At AUTM, Ken Levin, from the Department of Veterans Affairs, moderated a discussion on valuation and what industry thinks of the valuations Technology Transfer Officers put on their IP properties.
Mr. Levin would have done Socrates proud, leading a lively, interactive session, full of noteworthy valuation factors, admissions and omissions, shining a light on the purpose and importance of valuation PRIOR TO negotiations for commercialization.
One key point made by the group is the difference between valuation before commercialization and after … between when you don’t know much (early stage, start-ups, etc.) and when you know quite a bit. The first is prospective; the latter is retrospective, as of a point in time.
The discussion focused on best practices, and one practice that was generally agreed upon is to look at as many comps as possible. Use comps to set the bounds of the negotiation discussions. In a sense, they provide a way to “argue back.”
The discussion naturally turned to sources, with general agreement that the best source is your own files. What other deals have you done?
The second best source is the SEC, the only database in the world that has mandatory submissions of the full text of license agreements, many times with non-redacted royalty rate data. What you are looking for is similar licenses of similar technologies in a similar time frame. They are not easy to find, and you have to stretch the definition of comps once in awhile. One attendee suggested their organization uses the term “analogies” instead of comps. This topic is of primary importance to the AUTM audience, evidenced by the steady flow of traffic at the Technology Transfer Tactics booth, which offered several books with contracts and royalty rates, and at the BVR booth, which featured the ktMine database of 8,000 licenses with non-redacted royalty rate data. One panelist stated matter-of-factly the reason why: NOT having comps when entering negotiations is setting yourself up for failure, as industry (on the other side of the table) is looking for them.
Comparable to “relief from royalty” discussions valuation analysts hear in training sessions, several attendees suggested what it would cost to “work around” an innovation could be one input into a valuation. All agreed multiple methods (DCF, comps, work around, etc.) should be utilized to get the best feel for the property before negotiations.
Finally, there are two trends worth mentioning. The difficulties TTO offices have in valuing prospectively, valuing early stage technologies where you might not even know what the product will be, has led to an increase in optioning technology as an interim step before eventually licensing that technology. There is much less paid for an option, but it is a way to “get the technology off the shelf,” moving it forward towards eventual commercialization.
Second, in Pharma, the model of commercialization of a new drug is changing, and it is troubling. Jit Patel of AstraZeneca bemoaned the missing value enhancers that used to be provided by the large Biotechs. Less deals are being put together. Pharma is having to (wanting to) deal directly with the Universities, at least much more than before. (This, of course, also leads to more optioning.) Unfortunately, a number of CNS Biotechs have disappeared (e.g., Neurogen, Epix, TorreyPines, NPS). Who is left to “take a flyer” on the early stage technologies?
AstraZeneca is clearly attempting to develop and improve relationships with universities. A glance at the Pfizer website looks as if it is following the same strategy. This is a wake-up call to Biotech, in the proverbial you-reap-what-you-sow category. Cost cutting was necessary for survival, especially through the economy we have most recently experienced. However, if one cuts so deep that it can no longer act as the value-enhancing middleman in the drug development model, then Pharma is forced to act as if there is no middleman. That sounds like a dangerous effect, from here.
The big irony is Pharma is also reducing internal investment, wanting to rely, many times exclusively, on “externalization,” further fueling the rise of direct relationship activities between Pharma and the universities.