Business Aspects of IPR Bodhankar

IP Valuation and OffshoringA Key Success Factor

Ashish BodhankarGroup Manager, IP Division

Evalueserve

© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential

Slide 2

Presentation Plan

Importance of Intellectual Property

Intellectual Property impacts all stages of a product life cycle

Intellectual Property is an integral part of Business Strategy

Developing an IP strategy

Destination India

About Evalueserve


Slide 3

Presentation Plan





Destination India

About Evalueserve


Slide 4

Different IP activities are required at different stages of the invention’s lifecycle

Prior Art Search

Overlap Analysis

Add-on Freedom to Use Studies

Patent Drafting

Litigation Support

Freedom to Use Study

Competitive Licensing Need Analysis

Patent Filing and Prosecution

Patent out-licensing and in-licensing

Technology Valuation Analysis

Technology Commercialization Services

Ideation Value

extraction IP

protection R&D

Early-stage valuation

Per

tin

ent

IP S

ervi

ces

Business Managers

IP Heads

R&D heads

Researchers

Business Managers

Researchers

Business Managers

VCs

Researchers

VCs

Business Managers

Use

rs

IP Services


Slide 5


Research &

DevelopmentManufacturing

Product/Service

(Marketing & Sales)

IPR

Investments

Company

Competitors or

Others

Out-licensing/Royalty fees

Return on Investments

In-licensing/

Acquisition


Slide 6

Intellectual Property can generate huge financial gains……

– Market capitalization of Eli Lilly decreased by $36 million – a loss of 1/3 market cap, after the US Court of Appeals’ decided that Eli Lilly’s patent on Prozac was invalid (August 09, 2000)

– Royalties from inventions were estimated at $150 billion/year worldwide (in 2002) and were expected to grow at 30% p.a. for the subsequent 5 years

– Fonar, a small medical firm with annual revenues of less than $12 million, gained $128.7 million as damages from GE for infringement on Fonar’s MRI patent

– J&J was awarded $324 million in a stent patent infringement case against Boston Scientific

– Medical Instrument was awarded $424 million in a patent lawsuit against Elekta in the year 2002

– Monsanto agreed to pay $100 million to University of California for somatostatin for exclusive rights to market the animal growth hormone.

Infringement

Monetizing


Slide 7

Intellectual Property Generates Huge Financial Gains…

– Global licensing and technology transfer revenues have increased to $120 billion in 2002 from $15 billion in 2000

– IBM’s licensing revenue grew from $31 million in 1990 to $1 billion in 2000

– The average licensing revenue for the top 10 US universities is $71 million

– The Stanford University made $87 million through licensing fees received from just one basic biotech patent0

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Year

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Net License Income (in million$)

Net License Income per Respondent (in 10,000$ per respondent)

Number of Respondents

– 30% Japanese companies surveyed had over 2,000 unutilized patents each

– 35% of patented technologies become non-core due to changing business priorities and Licensing of non-core IP carries no risk

Underutilized IPUnderutilized IP ProfitsProfitsLicensingLicensing


Slide 8

Companies get Acquired/Sold based on IPRs

• Press Release: January 23, 2003

“FIT Biotech Plc acquired assets of Xenerate Ab and starts the development of novel gene technology based vascular devices

FIT Biotech Plc announced today that it starts a development of new biocompatible cardiovascular devices, applying its proprietary Gene Transport Unit (GTU®) technology. FIT Biotech acquired the intellectual property rights and other assets of Xenerate AB, a company combining medical devices and gene therapy. Together, FIT Biotech's knowledge in DNA plasmids and gene therapy, and Xenerate's background in cardiovascular device technology, will create a unique platform for the development of medical devices for the treatment of cardiovascular diseases.”

Source: http://www.fitbiotech.com/en_012303_1.html


Slide 9

Companies get Acquired/Sold based on IPRs

• Press Release: December 2000

“Exelixis Acquired Key Plant Technology, Intellectual Property And Plant Biology Capabilities Through Acquisition of Agritope

The acquisition of Agritope provides Exelixis with key intellectual property, substantial additional technology including expertise in additional model systems, and extensive experience in plant biology. Combined with Exelixis' existing expertise in bioinformatics, genomics, and complementary plant model systems, this program gives Exelixis a superior plant genomics program.”

Source: http://ir.exelixis.com/phoenix.zhtml?c=120923&p=irol-newsArticle&ID=779040&highlight=


Slide 10

Presentation Plan





About Evalueserve


Slide 11

Develop an IP Focus

• Develop an “IP-centric strategic R&D focus”

• Obtain strong IP protection for your inventions

• Develop products and build “Brand Equity”

• Extract value from protected inventions by identifying and encashing the right value extraction routes (licensing, commercialization, cross-licensing, etc.)


Slide 12

Redefine R&D Approach

A value-centric lifecycle of an invention

Ideation Value

extraction IP

protection R&D

Early-stage valuation

IdeationValue

extractionIP

protectionR&D

Strategic R&D

An idea-centric lifecycle of an invention


Slide 13

Develop Commercialization Strategies using IP

Exclusive product

• Marks a boundary around a technology

• Creates entry barrier for other players

• E.g. PCR by Roche

Licensing

• In-licensing of patents

• Out-licensing of patents

• Cross-licensing of patents

• Valuation of patents

Infringement

• Law-suit against someone using a patented technology

• J&J vs. Boston Scientific – total cost to Boston Scientific $324 million


Slide 14

Intellectual Property – Emerging Driver of Licensing Strategy

Need to in/out license

Identify technology to

license

Identify licensing

partner Valuation Negotiations

IP overlap analysis determines in-

licensing needs and out-licensing potential

IP landscape determines the

potential of in/out license

IP Landscape and overlap analysis help

in identifying licensing partner

IP valuation determines the value

of a licensing deal

IP overlap analysis answers the following questions:

• Do you need to in-license to cover/protect your product portfolio?

• Is your product portfolio adequately protected by your IP?

• Are you making the best use of your IP portfolio?

• Do you have any IP that is not earning any returns for you?

IP landscape answers the following questions:

• How crowded is the technology domain?

• What is the concentration of IP in the domain?

• Who are the key players?• What are the gaps and

opportunity areas in the technology landscape?

• What are the IP trends? • What are the emerging

technologies?

Amongst other factors, IP valuation is also dependent upon:

• IP concentration in the domain

• Strength of the IP portfolio

• Competitors


Slide 15

Case Study

Problem: Company A wants to in-license technology X from Company B. Company B is unwilling to out-license.

Possible solution: Identify in-licensing needs of company B obtain IP that fulfills these needs Negotiate

Approach1. Identification of product portfolio and patent

portfolio of company B2. Overlap analysis to identify products that

are not adequately covered by the patent portfolio of company B. These represent the in-licensing needs

3. Landscape analysis to identify patents that can fulfill the in-licensing needs of the company B


Slide 16

Case Study

Problem: Company A files a law-suit against Company B claiming that Company B’s product X infringes upon Company A’s patent Y. Company B wants to avoid the law suit.

Possible solution: Gather appropriate information capable of invalidating patent Y Negotiate with Company B to drop law suits or Invalidate patent Y in the court of law

Approach1. Identify key features of patent Y which map onto

product X 2. Perform prior-art search in patent and non-

patent literature for the key features3. Map all key features to prior-art4. Negotiate with Company A or file counter suit

against Company A


Slide 17

…Effective Management is Generating Higher Revenues from the IP Portfolio

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65 75103

258 272

358

246

182166

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1999 2000 2001

mill

ion

US

$ IBM

GE

Sony

Hitachi

Source: Evalueserve analysis, Company filings

Patent licensing is an increasingly lucrative source of revenue globallyPatent licensing is an increasingly lucrative source of revenue globally

© Evalueserve, 2006, All Rights Reserved.

A Monte Carlo Simulation based patent valuation model considers multiple potential economic outcomes and the likelihood of those scenarios materializing

The method is extremely useful when high uncertainty is expected, e.g., emerging technology, untested product

The method is based on the Income Approach of patent valuation and is implemented by first developing a base Discounted Cash Flow model

Parameters contributing to uncertainty are used for performing multiple trials to simulate potential economic outcomes

The multiple trials are used to obtain probability plots and numerous statistics for the value of the patent

Practical valuation methods are desirable, particularly early in the life of a patent, to lead to optimal decision making

Valuation of patent involves making judgments about the future and uncertainties, e.g., growth trends, technological feasibility

Patent valuation is especially necessary in case of sale of patents, licensing of patents, company valuation, M&A deals or infringement lawsuits

Patent valuation models are developed to provide a sufficiently accurate value of the net economic benefits (cash receipts less cash outlays) over the life of the patent

Patent valuation may be performed using a cost approach, a comparables approach, an income approach or an option pricing theory approach

Monte Carlo SimulationPatent Valuation

Patent Valuation – Introduction


Sale of Patents

Infringement Lawsuit

Licensing Deals

Assessment of TechnologyAssessment of Technology

Option Pricing Theory (OPT) Approach

Cost based Approach

Comparables Approach

Income Approach

Patent ValuationPatent Valuation

Different Approaches for Patent Valuation (1/2)


Valuation ApproachesValuation Approaches



Cost-based Approach

Cost-based Approach

Value Estimate Present value of

earnings attributable to the patent or, costs

avoided as a result of owning the

patent

Value Estimate Reproduction /

replacement cost-adjusted for

depreciation and obsolescence

Value Estimate Multiples or prices

from market transactions

involving the sale of comparable

patents

Income ApproachIncome Approach

Value EstimatePrice for

excercisingan option,

accounting for changing risk of

future cashflows

OPT ApproachOPT Approach

Different Approaches for Patent Valuation (2/2)


Patent Strength Analysis

Market Analysis Valuation

The Monte Carlo Simulation based patent valuation model is a three-step methodology based on the Income Approach.

Determine the technical strength of the patent

Identify key features of the patent

Identify companies with patents similar to the patent of the study

Identify major companies in the market place

Determine the growth trends for the relevant products

Project future revenues for the products

Develop a base discounted cash flow model. Use it to develop a Monte Carlo Simulation model

Perform multiple trials to obtain probability plots and statistics for the value of the patent

Monte Carlo Simulation Model – Overview


Develop an understanding of the patent and the technological domain

Identify the right search strategy and perform the search in the appropriate patent databases

Analyze the results

Obtain information such as key companies that have technically close patents

Identify competing technologies to identify substitute products and / or technologies

Determine the freedom-to-operate for the technology disclosed in the patent of the study

Objectives

– To determine the technical strength of the patent in light of existing art

– To identify key features of the patent

– To identify the companies in the market that have patents similar to the patent of the study

Inputs from the client

– Geographical scope of the analysis

– Claims to be focused on, if required

– Any relevant prior art, if available

ProcessDescription

Patent Strength Analysis


Identify major companies producing products that use technology that potentially overlaps with the technology described in the patent

Obtain past three-to-five years’ sales and / or revenue figures for the relevant products (of the above companies)

Determine the lifecycle of the relevant products

Estimate the growth trends for the products’ landscape using the lifecycle

Project the future revenues for the relevant products based on the growth trends

Objectives

– To identify major companies in the market

– To estimate growth trends for the products

– To project future revenues for the relevant products


– Future expectations of the market

– Geographical scope for the marketing of the products

– Regulatory threat, if any

ProcessDescription

Market Analysis


Identify uncertainty parameters i.e. parameters that contribute to the uncertainty of the earnings (, e.g., growth rate, conversion ratio, discount rate)

Determine the expected values for the identified uncertainty parameters

Determine the range of values for the uncertainty parameters and assign a suitable probability distribution

Develop a base discounted cash flow model with expected values for the uncertainty parameters

Develop a Monte Carlo Simulation based model and perform multiple trials, e.g., 1000, 5000 or 10000, using inputs from the base model

Objectives

– To obtain a value of the patent by adopting a multi-scenario probabilistic approach that is based on the Income Approach of patent valuation


– Expenses, e.g., cost-of-goods-sold likely for a product, if available

– Investment expected in the future for capacity expansion, if available

– Risks, if any, expected in the market

ProcessDescription

Valuation


Determine a ‘conversion ratio’. The conversion ratio is applied to convert the revenues to the earnings attributable to the patent. It is based on the expenses and the contribution of the patent to the earnings. This results in a range of values for the conversion ratio.

Determine a ‘discount rate’. The discount rate is used for discounting the cash flows. It is based on a Risk Assessment Matrix which includes an analysis of factors contributing to risk. This results in a range of values for the discount rate.

Growth rate is obtained from the market analysis

Assign an appropriate probability distribution to each uncertainty parameter

Examples

– Growth rate

– Investment capacity

– Contribution to earnings

– Price

– Sales / Revenues

– Discount rate

Probability Distributions

– Uniform

– Triangular

– Normal

– Lognormal

ProcessUncertainty Parameters

Uncertainty Parameters


Plots

– Net Present Value (NPV) probability distribution plot

– NPV cumulative probability distribution plot

– Tornado plot

Statistics

– Sensitivity Analysis

– Mean and Standard deviation

– Minimum and Maximum

– Confidence Intervals

Results

Various plots and statistics can be obtained by using a Monte Carlo Simulation based patent valuation model.

Results


Factors contributing to risk are independently analyzed. A risk premium is prescribed for each factor based on the selected level.

FACTOR LEVEL A LEVEL B LEVEL CRISK

PREMIUM

COMPANY STAGE

Start-up Existing, New domain-entrant

Well established

4-6%

DEMAND LEVEL

Low Medium High 0-2%

FACTOR X Very High High Moderate 4-6%

FACTOR Y Numerous Few None 8-10%

FACTOR Z New product Re-launch Stable 8-10%

OVERALL RISK ASSESSMENT

MODERATE TO HIGH RISK

New product (integrated circuit chip) with a well understood technology being launched in a market with numerous substitute products.

Discount Rate: 25 – 35 %

Expected Discount Rate: 30 %

Risk Assessment Matrix

Discount Rate Estimation


NPV Probability Distribution Plot

The following plot depicts the concentration of NPVs for a patent relating to integrated circuit chips. The mean NPV is indicated by a red arrow.

Probability Distribution Plot


NPV Cumulative Probability Distribution Plot

Red arrow depicts that there is a 50% probability for the NPV to lie between the minimum NPV (green arrow) and the value indicated (black circle)

Cumulative Probability Distribution Plot


Discount Rate

Growth Rate

Conversion Ratio

30% 40%

40% 50%

9% 11%

Base Case Value USD 4,748,122

Tornado Plot

A tornado plot is a series of horizontal bars based around the base case result, one for each parameter in the sensitivity. The length of a bar

indicates the change to the base case caused by the parameter.

Tornado Plot


Sensitivity Analysis

Growth Rate

(Amounts in USD mn)

13% 14% 15% 16%

25% 4.67 4.90 5.19 5.34

30% 4.57 4.76 4.95 5.14

35% 4.49 4.65 4.82 4.98Dis

coun

t R

ate

A sensitivity analysis is performed to provide NPV values for numerous combinations of two uncertainty parameters.

Sensitivity Analysis


NPV Statistics

Parameter ValueMean USD 4,771,199

Standard deviation 10,144

Minimum USD 4,541,702

Maximum USD 5,184,121

Kurtosis 0.19

Skewness 0.44

The table includes an indicative list of the NPV statistics that may be obtained from the Monte Carlo Simulation model.

Statistics


Slide 33

Presentation Plan





Destination India

About Evalueserve


Slide 34

IP Analysis is a Time-critical and Time-intensive Exercise

You need to take decision regarding the acquisition of a company: This requires analysis of a patent portfolio of over 10,000 patents in 10 working days

You need to identify out-licensing opportunities from a portfolio of over 16,000 patents

You want to benchmark you IP portfolio: This requires identification and analysis of patent portfolios of key players in a domain, comprising over 6,000 patents


Slide 35

Offshoring: A Time-efficient and Cost-effective Solution

Preparing, filing and prosecuting patent applications is carried out by approximately 30,000 USPTO-registered attorneys and agents

1997-2001• The USPTO granted almost 0.5 million patents

• Over 700 organizations were granted more than 100 patents each

2004• More than 353,000 utility, plant and reissue applications were filed

• Of these, more than 159,000 were from foreign applicants

2010• Evalueserve estimates that as many as 500,000 patent

applications will be filed with the USPTO

To meet rising demand, the need for attorneys and agents will exceed to 38,000 by 2010

Present Scenario Outlook

Ex

po

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nti

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inc

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se

in

pa

ten

t d

ata

Availability of IP experts lags behind the demand

IP licensing is not a continuous exerciseDo you want to hire full-time professionals for this? If yes, how many can you hire?


Slide 36

• New IP services and research tools

• Intellectual Property Asset Management (IPAM)

Offshoring IP Services: Drivers and BenefitsOffshoring IP Services: Drivers and Benefits

OffshoringIP Services

• Offshoring IP services proves to be cost-effective

• Billing rate: Euro 20-50/hour

Historically unviable projects become viable

• Reduced response time critical for projects with strict deadlines

• Project of 1,000 hours can be completed in 10 days

• Good quality work• Client spends only 10-20% of the effort required

• Easy availability to a large pool of talented professionals

• PhDs, Masters, Doctors working on the projects

• Easy to scale-up and scale-down the team

• Team size can be varied from 2-100 people

• Support services that allow a client to focus on its core activities

• Lawyers and paralegals can focus more on their core activities and spend more 'face time' with their clients.

Response Time Quality

Skill Set

Cost Advantage

Flexibility

Focus on Core Activities

Value Addition


Slide 37

Caution: IP Outsourcing Requires Strong Confidentiality Management Systems

Dedicated Teams

Processes

TechnologyLegal Measures

• NDA

• Western Jurisdiction

• IP of projects belongs to clients

• Client attorney privilege

• Chinese Walls

• Staffing rules

• Secure transmission

• Secure storage

• Data access for team members only

• Need-to-know

• Confidentiality as element of quality

• Clean desk


Slide 38

Outsourcing and Offshoring: Available Offshore Models

• Offshoring of IP services in three different models:– Captive Center (e.g. GE with 60 professionals in India)– Joint Ventures (not really working well)– Third Party Vendors

• Destination: INDIA– Highly qualified individuals with scientific/technical credentials

available, but need to be trained in a major way


Evalueserve: IP GroupEvalueserve: IP Group

500+ clients in the UK, Continental Europe, the US, Canada and Asia- Fortune 100/500 - SMEs

- IP law firms - IP consulting firms

Competency in high-tech domains– Electronics, Software, Telecom, Mechanical, Healthcare, Biotechnology, Pharmaceuticals,

Chemicals

Access to databases and tools– Delphion, MicroPatent, Patent Café, STN, IEEE, Find Articles.com, Thomson Dialog,

LexisNexis, Westlaw, Manupatra

EVS is ISO27001 certified

Biotech & Pharma40%

Electronics & Communication

36%

Others 24%

Biotechnology, Pharmacy,

Chemistry, Chemical, Medicine

Electronics &Telecommunication,

Electrical, Computers

Mechanical, Civil,

Industrial, Material Science

PhDs, MastersBachelorsMedical Doctors

Masters Bachelors

MastersBachelors

200+ IP Professional in India


→ Para-legal Support Services

→ Litigation Support Services

→ Drafting of Legal Documents

→ Legal Case Law Research

Para-legal Services(Emerging Lines of

Business)

Intellectual Property(Existing Capability)

→ Prior art search/Patent-

ability/Technology

Assessment

→ Patent Drafting and filing

→ IP Asset Management

Services

→ Commercialization Studies

Evalueserve: Existing and Emerging CapabilitiesEvalueserve: Existing and Emerging Capabilities