Federal Lab Consortium Regional Meeting Valuation of Intellectual Property Judy A. Byrd Mark J. Chandler September 21, 2006

Valuation of Intellectual Property ▼ Overview ▼ Basic Approaches ▼ Cost ▼ Market ▼ Income ▼ Case Studies ▼ Dispute resolution ▼ Technology licensing ▼ Financial planning ▼ Takeaway Points ▼ Questions

Valuation of Intellectual Property Overview Standard of Value Fair Market Value Or Value Identify the Purpose Purchase or Sale Litigation Business Planning Identify the Context Is there Financial Distress? Other Party Is Large or Small? In Relevant Industry? Choose a Method Cost Market Income

Valuation Basic Approaches ▼ Cost – reproduction and replacement ▼ Market – comparable transactions ▼ Income – discounted expected future cash flows ▼ Examples ▼ examine the value of Judy’s experience using each method

Cost Approaches Overview Reproduction = cost to reproduce the same asset Replacement = cost to develop something with similar utility ▼ Use today’s prices – pertinent costs – most efficient track ▼ Useful in cases with no economic activity to review ▼ Early stage technologies ▼ Product/service profits difficult to measure ▼ Weaknesses – ▼ Simply provides costs ▼ Does not account for economic benefit ▼ Does not account for ‘wasted’ costs

Market Approach Overview ▼ Compare similar assets in recent transactions ▼ Works best when active market exists and recent examples are publicly disclosed ▼ Understand equivalence – terms, conditions, and nature of benchmark transactions ▼ Weaknesses – ▼ If IP is unique then finding similar assets can be challenging ▼ Often best if combined with other approaches

Income Approach Overview ▼ Assess the ability of IP to produce cash flow ▼ Based on discounted cash-flow theory = Present value of cash flow generated from future sales over useful lifetime of IP ▼ Key points ▼ Identify revenue portion generated by IP ▼ Anticipate growth in projections ▼ Anticipate duration of revenues ▼ Evaluate risks affecting projections (market, IP, technology)

IP Valuation Case Study Software License – Dispute Resolution ▼ Software firm created custom solution to a Commercial off- the-Shelf (COTS) enterprise package ▼ Customer requested firm to ‘transfer’ know-how to other contractors, but reimbursement ultimately fell through ▼ Objective – Determine appropriate payment from client to software firm for transfer of IP ▼ Challenges - No patented assets, IP benefits were in future efficiency – no reliable way to predict or measure ▼ Two approaches utilized – Cost Savings and Market

IP Valuation Case Study Software Approaches – Cost Savings ▼ Rationale ▼ By virtue of the Technology Transfer of the IP assets, other contractors would not have to incur the IP development costs incurred, and accounted for, by software firm ▼ By virtue of this Technology Transfer, the customer will realize a cost savings in each of these programs ▼ Cost for other providers to reproduce similar features would be similar to client’s historical costs ▼ Determine programs to benefit from IP ▼ Compile data on personnel dedicated to custom features development ▼ Cost data is proxy for Reproduction Cost ▼ Customer should pay some percentage of Cost Savings to IP owner (starting point for discussion, 50%)

IP Valuation Case Study Software Approaches – Cost ▼ What is the Customer’s cost savings? Initial Project Service contract Significant custom work Customer driven IP Development Other Project Multi-year program Contractors can utilize Client’s IP Costs of developing IP are not incurred Other Project Multi-year program Contractors can utilize Client’s IP Costs of developing IP are not incurred Tech Transfer workshops

IP Valuation Case Study Software Approaches – Market ▼ Rationale ▼ The IP assets were developed by Client for one program use only ▼ Transferred for use in at other separate programs ▼ The developer of these new and unique IP assets is entitled to a reasonable license fee for this ongoing usage ▼ The license fee has two components ▼ An appropriate royalty rate ▼ The size of the relevant contracts ▼ Determine number of programs to benefit from IP and magnitude of these programs (royalty base) ▼ Examine similar benchmark transactions – select most appropriate ▼ Determine average royalty rate ▼ Multiply royalty rate by magnitude of sales

IP Valuation Case Study Licensing ▼ Scenario ▼ New medical injection needle, prevents sticks at cost savings over current models ▼ Objective ▼ Prepare for negotiations to license emerging technology to product company ▼ Determine range of fair market value ▼ Approaches – Income and Market ▼ Determine and communicate to customer the economic value of product based upon subject IP (increased profit) ▼ Determine and communicate the comparable market rates for benchmark IP (similar to real estate market)

IP Licensing Case Study Preparation - Homework Income approach ▼ Understand potential products – pricing, benefit to producer (cost savings, efficiency savings, improved performance) ▼ Investigate pricing, gross profits, cost to produce, range of net profits ▼ Profile public companies with similar products to determine profitability scenarios ▼ Investigate market projections ▼ Profile public companies with similar products to determine profitability scenarios ▼ Investigate market projections Market approach ▼ Investigate similar IP transactions – Royalty databases, SEC filings ▼ Understand royalty basis – i.e. anticipated products, services, variations ▼ Investigate market projections ▼ Current needles cost $0.08 to produce, sell for $0.20. ▼ New needles would cost $0.04 to produce, allowing for increased profit ▼ Increased potential profit of $0.04 per unit, or 20% of current selling price ▼ Suggests royalty rate of 5% as starting point ▼ Similar syringe and needle licenses suggest range of 1% to 8% on sales of encapsulated needle ▼ Market forecasts for indicate moderate growth in similar needles, suggesting mid-range target royalty

Case Study Licensing - Overview ▼ Income approach ▼ Project customer’s sales volumes, net income from product ▼ Determine portion of profit attributable to IP – 25% rule ▼ Translate the apportionment of profits into sales percentage ▼ Define ‘Arm’s-length’ sale ▼ Project future sales and resultant royalties ▼ Determine appropriate scenarios (high, base and low) and discount rates ▼ Project anticipated future discounted cash flows and NPV ▼ Market approach ▼ Similar – determine projections ▼ Apply benchmark royalty rate ▼ Determine appropriate scenarios (high, base and low) and discount rates ▼ Project anticipated future discounted cash flows and NPV

Case Study – Financial Planning ▼ IP owner with well-licensed technology ▼ > 10 royalty generating products ▼ > $10M in royalties ▼ Objectives –Forecast revenue and possible risks to generate a ‘value’ estimate (potential sale?) ▼ Somewhat easier – Royalty rates already established ▼ Homework – Market forecasts, analyst projections, company guidance announcements

Financial Planning Assembled Projections Worldwide2006E2007E2008E2009E Cowen & Co. $ 133,000,000 $ 532,000,000 $ 1,064,000,000 $ 2,128,000,000 Credit Suisse 79,000, ,000, ,000,000 1,300,000,000 JP Morgan 113,000, ,000, ,000, ,000,000 Morgan Stanley 266,000, ,000, ,000,000 1,197,000,000 Bear Stearns 226,000, ,000, ,000, ,000,000 UBS 333,000, ,000,000 1,164,000,000 1,463,000,000 Mean $ 191,666,667 $ 532,666,667 $ 894,166,667 $ 1,331,666,667

Financial Planning Projections – Outliers removed Worldwide2006E2007E2008E2009E Cowen & Co. $ 133,000,000 $ 532,000,000 $ 1,064,000,000 $ 2,128,000,000 Credit Suisse 79,000, ,000, ,000,000 1,300,000,000 JP Morgan 113,000, ,000, ,000, ,000,000 Morgan Stanley 266,000, ,000, ,000,000 1,197,000,000 Bear Stearns 226,000, ,000, ,000, ,000,000 UBS 333,000, ,000,000 1,164,000,000 1,463,000,000 Mean $ 184,500,000 $ 514,500,000 $ 909,000,000 $ 1,234,500,000 Royalty Rate1.5% Royalties $ 2,767,500 $ 7,717,500 $ 13,635,000 $ 18,517,500 ▼ With discount rate of 10%, NPV of future revenue streams is $31.79M ▼ Select appropriate discount rate for industry and circumstances

Valuation of Intellectual Property Takeaway Points Standard of Value Fair Market Value Or Value Identify the Purpose Purchase or Sale Litigation Business Planning Identify the Context Is there Financial Distress? Other Party Is Large or Small? In Relevant Industry? Choose a Method Cost Market Income

Federal Lab Consortium Regional Meeting Valuation of Intellectual Property Questions? Judy A. Byrd Mark J. Chandler September 21, 2006