
• ULEHI sells when it can – no price speculation
• ULEHI conveys proceeds to TTO and TTO distributes cash
  per the royalty distribution policy
• Opportunity exists to continue ULEHI investing to retain
  initial % ownership, thereby increasing the economic

• Difference between exit and termination
• Termination of a license
   – At will by licensee, upon breach by Licensor
   – Breach terms and cure periods
   – Treatment of sublicensees
• Monetization of a license asset
   – Why, how, and who
• Equity as partial consideration for a license
   –   Common v. preferred stock
   –   Member shares in an LLC
   –   Dilution
   –   Liquidation
         CU Technology Transfer…
•   is fundamentally a faculty service organization
    extending the research mission
•   helps faculty scale the impact of discoveries
•   has a well-defined and efficient process for
    managing inventions
•   works closely with Colorado's business
•   plays a critical role in bringing clinical
    discoveries to patients and technology to users
•   is really interesting work

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