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					Identifying Undervalued Companies Via Patent
     Analysis As a Means of Highlighting
          Merger/Acquisition Targets

                    Presented at:
  National Meeting of the American Chemical Society
                    San Diego, CA
                     April 3, 2001

                   Presented by:

            Anthony Breitzman, VP/CTO
         Patrick Thomas, Research Analyst
                 CHI Research, Inc.
                10 White Horse Pike
             Haddon Heights, NJ 08035
               www.chiresearch.com
             abreitz@chiresearch.com
                      Introduction

Mergers and acquisitions take place for a variety of
reasons, including strategic growth, expansion into new
markets, or because the target company is attractively
priced and contains know-how the suitor would like to
obtain.
In this presentation we will concentrate on the third issue;
that is, the use of patent analysis in the valuation of
companies.




2
      Key Questions in Analyzing Mergers
     between Technology Based Companies
1. Does the merger make sense in technological terms?
    – Are the firms technologically compatible?
    – Does the merger fill a technological gap?


2. Are the financial terms of the merger appropriate?
    – Is the buying firm getting a fair price?
    – Is there a best target in terms of technology and price?



Patent analysis can help frame both issues.



3
                           Overview

Slide 5: Introduction to patent analysis

Slides 6-9: Traditional uses of patent analysis in M&A
            Situations

Slides 10-22: Use of patent analysis in valuing companies




4
                  Patent Analysis Basics

 Patent and Patent Family counts can be used to
  measure the level of R&D activity.

 Impact or value of R&D activity can be measured by
  weighting patent activity against patent indicators such
  as citation counts, number of equivalent documents,
  renewal decisions, science linkage, innovation speed,
  etc.

    For more on patent analysis see CHI Publication List:
    http://www.chiresearch.com/pubs.htm papers 146, 113, 103
    among others.



5
    Traditional Uses of Patent Analysis in M&A
                    Situations
 Targeting

 Due Diligence

 Technological Compatibility

And now

 Valuation




6
            Recent Targeting Examples

 A large pharmaceutical company wishes to identify
  small biotech firms with strong genomics capabilities.

 A South American cosmetics company wishes to
  manufacture anti-perspirants in Europe. Which
  European firms have the technological capabilities and
  might be viable acquisition targets?

 A large semiconductor firm wants to invest in firms
  doing bioinformatics. Who has the best and are they
  for sale?



7
              Due-Diligence Examples

 Is the firm everything it seems technologically? Are
  the key inventors still with the firm? We once did a
  due-diligence analysis where the key inventor was
  moved to the parent company, before the sale of a
  subsidiary.

 We once killed an acquisition of a hearing-aid
  company. The target had a strong sales network, but
  its technology was all analog while the competition was
  going digital.




8
     Technological Compatibility Examples

 Is the acquisition active in the same areas as the
  acquiring company? Does the firm fill a technological
  niche or gap that the acquiring company needs filled?

 Recently we showed that the Glaxo-SmithKline merger
  was a good technological fit because both companies
  are active in largely the same treatment areas, but
  Glaxo would gain entry into a number of new areas.
  Also their strengths are complimentary. SmithKline
  would strengthen Glaxo’s weaker pharmaceutical
  technology, while Glaxo’s strong biotechnology and
  basic chemistry research would strengthen
  SmithKline’s weaker standing in those areas.

9
        Basic Idea of Valuation Methodology

 Once a target or targets are identified, what is a
  reasonable price for that target?
 Patent analysis can be used in the following way:
     1. All players in the technology can be identified via patent
        activity.
     2. A market-to-book value can be identified for the publicly
        traded subset.
     3. Regression analysis can be used to correlate market-to-book
        values with patent impact indicators.
     4. A target price is set based on where the target fits among its
        peers in patent indicators.
     5. If the company is public, and its target price is above its
        actual price, than it is undervalued, and is a good buy.



10
             Valuation Example 1 – Who is the best
                        Biotech Target?
                                         Tech                                Tech-
                                         Score     Market              Tech  Score        Value
                                       Percentile Price Per Price/Book Score  Price    Percentile
Name                            Ticker    (1)      Share       (MTB)   MTB 2/28/01 (2) 2/28/01 (3)
Heska Corp.                     HSKA       81       1.06        1.21     3.50    3.07       97
Emisphere Technologies Inc      EMIS       99       23.50       2.11    12.51   139.09      95
Ribozyme Pharmaceuticals Inc.   RZYM       76       7.88        1.56     3.32    16.79      91
Curis Inc                        CRIS      65       5.50        1.12     3.08    15.05      91
Synaptic Pharmaceutical Corp.   SNAP       70       4.81        1.37     3.20    11.18      91
Caliper Technologies Corp       CALP      100       25.50       3.01    58.31   493.89      89
Incyte Pharmaceuticals Inc.      INCY      48       16.81       1.77     2.77    26.36      69
Affymetrix Inc.                 AFFX       98       57.28      19.29     9.18    27.27      43
Chiron Corp                      CHIR      73       46.81       4.91     3.24    30.95      41
Enzon, Inc.                     ENZN       94       63.56      20.84     4.93    15.05      39
Cephalon Inc.                   CEPH       83       55.06      15.16     3.58    12.99      34
Tularik Inc.                    TLRK       54       26.06       4.65     2.87    16.09      33
Genzyme Corp.                   GENZ       55       87.94       6.03     2.90    42.29      29
Genentech Inc                    DNA       48       52.50       4.87     2.79    30.04      28
Corvas International, Inc.      CVAS       69       10.06      14.17     3.19    2.26       26
ICOS Corp                       ICOS       73       54.13      34.48     3.23    5.07       25
Cell Therapeutics Inc            CTIC      28       23.81       3.71     2.45    15.71      19
Millenium Pharmaceuticals       MLNM       52       33.75       9.10     2.85    10.57      19
Immunomedics Inc                IMMU       58       12.94      15.40     2.97    2.49       17
Biogen Inc.                     BGEN       39       71.56       9.98     2.62    18.78      10
Human Genome Sciences Inc.       HGSI      41       54.94      12.72     2.67    11.53       9
Invitrogen Corp.                 IVGN      33       80.50      19.87     2.54    10.29       5


 11
              Footnotes to Previous Slide

1. Technology Score is a linear combination of various patent
   indicators. These are then percentile ranked by industry so that
   companies with a percentile score of 100 have the strongest
   technology indicators within the industry.

2. Regression analysis is used to determine the MTB level for a
   company with a particular tech. score within an industry. Once an
   MTB is determined, a price-per-share can be easily determined.

3. By comparing a company's actual price with its tech-score price,
   one can determine whether a company is over or under-valued in
   the market.




12
         Example 2: Glaxo Purchased SmithKline at a
                       Bargain Price

Using Tech Prices:     1 SmithKline share = $3.51
                       1 Glaxo share = $6.72

Therefore:             1 SmithKline share = 0.5223 ($3.51/$6.72) Glaxo shares

Terms of merger:       1 SmithKline share = 0.4552 Glaxo shares




SmithKline was overvalued, but not as much as Glaxo. By doing a stock swap,
Glaxo used overvalued stock to pay for less overvalued shares of SmithKline.




   13
                                                    Example 3: Acuson Case Study.
          In Ultrasound Technology Acuson is One of the Most Prolific Patenters, Its
       Patents are Highly Influential, and Have the Closest Links to Scientific Research
                                                                                               Number of US Patents 1995-99

                General Electric
                              Acuson
                              Siemens
                      Philips/ATL
    Hewlett Packard/Agilent
                Boston Scientific
                              Toshiba

                                             0                               20                               40           60                    80                      100                        120


                               Current Impact Index
                                                                                                                                   Average Science Links Per Patent
4                                                                                                                  10

                                                                                                                   8
3
                                                                                                                   6
2
                                                                                                                   4

1                                                                                                                  2

                                                                                                                   0
0




                                                                                                                                                                      HP/Agilent



                                                                                                                                                                                   Scientific
                                                                                                                                                       Philips /ATL




                                                                                                                                                                                                Tos hiba
                                                                                                                        General



                                                                                                                                   Acus on



                                                                                                                                             Siemens
                                                                                                                        Electric




                                                                                                                                                                                    Bos ton
                                                                HP/Agilent




                                                                                  Scientific
                                                 Philips /ATL
     General




                                                                                                   Tos hiba
                    Acus on



                                  Siem ens
     Electric




                                                                                   Bos ton




14
                                   Example 3: Acuson Case Study.
     Acuson is at the Center of the Latest Developments in Ultrasound Technology

               (Linkage Map shows Citation Relationships Between Companies)

        Hewlett Packard                            9      Boston
          Incl. Agilent                                  Scientific
              13         25                                   7




                                                                       154
                              8
           Siemens                                       Acuson                                   Toshiba
                                                                                       6

         10                                            170                                            4




                    37                                            13
                                                                       13
                              36                          Philips
               GE                                                                                 Fujitsu
                                                         Incl. ATL



                         Company in selected set                       Company receiving most cites

                         Company not in selected set                   Company receiving 2nd most cites


15
                                 Example 3: Acuson Case Study.
     Acuson’s Patents are Influential both Inside and Outside the Ultrasound Industry

          Patent Title: Ultrasonic Harmonic Imaging System and Method
                      Citing                                                            Citing
                      Year                                                              Year

                      2000      06034922     06036643       06122223     06056943       2000
                               Schering AG                  06122222     06036644
                                                            06120448     06019960
                                                            06117082      Alliance
                                                            06116244   Pharmaceutical
                                                            06104670
                                                            06048316
                                                            06042545
                                                            06027448


                      1999      05961464     05908389       06009046                    1999
                                 Hewlett     05879303       06005827
                                 Packard                    05957852
                                                            05933389
                                                            05897500
                                                            05882306
                                                             Acuson
                                                             Corp.


                      1998                   05833613                                   1998
                                             Koninklijke
                                               Philips
                                             Electronics




           Starting   1998                                 05740128                     1998 Starting
           Patent                                           Acuson                           Patent

16
                                                      Example 3: Acuson Case Study.
                              On August 15th, CHI selected Acuson for inclusion in Nike Securities’ Patent
                                                            Quality Trust

                                   Siemens Purchased Acuson at a 50% Premium on September 27th
                              25




                              20
                                         August 15th: CHI Identifies Acuson as an Undervalued Company for
                                                             Nike's Patent Quality Trust
     Acuson Share Price ($)




                              15




                              10
                                                                                        September 27th: Siemens has $23 a share bid
                                                                                                   for Acuson accepted


                               5




                               0
                              1/15/00   2/15/00   3/15/00    4/15/00     5/15/00    6/15/00    7/15/00      8/15/00   9/15/00




17
        Example 3: Acuson Case Study. Key Facts

 Patent analysis showed that Acuson’s ultrasound technology was
  very good relative to its peers.

 Its stock price indicated it was undervalued relative to its industry
  and its technological quality.

 The conclusion at the time (August 2000) was that Acuson was
  ripe for either a takeover or a substantial rise in stock price.




18
       Can the Acuson Example be Generalized?

 Yes. The method can and has been generalized to identify
  undervalued companies whose stocks should rise.

 The method is the subject of a recently issued and another pending
  patent.

 The basic idea of the method is that once a company’s industry is
  identified, one can always tell 1) whether its patents are as good or
  better than its peers and 2) whether this is reflected in its stock price.




 19
     Companies Undervalued Based on Patent Scores are More Likely to
                 Experience Increased Market-to-Book
                  (and hence increased stock prices).

                 Percent of Companies with Increased Market to Book
                            2 Years after Patent Evaluation

 100


     90


     80


     70


     60


     50

                                                    undervalued
     40


     30                                             overall

     20
                                                    overvalued
     10


      0
          1990   1991      1992     1993         1994            1995   1996   1997

                                    Year of Evaluation



20
     $100 invested in the most undervalued companies (refreshed each
                year) would return over 2000% in 10 years.



        2500
                               ITL 20 Undervalued       NASDAQ

        2100                   S&P500                   ITL 20 Overvalued



        1700



        1300



         900



         500



         100
               Dec 90 Dec 91 Dec 92 Dec 93   Dec 94 Dec 95 Dec 96   Dec 97 Dec 98 Dec 99 Dec 00




21
     But how does it perform in a bear market?


                                Year 2000 Jan - Mar 27, 2001
                                % Return      % Return
         CHI 20 Undervalued        23%            9%
                   NASDAQ         -39%           -20%
                    S&P500        -11%           -11%
         Dow Jones Ind. Avg.       -6%            -8%


     The market has been unkind overall so far this year, but the
     undervalued companies have done well.




22
      For More Information and Related Papers
                       Visit:

     www.Chiresearch.com

     Or Contact:

     Tony Breitzman VP/CTO
     CHI Research, Inc.
     10 White Horse Pike
     Haddon Heights, NJ 08035

     Ph: 856.546.0600  Fax: 856.546.9633
     E-mail: abreitz@chiresearch.com


23

				
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