IP Valuation and Offshoring

A Key Success Factor

Ashish Bodhankar
Group Manager, IP Division
Evalueserve
 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 2
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
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
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
Different IP activities are required at different stages of the
invention’s lifecycle

Early-stage IP Value
Ideation R&D
valuation protection extraction

IP Services
Researchers Researchers Researchers IP Heads Business
VCs Business Business R&D heads Managers
Managers Managers
sr es U

Business
Managers VCs
Prior Art Search Overlap Add-on Patent Drafting Litigation Support
Analysis Freedom to Use
Studies
Freedom to Use Competitive Patent Filing andPatent out-
Study Licensing Need Prosecution licensing and in-
Analysis licensing

Technology Technology
Valuation Commercializatio
Analysis n Services
I t ne ni t r e P

Slide 4
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Intellectual Property is an integral part of Business Strategy

Return on Investments Competitors or

Others

Company IPR Out-licensing/Royalty fees

Research & Product/Service

Investments Manufacturing
Development (Marketing & Sales)

In-licensing/
Acquisition

Slide 5
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 Intellectual Property can generate huge financial gains……
Monetizing
– 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

Infringement
– 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.

Slide 6
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 Intellectual Property Generates Huge Financial Gains…

Underutilized IP Licensing Profits

– 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
1400
– 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
250
million in 1990 to $1 billion in 2000

Number of Respondents
1200
200
Licening Revenue

1000 – The average licensing revenue for the top 10

800 150 US universities is $71 million
600 100
400 – The Stanford University made $87 million
200
50 through licensing fees received from just
one basic biotech patent
0 0
1991 1994 1997 2000 2003

Year

Net License Income (in million$)

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

Slide 7
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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 8
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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 9
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
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

 About Evalueserve

Slide 10
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
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 11
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Redefine R&D Approach

An idea-centric lifecycle of an invention

IP Value
Ideation R&D
protection extraction

A value-centric lifecycle of an invention

Early-stage IP Value
Ideation R&D
valuation protection extraction

Strategic R&D

Slide 12
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Develop Commercialization Strategies using IP

• Marks a boundary around a technology

Exclusive product • Creates entry barrier for other players
• E.g. PCR by Roche

• In-licensing of patents
Licensing • Out-licensing of patents
• Cross-licensing of patents
• Valuation of patents

• Law-suit against someone using a patented

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

Slide 13
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Intellectual Property – Emerging Driver of Licensing Strategy
Identify Identify
Need to in/out
technology to licensing Valuation Negotiations
license
license partner

IP overlap analysis IP landscape IP Landscape and

IP valuation
determines in- determines the overlap analysis help
determines the value
licensing needs and potential of in/out in identifying
of a licensing deal
out-licensing potential license licensing partner
IP overlap analysis answers IP landscape answers the Amongst other factors, IP
the following questions: following questions: valuation is also dependent
• Do you need to in- • How crowded is the upon:
license to cover/protect technology domain? • IP concentration in the
your product portfolio? • What is the concentration of domain
• Is your product portfolio IP in the domain? • Strength of the IP
adequately protected by • Who are the key players? portfolio
your IP? • What are the gaps and • Competitors
• Are you making the best opportunity areas in the
use of your IP portfolio? technology landscape?
• Do you have any IP that • What are the IP trends?
is not earning any • What are the emerging
returns for you? technologies?

Slide 14
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 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

Approach
1. Identification of product portfolio and patent
portfolio of company B
2. 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 15
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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

Approach
1. 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 features
3. Map all key features to prior-art
4. Negotiate with Company A or file counter suit
against Company A

Slide 16
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 …Effective Management is Generating Higher Revenues from
the IP Portfolio

Patent licensing is an increasingly lucrative source of revenue globally

800

700 646
590
600
515
500 IBM
million US$

GE
400 358
Sony
300 258 272 Hitachi
246

200 166 182

103
100 65 75

0
1999 2000 2001

Slide 17
Source: Evalueserve analysis, Company filings
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
Patent Valuation – Introduction
Patent Valuation
 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 Simulation
 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
© Evalueserve, 2006, All Rights Reserved.
 Different Approaches for Patent Valuation
(1/2)
Assessment of Technology

Infringement Sale of Licensing

Lawsuit Patents Deals

Patent Valuation

Option Pricing
Cost based Comparables Income
Theory (OPT)
Approach Approach Approach
Approach

© Evalueserve, 2006, All Rights Reserved.

 Different Approaches for Patent Valuation
(2/2)
Valuation
Valuation Approaches
Approaches

Cost-based
Cost-based Comparables
Comparables OPT ApproachIncome Approach
Approach Approach OPT ApproachIncome Approach
Approach Approach

Value Value Value Value

Estimate Estimate Estimate Estimate
Reproductio Multiples or Price for Present
n/ prices from excercising value of
replacement market an option, earnings
cost- transactions accounting attributable
adjusted for involving the for changing to the patent
depreciation sale of risk of future or, costs
and comparable cashflows avoided as a
obsolescence patents result
© Evalueserve, 2006, All Rightsof
Reserved.
Monte Carlo Simulation Model – Overview
The Monte Carlo Simulation based patent valuation model is a three-step
methodology based on the Income Approach.

Patent Strength
Market Analysis Valuation
Analysis

 Determine the  Identify major  Develop a base

technical strength of companies in the discounted cash flow
the patent market place model. Use it to
develop a Monte Carlo
 Identify key features  Determine the growth Simulation model
of the patent trends for the
relevant products  Perform multiple trials
 Identify companies to obtain probability
with patents similar to  Project future plots and statistics for
the patent of the revenues for the the value of the patent
study products

© Evalueserve, 2006, All Rights Reserved.

 Patent Strength Analysis
Description
 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
Process
 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
© Evalueserve, 2006, All Rights Reserved.
Market Analysis
Description
 Objectives
– To identify major companies in
the market
– To estimate growth trends for the
products
– To project future revenues for the
relevant products
 Inputs from the client
– Future expectations of the market
– Geographical scope for the
marketing of the products
– Regulatory threat, if any
Process
 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
© Evalueserve, 2006, All Rights Reserved.
Valuation
Description
 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
 Inputs from the client
– 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
Process
 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
© Evalueserve, 2006, All Rights Reserved.
 Uncertainty Parameters
Uncertainty Parameters Process
 Determine a ‘conversion ratio’. The
 Examples conversion ratio is applied to convert the
– Growth rate revenues to the earnings attributable to the
patent. It is based on the expenses and the
– Investment capacity contribution of the patent to the earnings.
This results in a range of values for the
– Contribution to earnings conversion ratio.
– Price  Determine a ‘discount rate’. The discount
rate is used for discounting the cash flows.
– Sales / Revenues
It is based on a Risk Assessment Matrix
– Discount rate which includes an analysis of factors
contributing to risk. This results in a range
 Probability Distributions of values for the discount rate.
– Uniform  Growth rate is obtained from the market
analysis
– Triangular
 Assign an appropriate probability
– Normal
distribution to each uncertainty parameter
– Lognormal

© Evalueserve, 2006, All Rights Reserved.

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

Results
 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

© Evalueserve, 2006, All Rights Reserved.

 Discount Rate Estimation
Factors contributing to risk are independently analyzed. A risk premium
is prescribed for each factor based on the selected level.
Risk Assessment Matrix
FACTOR LEVEL A LEVEL B LEVEL C RISK PREMIUM

COMPANY Start-up Existing, New Well established 4-6%

STAGE domain-entrant
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 %

© Evalueserve, 2006, All Rights Reserved.

 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.

NPV Probability Distribution Plot

© Evalueserve, 2006, All Rights Reserved.

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)
NPV Cumulative Probability Distribution Plot

© Evalueserve, 2006, All Rights Reserved.

 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

30% 40%
Discount
Rate
40% 50%
Growth
Rate
9% 11%
Conversio
n Ratio

Base Case Value

USD 4,748,122

© Evalueserve, 2006, All Rights Reserved.

 Sensitivity Analysis

A sensitivity analysis is performed to provide NPV values for numerous

combinations of two uncertainty parameters.

Sensitivity Analysis
Growth Rate
(Amounts in 13% 14% 15% 16%
USD mn)
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 4.98

et a Rt nuocsi D

© Evalueserve, 2006, All Rights Reserved.

 Statistics

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

NPV Statistics

Parameter Value
Mean USD 4,771,199
Standard deviation 10,144
Minimum USD 4,541,702
Maximum USD 5,184,121
Kurtosis 0.19
Skewness 0.44

© Evalueserve, 2006, All Rights Reserved.

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 33
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
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 34
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
 Offshoring: A Time-efficient and Cost-effective Solution
• The USPTO granted almost 0.5 million patents
Exponential increase in patent data

1997-2001
• Over 700 organizations were granted more than 100 patents each

• More than 353,000 utility, plant and reissue applications were filed
2004
• Of these, more than 159,000 were from foreign applicants

• Evalueserve estimates that as many as 500,000 patent

2010 applications will be filed with the USPTO

Availability of IP experts lags behind the demand

Present Scenario Outlook IP licensing is not a

continuous exercise
Do you want to hire
Preparing, filing and prosecuting To meet rising demand, the full-time
patent applications is carried out need for attorneys and agents professionals for
this? If yes, how
by approximately 30,000 will exceed to 38,000 by 2010 many can you hire?
USPTO-registered attorneys and
agents

Slide 35
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
Offshoring
Offshoring IP
IP Services:
Services: Drivers
Drivers and
and Benefits
Benefits
Response Time Quality
• Reduced response time critical • Good quality work
for projects with strict deadlines • Client spends only 10-
• Project of 1,000 hours can be 20% of the effort required
Skill Set
completed in 10 days
Focus on Core • Easy availability to a large pool
Activities of talented professionals
• Support services that allow a • PhDs, Masters, Doctors
client to focus on its core working on the projects
activities Offshoring
• Lawyers and paralegals can IP Services Cost Advantage
focus more on their core
activities and spend more 'face • Offshoring IP services proves
time' with their clients. to be cost-effective
• Billing rate: Euro 20-50/hour
Flexibility
• Easy to scale-up and Value Addition
scale-down the team • New IP services and research
• Team size can be varied
tools
from 2-100 people • Intellectual Property Asset
Management (IPAM)

Historically unviable projects become viable

Slide 36
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
Caution: IP Outsourcing Requires Strong Confidentiality
Management Systems

Dedicated Teams
• Chinese Walls
• Staffing rules

Legal Measures Technology

• NDA • Secure
transmission
• Western
Jurisdiction Processes • Secure storage
• IP of projects • Data access for
• Need-to-know
belongs to clients team members
• Confidentiality as only
• Client attorney
element of quality
privilege
• Clean desk

Slide 37
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
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

Slide 38
© Evalueserve, 2004. All Rights Reserved - Privileged and Confidential
Evalueserve:
Evalueserve: IP
IP Group
Group
200+ IP Professional in India

PhDs, Masters
Biotech & Pharma
Biotechnology, Pharmacy, Bachelors
40% Chemistry, Chemical, Medicine Medical Doctors
Electronics & Electronics Masters
Communication &Telecommunication, Bachelors
36% Electrical, Computers
Mechanical, Civil, Masters
Others
Industrial, Material Science Bachelors
24%

 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

© Evalueserve, 2006. All Rights Reserved - Privileged and Confidential

Evalueserve:
Evalueserve: Existing
Existing and
and Emerging
Emerging Capabilities
Capabilities

Para-legal Services
Intellectual Property (Emerging Lines of
(Existing Capability)
Business)

→ Prior art search/Patent- → Para-legal Support Services

ability/Technology
→ Litigation Support Services
Assessment
→ Drafting of Legal Documents
→ Patent Drafting and filing
→ Legal Case Law Research
→ IP Asset Management
Services

→ Commercialization Studies

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