IP Valuation Dr. Rahul Verma, Assistant Vice President, Intellectual Property and Legal Support Services Rahul.Verma@Evalueserve.com April 2010

Presentation Plan IP Valuation Overview IP Valuation Approaches Case Study Appendix 2

Presentation Plan IP Valuation Overview IP Valuation Approaches Case Study Appendix 3

Biotechnology Industry in India (1/2) The Indian biotechnology industry is estimated to be more than USD 2.6 billion. This accounts for about 3% of the global biotechnology sector. The revenues for the industry have grown from Rs. 2,345 crores in 2002 – 03 to Rs. 12,137 crores in 2008 – 09. It can be divided into the following five segments: BioPharma, BioServices, BioAgriculture, BioIndustrial and BioInformatics. BioPharma BioServices BioAgriculture BioIndustrial BioInformatics Includes medicines prepared by recombinant DNA technology Revenue – Rs. 7,883 crores in 2008 – 09 Includes clinical research, contract research organizations and custom manufacturing Revenue – Rs. 2,062 crores in 2008 – 09 Includes manufacturing commodities for human and livestock consumption Revenue – Rs. 1,494 crores in 2008 – 09 Includes enzyme manufacturing Revenue – Rs. 478 crores in 2008 – 09 Includes computer software tools for data management, database creation, data mining and data warehousing Revenue – Rs. 220 crores in 2008 – 09 Sources: Link1, Link2, Link3

Biotechnology Industry in India (2/2) Apart from the above mentioned five sectors of the Indian biotechnology industry, there are other emerging sectors like Biosimilars, Nanotechnology and Stem Cell Research. Biosimilars – This includes biotechnology-based drugs similar to biologic drugs that enter the market after the innovator drug goes off patent. The biosimilars market in India is expected to reach USD 2 billion in 2014. Stem Cell Research – This market is expected reach USD 540 million in 2010.

The On-Off Evolution Matrix Business Outsourcing Opportunity Technology Outsourcing Opportunity No Yes Captives Off-Shore R&D Centers On/Off-Shore Markets Technology Scouting Off-Shore Technology Partners On/Off-Shore Markets Borderless Innovation In-house On Shore R&D Centers On-Shore Markets Licensing/Marketing Partnerships On-Shore R&D Centers Off-Shore Markets 6

The Chindia Story China India In 2009 – Despite global economic downturn, the Chinese Patent Office (SIPO) received a total of 976,686 patent applications, with a growth rate of 18% over the previous year. During 1999 – 2009: About five million patent applications were filed If the current growth rates remain the same, China will surpass the US in 2012 with respect to the invention patent application filings China 20-21% annual increase in patent filing IP awareness is spreading among Indian companies IPR reforms reflect seriousness of the government India 7

Patenting trends in India The patent filing in India has been on the rise in the last few years. The Figure below illustrates the increase in the filing activity in various technical fields of the life science domain over the last five years.

Two Perspectives of Technology Licensing in Indian Context India ranks 30th out of 134 countries on Prevalence of Foreign Technology Licensing Two Perspectives of Technology Licensing in Indian Context MNCs partnering with Indian companies with innovations MNCs entering the Indian market

Foreign Technology Licensing in India MNCs partnering with Indian companies with innovations MNCs entering the Indian market Imtech licensed a new drug molecule to Nostrum Pharmaceutical for USD 3 million in 2009. Imtech, a CSIR laboratory licensed a clot-busting therapeutic protein to US-based Nostrum Pharmaceutical for USD 20 million in 2006 Shasun, Indian drug manufacturing firm, sign non-exclusive license with Merck. Indoco Remedies Ltd., a Mumbai-based generic company, announced a technology licensing agreement to produce generics with Watson Pharmaceuticals, Inc. Watson will file an ANDA for US FDA approval. Pfizer entered into licensing agreements with India’s Strides Arcolab, Aurobindo and Claris LifeSciences for supply of generic products and injectibles Evolving Indian market and customer feel the need for advanced and world-class products and services Automatic permission for foreign technology agreements in a few industries CSIR has signed a MOU with San people of South Africa for commercialization of Hoodia, as a blockbuster anti-obesity drug. Eisai, a Japanese pharma major to set up manufacturing and research base in India.

Presentation Plan IP Valuation Overview IP Valuation Approaches Case Study Appendix 11

Growing Importance of IP Valuation Increased focus of industry and markets on knowledge-based market Since intangible assets form the backbone of any company, their valuation is important from the market perspective. With industry- and production-based economies worldwide giving way to a knowledge-based economy, intangible assets are gaining importance in the market value of a company. This is evident from the graph which shows that the contribution of intangible assets to the components of the Standard & Poor's 500 market value has increased from 17% in 1975 to about 80% in 2005. IP is one of the most important intangible assets, with trademarks, copyrights, trade secrets, and patents becoming vital money-making tools for a company. There is an increasing need for shifting research focus from valuing tangible assets to valuing intangible assets. Source – Ned Davis Research

Monetizing IP – Patents Patent Monetizing Ideas Aggressive Marketing of Products Patents as a Business Concept Portfolio of Stocks with Strong Patent Portfolio Adobe markets its key product, Adobe Reader 7.0, with 51 utility US patents, 4 US design patents, and patent pending legal notices A 2002 study by the Equipment Leasing and Finance Foundation listed the market value of patent-based licenses at USD 1 trillion in the US Ocean Tomo 300™ Patent Index, the first equity index based on the value of corporate IP of 300 diversified companies, was launched in 2006; it is published by Amex It is very important for a startup to attract consumers to its products and get VCs to fund your venture. As the awareness of VCs and consumers grows towards the knowledge-driven market, attention is also paid to the patents that accompany a product. Aggressive marketing of products refers to companies using the patent pending status of their inventions to reap rich benefits from VCs and consumers alike, for example Adobe. After gaining a small foothold in the market, the next step is to establish oneself—this is where patents are used as a business concept. You can monetize your portfolio of patents by licensing or selling the technology to companies. You can also gain more market share by issuing damaging lawsuits on competitors. In fact there is a concept of “patent trolls” that has developed in the market over past decade. They identify worthwhile and good patents from individual investors or small time companies and then make money by either licensing them out , or selling them or even by issuing lawsuits on companies. For established firms in the market, besides the above two points it is also worthwhile to note the emergence of indices and stocks being built based on patent portfolio of companies. Ocean Tomo 300 In addition, based on the back-calculations and findings published by the American Stock Exchange for evaluating this index from 1996 to 2006, the index would have outperformed S&P 500 by average of 500 basis points per annum.

Context for IP Valuations Small and Medium Enterprises in Hi-Tech Domains Pharmaceutical Companies Electronics and Computer Hardware Firms Licensing Deals Sale of IP IP Brokerage Firms and Medium-Sized Enterprises M&A Deals Consulting Firms Investment Banks Private Equity Funds Infringement Lawsuits Infringement Support Law Firms Plaintiff/Defendant Financing/ Securitization Banks Private Equity Funds VCs Tax/Financial Reporting Any

Patent Valuation and Product Valuation Valuation methods, particularly early in the life of a patentable idea Lifecycle of a patent Future and uncertainties of the technology, e.g., new and ongoing research, lifecycle/term of a patent, and income attributable to a patent Legal issues on jurisdictions Valuation methods, before launching a product in the market Cost of OEMs Future and uncertainties of the product market, e.g., growth trends, lifecycle of a product and competing products available in the market The whole world is a potential market Practical valuation methods are desirable for both patents and products. For patents it is important that valuation be done early in the life of a patent so that optimal decision can be reached regarding the course of action. For products, valuation at the launch of the product is used to determine the market entry price that will vary based on market parameters. Patent valuation is usually performed by various techniques based on lifecycle of patent. For example, a patent pending idea will be valued using a different approach than a granted patent that has recently been used in the industry or a granted patent based on which lots of products are already in the market. This will also be covered in detail later in the presentation. Product valuation on the other hand is usually performed using OEM cost. Valuation of patent involves making judgments about the future and uncertainties of the technology, e.g., new and ongoing research, lifecycle/term of patent, and income attributable to patent. Valuation of products involves making judgments about the future and uncertainties of the market of the product, e.g., growth trends, lifecycle/term of product and competing products available in the market Legal issues such as the amount of coverage and the jurisdiction in which coverage is offered by the patent are important factors during patent valuation. In case of product valuation, essentially the entire world is your market, but you will have to consider if you have freedom to operate a product in a particular jurisdiction. Patent and product valuation go hand in hand. To estimate the value of a patent or product, knowledge about the related product or patent and the associated market/legal boundaries is helpful.

Factors for IP Valuations of Biotechnology Invention Novelty of the technology Competitive technologies/products in the domain Benefits of the technology over the competing technologies IP Landscape in the domain Regulatory requirements Efficacy of the product Target Market Novelty – Highlight and quantify the novel feature of the technology Competitive technology – Assess the technology landscape to identify the competitors and their hold on the target market Benefits of technology over the competing technologies – differentiate the current technology from the competitive technologies highlighting the shortcomings of the competitors that are overcome by the current technology IP landscape – to identify the emerging technologies in the domain Regulatory requirements – identify the cost and the time required for regulatory approvals Efficacy of the product – highlight the working efficiency of the product based on the technology Target market – identify the market size as well as geographic region that can be the most appropriate market for the product Market acceptance – This is an issue for most recent biotech inventions like GM (genetically modified) crops and stem cell therapy. Due to hesitation by the customers in accepting the new technology, the market penetration reduces. Cost of the product – In comparison to substitute products in the domain. This will also effect the market penetration. Marketing Strategy – This will change based on the technology/product and the target costumers. Eg: In case of a new drug for cancer therapy, the doctors will be the target customers. So marketing will be through medical representatives or conferences and symposiums. This additional cost will have to be taken into account when calculating the licensing amount. Biogenerics Original drug going off patent – This will influence the launch time/year for the product Efficacy – to establish that the biogeneric should be able to replace the innovator drug as well as other chemical based generic drugs Major players – This will influence the market penetration of the biogeneric. Higher the number of competitors lower the market penetration Cost - This will also affect the market penetration. Higher the cost lower the percentage of market that can be captured. Clinical Trials Novelty – Process of conducting the clinical trials. As the actual process is very well known, it is very important to highlight the innovation/novelty of the current process. Quantifying the benefit – As it is a process patent, the benefits (ease of conducting the trials, less time consuming, more accurate results, better interpretation of results etc) will have to be quantified in monetary terms. Target market – The same process for conducting clinical trials might not work well for all technologies. Thus, it is important to identify the exact market. Market acceptance Cost of the product Marketing Strategy

Process Flow in a Typical IP Valuation Understanding IP Assessing IP Strength Assessing IP-Centric Factors Identifying Market for IP Building Valuation Model Understand how is the IP different from other existing IP in the market What are the competing companies and technologies What does the IP uniquely add to the market What factors of market demand does it satisfy How powerful is the IP in terms of the existing IP Will it sustain an invalidation attempt by competitors How does the IP fare in comparison with competing technologies, in terms of major advancement or minor adjustment How broadly does the IP claim In which jurisdiction is the IP applicable What is the remaining life of the IP Are there any risks associated with government rules with the IP What is the market for the technical domain in the specific jurisdiction What is the growth trend of the market What is the lifecycle of the IP What is the discount rate for the DCF modeling How sensitive is the value on the estimations used in the model 17

Approaches for IP Valuation Valuation Approaches Comparable Approach Cost Approach Income Approach Value Estimate Multiples or prices of market transactions involving the sale of comparable IP Value Estimate Reproduction/ replacement cost adjusted for depreciation and obsolescence Value Estimate Present value of earnings attributable to the IP or costs avoided as a result of owning the IP It is very important for a startup to attract consumers to its products and get VCs to fund your venture. As the awareness of VCs and consumers grows towards the knowledge-driven market, attention is also paid to the patents that accompany a product. Aggressive marketing of products refers to companies using the patent pending status of their inventions to reap rich benefits from VCs and consumers alike, for example Adobe. After gaining a small foothold in the market, the next step is to establish oneself—this is where patents are used as a business concept. You can monetize your portfolio of patents by licensing or selling the technology to companies. You can also gain more market share by issuing damaging lawsuits on competitors. In fact there is a concept of “patent trolls” that has developed in the market over past decade. They identify worthwhile and good patents from individual investors or small time companies and then make money by either licensing them out , or selling them or even by issuing lawsuits on companies. For established firms in the market, besides the above two points it is also worthwhile to note the emergence of indices and stocks being built based on patent portfolio of companies. Ocean Tomo 300 In addition, based on the back-calculations and findings published by the American Stock Exchange for evaluating this index from 1996 to 2006, the index would have outperformed S&P 500 by average of 500 basis points per annum. 18

Approach usage rationale Comparables Approach Approach usage rationale Disadvantage Comparing the IP to comparable assets recently exchanged under similar circumstances Finding a comparable asset in same technology domain as the IP to be valued can be difficult Comparing two different IPs, even the ones in the same domain can be difficult Advantage Process Comparatively simpler method of valuation Establish IP comparability: type of asset, industry relevance, geographical constraints, timeframe, financial characteristics of underlying operations Locating similar licensing deals This method is very easy to use and estimates the value of IP based on past occurrences

Approach usage rationale Cost Approach Approach usage rationale Disadvantage Determine the value of patent by aggregating the costs involved in its development Determine ‘Reproduction Cost’ to reproduce the same asset Cost based approach provides a benchmark for management to control cost of development and not a fair value of the IP The data is not publicly available Advantage Process It is a simple method It is easy to use Collect and analyze IP R&D cost client data Review comparable cost data of similar IPs Identify direct cost and multiples for allocation of indirect cost Prepare a cost sheet for the IP R&D project If the cost approach is to be used at the product manufacturing stage (IP management), should not the production costs also be included. R&D costs can be wrong indicator as prototype building is always expensive and may give exaggerated value of the IP even if this approach is used at an intermediate stage of IP Protection and IP Management. This method is useful in identifying the floor value of IP 20

Approach usage rationale Income Approach Approach usage rationale Disadvantage Establish ability of patent to generate economic benefits over the property’s useful life When discount rate for the IP can be known with certainty but not cash flows Discounted Cash Flow (DCF) is a static model It only captures the expected cash flows and does not account for uncertainty Advantage Process Gives a very objective value of the IP in relation to the market Proportion of the revenue attributable to the subject IP Estimating size and growth rate of relevant industry Estimate revenue, risk and growth associated with the IP proportion of the revenue attributable to the subject IP Application of DCF, Monte Carlo and option pricing techniques This method is useful in identifying the intrinsic value of IP 21

Presentation Plan IP Valuation Overview IP Valuation Approaches Case Study Appendix 22

What methodology will you follow to identify the price of the patent? Case Study*: How do we actually value a patent? What is patented? Objective and Need A biosimilar drug molecule for treatment of autoimmune diseases. You need to present the patented idea to a pharmaceutical company to sell the patent. They are already convinced that there is a market that can be tapped. You need to identify the target market and what value should you go to the negotiation table with. What methodology will you follow to identify the price of the patent? Assess the strength of IP and the competing IP in the space Identify market targeted by the IP based on IP centric parameters Identify licensing amount The patent also claims the method of production and purification of the molecule. Further, the patent protection of the innovator drug will be over in the near future. *: Indicative numbers have been used in this case study

Market Parameters for Valuation (1/2) The market size was calculated to be more than USD 9 bilion in 2013. The calculation is based on the market for the original drug of which biosimilar has been invented. The market figures were confirmed by surveys with Subject Matter Experts or secondary sources in the biosimilar market and forecast status of market. The market penetration and price discount was calculated on the basis of a report by CAGW on target market penetration and price discount for biosimilar. Identify the target market and growth rate of the market for the biosimilar Market penetration & price discount – the biosimilar can be classified as low range, mid-range or high range.

Market Parameters for Valuation (2/2) Based on IP analysis, and competitive intelligence you can determine if your new drug is a high-range, medium-range or low-range drug. Assuming it to be a medium-range biosimilar, you can expect a market penetration of 3% in the year of launch and 40% after 6 years. Again for a medium-range biosimilar the price of the product will also be reduced based on price discount The market share for intermediate years was calculated on the basis of S-curve. The cost of conducting clinical trials for FDA approval will require approximately USD 25 million over the next 4 years. The average royalty rates on sales in the pharmaceutical sector have been found to be 6%. The discount rate has been assumed based on the industry standard for pharmaceutical sector. This has been confirmed by the risk assessment matrix or the SWOT analysis of the technology. FDA approval Royalty rate - les Nouvelles Dec 2002; Royalty Source Transaction Analysis; Dan McGavock – IPC Discount rate

IP Parameters for Valuation IP Landscape analysis was conducted to identify relevant IP in the domain. Intensive IP analysis, such as broadness of claims, details of office actions can help in identifying the share of the market that can be attributed to current technology. Active companies in the technology domain were identified as they can influence the market captured by the current biosimilar. Both these parameters have been factored in the risk assessment matrix while calculating the discount rate that can be offered.

Strength of the patents Risk Assessment/SWOT analysis Parameter Level 1 Level 2 Level 3 Level 4 Level 5 Demand Level No existing demand Spurious demand Low demand Medium demand High demand Customer Segment Unidentifiable Identified and growing slowly Identified and small size Identified and moderate size Identified and huge size Technology New and not tested New and tested but with marginal results New but positive results Existing and growing rapidly Existing and well established but not growing rapidly Product New and not tested in the market New but positive feeling Existing Old product, re-launch Substitute Products Numerous and very good Number fairly high Few and very good Few but with old technology No substitutes Strength of the patents Low; Clustered  domain of patents Moderate; Numerous other patents Moderate; Few patents in the domain High; Few patents in the domain Very High; Are key patents

Life Cycle Analysis It is assumed that biosimilars will start gaining market share only in 2013. Further, 3% market penetration will be achieved in 2013 and market penetrations of 30% will be achieved by 2018.

(Amounts in USD million) DCF Valuation Model (1/3) (Amounts in USD million) Values Current Forecasted 2010 2011 2012 2013 2014 2015 Overall Market Size   9516 10372 11300 Market Penetration 0% 3% 12% 22% Price Discount % 20% 29% 34% Target market 228 883 1668 Market Share of invention 91 353 667 Market Share 10% Royalty Earnings 5.5 21.2 49.2 Licensing/Milestone payments 2.5 5 7.5 10 Royalty Rate 6% Discount Rate 25% Present Value 6.7 8.9 11.2 2.8 9.2 10.7 Licensing/Milestone payments is the approximate amount required for conducting clinical trials. 29

(Amounts in USD million) DCF Valuation Model (2/3) (Amounts in USD million) Forecasted 2016 2017 2018 2019 Terminal Value Overall Market Size 11532 11760 12002 12239 24,475 Market Penetration 31% 36% 40% 43% Price Discount % 37% 39% 41% Target market 2226 2612 2879 3073 6146 Market Share of invention 890 1045 1152 1229 2458 Market Share   Royalty Earnings 75.0 93.5 107.0 117.0 233.3 Licensing/Milestone payments Royalty Rate Discount Rate Present Value 22.5  23.5 22.3 20.3 33.8 30

Post Tax Net Present Value DCF Valuation Model (3/3) Pre-Tax Net Present Value 117.84 R&D Success Probability (FDA approval Probability) 60% Post Tax Net Present Value USD 52 million Bio-equivalent molecules are a sort of “generic“ version of the original molecule that needs to display bio-equivalence, thus the probability of R&D success will be higher or similar to that of a generic molecule. Two taxation scenarios: 30% on all income – standard 30% on 20% of the royalty income - R&D/ Biotech business enjoys tax holidays on several fronts

Presentation Plan IP Valuation Overview IP Valuation Approaches Case Study Appendix 32

Structure of IP Valuation Curriculum Highlights various parameters on which IP valuation can be dependent, such as jurisdiction for legal protection, duration of protection, market attributable to an IP, and risk factors involved Help in understanding the various parameters for modeling a valuation solution, such as forecasting revenue streams, royalty rate estimations, accounting for risk premiums in discount rate calculations, sensitivity analysis, real-option pricing, and Monte Carlo Simulations Intellectual Property Programs Financial Programs IP + Finance Intersection of Intellectual Property and Finance Programs Valuation of IP requires knowledge of both IP and finance Knowledge of IP helps in determining the parameters that affect revenue streams, volatility, and other risk factors Important to understand IP factors as they play a crucial role in determining financial parameters that affect valuation Knowledge of finance necessary to identify the number associated with the IP factors Combination of IP and finance also helps in understanding how real option pricing and Monte Carlo Simulations can be used to assess the impact of estimations on valuation Take an instance of patent valuation and comment on the parameters… Lets take patent valuation as an example, it is important to know what is the life of the patent (that helps in identifying till which year revenue streams need to be accounted for), jurisdiction in which the patent/patent family is effective (this helps in estimating the market size), the breadth of claims (that helps in identifying how much market can it capture), technical analysis of the patent with respect to the other IP in the space (to estimate the market needs that the IP is trying to address)… All these and many more IP specific parameters need to be incorporated in a financial model.

Existing Curriculums The National Law University, Jodhpur, is the first university in India to offer Masters Degree, and Honors and Distance Education Programs in IPR. IPR Honors program has eight papers, one of which is IP Valuation. The PSB Academy, an institute in Singapore, offers a one-day lecture-cum-enhanced learning through case studies training program–Intellectual Property Management for Enterprise Managers. Their training on IP Valuation comprises purpose of intangible asset valuation, commonly-used IP valuation approaches, and IP asset valuation criteria. Bournemouth University, Center for Intellectual Property Policy & Management, specializes in copyright, industrial design, patents, trade marks, law & policy, IP exploitation, and legal education. It offers Customized IPR Short Courses—a half-day, a one-day and a two-day course, including IP licensing and IP valuation. As such a few financial curriculums in law and business school have some courses, case study sessions and seminars on IP valuations. These are just a few of those. Stern Business School has IP Valuation as a part of curriculum. However, there is a growing need to develop the art of IP valuation into a science and teach it as a course in technical institutes since most of the parameters, calculation steps have to be based on technical details of the IP. Telestrat Education is a worldwide leader in continuing education seminars. It provides a half-day course on IP Valuation, which includes valuation basics, valuation methods, discount rate, and cost of capital knowledge.

Research Topics and References Estimating growth rate of revenue streams from an IP by using SWOT analysis based on IP-specific risk parameters Accounting for IP parameters, such as FDA approvals in the case of a biotech IP, as risk premiums Estimation of royalty rates for IP in various technical domains Real-options and binomial approach—when treating patents as an asset with an option of creating products based on the patents now or later Research Topics Strategies for Investing in Intellectual Property by David S. Ruder Essentials of Licensing Intellectual Property by Alexander I. Poltorak, Paul J. Lerner Intellectual Property Assets in Mergers and Acquisitions by Melvin Seminsky References Lots of research material and books available on Valuation of IP. These are just a few of those.

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