OTM NEW DOSIMETRY TECHONOLGY: LICENSING IT TO EITHER

OTM NEW DOSIMETRY TECHONOLGY:
LICENSING IT TO EITHER A STARTUP COMPANY OR
AN ESTABLISHED COMPANY?
COMPARATIVE ANALYSIS
MSTM Adv Team-3
Levent Mert, Viveka Koppisetti, Sadullah Ozcan, Lin Lin,
Taghreed Hamdto, Ki Tae Park, Emre Kacar, Murat Vural
Contents
Executive Summary....................................................................................................................................... 3
1.
Introduction .......................................................................................................................................... 4
2.
Dosimetry Market Analysis ................................................................................................................... 5
2.1.
Market Potential and Size: ................................................................................................................ 6
2.2.
Market Size: ...................................................................................................................................... 6
2.3.
Five force analysis ............................................................................................................................. 7
2.4.
Market Acceptance: .......................................................................................................................... 8
3.
OTM’s New Dosimetry Method ............................................................................................................ 8
4.
FDA Approval Process ........................................................................................................................... 9
5.
Reimbursement Systems .................................................................................................................... 12
6.
Licensing as a way of commercialization ............................................................................................ 16
6.1.
7.
Revenue Sources ............................................................................................................................. 17
Potential Licensees and Preferences .................................................................................................. 18
7.1.
Start-up Company ........................................................................................................................... 18
7.2.
Further developments and R&D capability..................................................................................... 19
7.3.
Established Company ...................................................................................................................... 20
7.4.
Differences of Start-up and Established Companies ...................................................................... 20
7.5.
Licensing Preferences ..................................................................................................................... 24
8.
IP (Patent) Evaluation Methods and Cost Analysis ............................................................................. 27
Cost based method ...................................................................................................................... 28
8.1.
8.1.1.
Cost Analysis ............................................................................................................................ 29
8.2.
Market based method .................................................................................................................... 31
8.3.
Income based method .................................................................................................................... 33
9.
10.
Conclusions ......................................................................................................................................... 35
References ...................................................................................................................................... 40
Executive Summary
The purpose of this report is to analyze the benefits of licensing the technology to a
startup or an established company and recommend for Office of Technology
Management (hereafter OTM), University of Illinois at Urbana Champaign’s technology
transfer office looking at licensing their new Dosimetry technology. In this paper, we
have analyzed some of the essential determinants that should be taken into account like
the scope of the technology, its uniqueness, superiority, and the significant benefits and
advantages of licensing to both Start-up and established. In the process of doing so, we
have conducted profound analysis in terms of market size estimation, cost as well as
funding, FDA approval, reimbursement system, intellectual property and general
structure of both type of companies. After the in depth research and analysis, we have
concluded that it is best for OTM to license the new technology to a start-up company.
Reasons being the nature of the technology, in terms of cost and profit, there seemed to
be more pros than cons, licensing fee did not differ much between the two options,
royalty fees did not depend on the size of the company, and instead it depended on the
technology and market potential. The market size estimated is very small for an
established company to proceed further with the technology. In addition, it is easier for
start-ups to find venture capital funding and training expenses are relatively more
expensive for established. While working on the project, the confidentiality of the
technology was placed on the top priority and there were no oral or written disclosures
to outsiders.
1. Introduction
In general, technology transfer is the transfer of knowledge, ideas, discoveries and
innovations to the public. With an annual funded research budget of more than $645
million dollars, the University of Illinois is a leader in generating advances that translate
into products and services. During the past several years, the University has put in
place a series of resources designed to facilitate all stages of the process of technology
transfer. The Office of Technology Management (OTM), one of the entities of the
University’s technology commercialization infrastructure evaluates patents and licenses
the University’s intellectual property (which means new technology in this case).
OTM is responsible for managing the University’s intellectual property generated by
research and educational activities at the University. Its mission is to encourage
innovation, enhance research and facilitate economic development through the transfer
of intellectual property. It has developed a documented, systematic and timely process
for the analysis, protection and commercialization of intellectual property.
Exhibit-1: Technology transfer process
Invention
Disclosure
Screening
Assessment
Patenting
Marketing
Licensing
In the screening evaluation/assessment phase, OTM decides whether or not to pursue
commercialization efforts for a specific technology. At the end of this process, patent
landscaping, an analysis of where the technology fits in the market place and research
into possible licensees are supposed to completed. In patenting phase, OTM decides
which technologies to patent, identifies the initial patent strategy, and hires an
independent patent law firm to prepare and prosecute the patent application.
In marketing phase, detailed analysis is done to understand the potential market for the
technology and to determine further patenting and marketing actions. In this phase,
OTM also spends considerable time and resources to research and contact with the
interested licensees in this phase to license the technology.
Finding a best potential licensing partner takes time, since most of the University
innovations are on the cutting edge and well in advance of the state of the industry and
the needs of the market place. Sometimes, the market is not ready for licensing
opportunities for years after an invention has been disclosed and patented. OTM works
with others to determine the best time to market the technology.
In this report, the market value of the new technology regarding dosimetry diagnostic of
cancerous tissue, and market realization options of licensing it to a start-up company or
an established company are evaluated. The report gives the pros and cons of each
option, and determines the best option by comparing both options in terms of
organizational structure, reimbursement process, future market potential, and
intellectual property process.
2. Dosimetry Market Analysis
Optical Coherence Tomography has gained multi-disciplinary research interest as a
non-invasive optical imaging technique that can be used to perform cross-sectional insitu imaging of microstructures in biological tissues.
Dosimetry technology has many advantages with few limitations.







Potential to improve the accuracy of diagnosis.
Addresses a completely unmet but clear need.
Enhance processes by enabling tissue and cell imaging at the molecular level.
Can complement other imaging techniques since it’s amenable for multi modal
imaging.
Easy to use modality that provides digital cellular 2D and 3D imaging solutions
for clinical and research pathology lab application needs.
Aid in the early detection of various disorders.
Cannot be applied to all types of cancers.
Market trends indicate that the use of non-invasive optical imaging probes allows for
easy access to in-depth structures. Recent advances in detection techniques are
enabling dramatic increases in adoption rates of optical imaging methods.
Looking into the future with Optical Coherence Tomography showing rapid progress is
believed that many commercial devices addressing a plethora of clinical applications
could hit the market.
Thermal ablation has proven its efficiency over standard treatments and, in fact, the
ongoing protocols have marked regional thermal ablation as an important modality in
the prevention and treatment of recurrent and advanced cancer. BSD Medical
Corporation is the leading developer of systems used to treat cancer at high
temperatures using focused electromagnetic energy.
2.1.
Market Potential and Size:
Estimated US Cancer cases in US in 2012 are 1,638,910.On the other hand the total
number of hospitals in US is about 5,795 which are registered under the AHA or the
American Hospital Association. Apart from these registered hospitals in the United
States, there are other types of hospitals that do not fall under the category of the one
mentioned above. They include United States Community Hospitals, Non-government
or not for profit community hospitals, Investor owned community hospitals (for-profit),
State and local government community hospitals, Federal Government hospitals,
Nonfederal psychiatric hospitals, non-federal long term care hospitals and hospital units
of institutions. If we make an approximate calculation according the AHA resource
center list the total number of hospitals in US goes beyond 16,598 as of the 2011
statistics edition.
On the other hand this device has very small size and niche market. When we look for
cancer ablation centers the size is approximately 103. So it is very small when
compared to 16,598 hospitals. The related number of cases that these ablation centers
face of is about:
Number of cases in center-1 per year: 160
Number of cases in center-2 per year: 75
Number of cases in center-3 per year: 200
Center 1
Center 2
Center 3
2.2.
Number of Mean
cases (a)
(a/3)=b
160
145
75
145
200
145
Difference
mean (a-b)
15
70
55
from Variance
(a-b)²
225
4900
3025
Market Size:
Standard deviation of sample =
=63.84
Standard deviation of population = 63.84/√103
= 6.29
The 95% confidence interval for 103 thermal ablation centers:
Lower and upper intervals for the number of cases would be (126.63, 163.37) per center
and for 103 cancer centers, the interval would be (13,042.89; 16,827.11).
Overall the average number of cases is 14,935 cases.
2.3.
Five force analysis
To analyze the market of dosimetry devices, Porters Five Forces Analysis method is
used. The analysis and findings are as follows:
Incumbents: GE, Siemens, Philips, Sonosite and Toshiba America Medical Systems
where 80% of the market is dominated by them. Their greatest strength is that the
relationship they have with their existing customers.
Buyers: Hospitals, Clinical laboratories, Cancer centers. The relationship with the major
players is established. For the buyers to take risk with the startup companies in case of
future problems with the device is another factor to be considered. For new
technologies, one of the most important factors to be approved for reimbursement is the
success of clinical trials.
Suppliers: There are numerous suppliers in this market, just to name a few SonoCine
Inc. and Imalux corporation, Optovue Inc. Since entry barriers are low and the clinical
applications for the technology are numerous there could be many more suppliers who
enter this market in future.
Threat of substitutes: MRI and CT, there is need for minimally invasive/non-invasive
modality for interventional procedures. The price and quality of the alternatives is
another factor that should be considered. Clarity Breast System is the world’s first 3D
ultrasound for improved treatment planning and Image Guided Radiation Therapy in
breast cancer. The device allows imaging of the tumor’s exact location/cavity, and
targets the area of therapy delivery, without any additional radiation from the system.
The device is being used in more than 100 centers throughout North America and
Europe. Visualase technology uses light energy to destroy soft tissue. This is laser
induced interstitial thermotherapy in which laser fibers are directed to targeted areas in
the body to destroy the cancer tissue. This is a minimally invasive therapy in
combination with powerful image guided system MRI and doctors are currently using for
brain, prostate, liver, bone and spine.
Threat of new entrants: Entry barriers are high because it is a health related market,
and it requires many though processes like FDA Approval, reimbursement approval,
good relations with hospitals and insurance companies. Therefore, if there is a lack of
reimbursement, capability to meet clinicians’ needs for complementary image data, it
will be very hard for new entrants to penetrate into market. On the other hand, the
hybrid imaging market is in a growth phase with a significant commercial potential down
the decade.
Most new device categories are typically developed by venture backed startup
companies. Seno Medical, TX is developing an optoacoustic tomography system, which
is a non-invasive and non-ionizing technology. It can detect early stage cancers without
causing patient discomfort unlike mammography. It also produces high-resolution
imaging of angiogenesis in real-time, which represents a significant step forward in
medical imaging. Seno Medical OAT technology has thus far attracted US Federal
funding totaling $3.8 million to support phase II research into breast and prostate cancer
detection.
Michelson Diagnostics: The OCT based VivoSight scanner provides real-time images of
sub-surface tissue similar to ultrasound, but at much higher resolution, providing the
clinician with critical details of the skin epidermis and dermis. Used for diagnosis of nonmelanoma skin cancers and image guidance during skin cancer surgery.
2.4.
Market Acceptance:
Each year about 100,000 people in the United States develop primary or secondary
malignant liver tumors. Traditional cancer therapies such as chemotherapy or radiation
are ineffective in the treatment of these tumors. Surgical resection of the tumors is
considered the only potentially curative therapy for these patients. Unfortunately few
patients are surgical candidates and of those who undergo surgery, 50-60% develop
new liver tumors within one to five years.
In a clinical research study for patients treated with radio frequency thermal ablation,
21% had complete pain relief and 65% reported mild to moderate pain relief. None of
the patients developed significant infection, bleeding, hematoma formation, or
numbness as complications. Global ablation technologies market was valued at 7.5
billion in 2011 and is expected to grow at 10.5% to reach 12.4 billion by 2016. The
major driving forces for this market are technological advancements and increasing
demand for minimally invasive surgical procedures.
Technology capability is high and funding viability is medium for optical coherence
tomography. Beating competition requires participants to engage in collaborative efforts
to bring in innovations. Focus upon utilizing technology across application areas gaining
momentum so that they can partner with industry majors and succeed in completion of
clinical trials cum regulatory approval status.
In conclusion, we suggest licensing the technology to a startup company for few
reasons. First, it is a small market and established companies intent to kill innovations
due to their current products and the size of the market which might not be feasible for
their requirement. Second, despite the lack of financial abilities, startup companies are
more interested in innovation in small and niche markets. Because it is one of the few
ways to enter the market and get the opportunity to become a big player, there would be
greater focus on technology and commitment of the inventors to the commercialization
process.
3. OTM’s New Dosimetry Method
Tumors are generally ablated with heat or cold in today’s medical world. It is very likely
to kill healthy tissue along with the cancerous tissue in these methods. Because, using
thermometer near the tumor gives very slow responses, and using radiation technique
combined with CT scan provides very slow and inaccurate results. Therefore, accurate,
fast temperature measurement of the tissue surrounding the tumors is needed to
minimize healthy tissue destruction.
As a brand new and early-developing stage technology, OTM’s new dosimetry
diagnostic technology meets these expectations. It is a real-time technique, and
provides much more accurate results than the existing technologies. The technology of
the new method is similar to emerging Ultrasound inventions which measure viscosity of
tissue around a tumor to predict growth rate of tumor. In brief, the new method;
• provides surgeons with real time visual clues on the extent of malignancy during
surgery,
• detects the deceased site more accurately, and
• minimizes healthy tissue destruction.
Exhibit-2: The new dosimetry method
4. FDA Approval Process
The United States Food and Drug Administration (FDA) is the federal governmental
agency charged with protecting the public health by assuring the safety, effectiveness,
and security of human and veterinary drugs, vaccines and other biological products,
medical devices, our nation’s food supply, cosmetics, dietary supplements, and
products that give off radiation through the regulation of food, drugs and medical
devices, among other responsibilities.
FDA approval is needed to have because of several reasons;
 To create a regulatory environment that allows innovation to thrive,
 To eliminate unwanted regulatory obstacles,
 To assure consumers' confidence that medical technology in the U.S. is safe and
effective,
 To check if the products behave what it claims to perform in an effective way,
 To have ability and rights to market the new medical devices.
The FDA approval process for medical devices is shown below in Exhibit-3. The
process is formed by the steps of concept and design, Pre-Clinical Engineering
Development, Clinical Trials, FDA Review and Reimbursement Assignment.
Exhibit-3 FDA Medical Device Approval Process
The FDA classifies devices according to risk, since not all medical devices carry the
same risk. Only the highest-risk devices require FDA approval. Lower risk medical
devices such as bandages have been exempted from premarket review. A medical
device that poses a moderate risk like dialysis equipment can be cleared by FDA
regulators if they are substantially equivalent to a device already on the market. Again,
the maker needs to convince the FDA of safety and effectiveness.
In the end of an approval process, FDA will either "clear" the device after reviewing a
premarket notification, or "approve" the device after reviewing a premarket approval
(PMA) application that has been submitted to FDA.
The classification of the medical device will determine whether a 510(k) or a PMA
application needs to be filed. The submitter of the 510(k) must show that the medical
device is "substantially equivalent" to a device that is already legally marketed for the
same use to acquire clearance to market a device using the 510(k) pathway. Besides,
the PMA applicant must provide reasonable assurance of the device’s safety and
effectiveness to acquire approval of a device through a PMA application.
Exhibit-4: Differences between Start up and established company
Established company
Startup company
Submission
Submitting application will required same
documents from both kinds of companies.
Clinical Trials
Proof of Concept
It is not easy to do this in This
step
establish company. Many challenging
departments will be involved. companies
steps
and
is
kind
of
for
startup
because
it
[To prove and show the
effectiveness of the
device,
the
collaboration
with
industry, patients, and
outside experts, and
being able to explain
their
thinking
and
decision
making,
establishing the right
balance
between
benefits
and
risks,
setting
the
right
expectations,
and
creating new ways that
get safe and effective
devices to market more
quickly and efficiently.]
However, the relationships
that were built in many years
are very important at this
point.
required relationships with
many outside experts and
patients. Therefore, startup
companies need to try gaining
these people’s trust and their
collaborative work.
Staff Training
Established company already
have the equipment and
requirements that they need
for training and for preparing
an appropriate environment
so sufficient training for staff
and industry will be well done
or at least need a little
adjustments.
In order to create an
appropriate environment some
training should be done but in
startup company will suffer
from insufficient training for
staff and industry.
Pivotal Trial
[This is the most
important point. In this
kind of sensitive issues
about people health or
patients’
treatment,
customers really care
about
the
service.
That's why their trust
has to be gained to be
successful
in
this
industry.]
Decisions
and
Formalities
Established companies are
already well known and have
their customers. In addition,
they built a reputation
through many years. These
points make it easy and
possible to gain customers’
confident.
In a startup company, it needs
to prove to customers that it
can offer a unique and
appropriate service with this
medical devise. This will be
big obstacles for startup
companies because they need
support to gain customers
trust.
Here
they
have
the
information they need to
make
well-informed
and
timely decisions; adequate
and stable resources to get
the job done right and
Since startup companies are
not ready with the important
information that they need for
the high quality submission
these could cause insufficient
guidance for industry; and
quickly. So the medical
industry will have the kind of
predictable,
consistent,
transparent, and efficient
ways
to
market
that
innovation.
poor-quality submissions from
industry.
Unless,
working
quickly and hard would takes
care of this gap but will not be
as professional as established
companies.
Appropriate Marketing Established companies have
Program
experience
in
marketing
because this device is not
the first one for them. They
already
marketed
many
products. Therefore, figuring
out the appropriate marketing
program
is
predictable.
Getting funding for marketing
this device will take shorter
time than it could take with
startup companies.
Insufficient predictability in
market
programs
create
challenges for small start-up
companies to get investor and
capitalist funding for new,
early-stage
technologies,
which are critical to assuring
that new technology reaches
patients safely and effectively.
Going through all the previous points shows us that established company would be
eligible for FDA approval faster and easier than the startup companies. Unless, startup
companies would pass all the obstacles and difficulties that will face.
5. Reimbursement Systems
Investments for facilities, equipment or staff for development of Medical device can be
financially supported by government through reimbursement system. The financing of
health care centers around two streams of money: the collection of money for health
care, and the reimbursement of health service providers for health care. In the
United States, the responsibility for these two functions is shared by private insurance
companies as well as the government, both of which are known in policy terms as
“payers.” As such, the United States can be thought of as a “multi-payer” system.1
1
http://www.amsa.org/AMSA/Libraries/Committee_Docs/HealthCareSystemOverview.sflb.ashx
Exhibit-5: Reimbursement System
Reimbursement is the health term that refers to the complex set of rules, regulations
and processes by which physicians and hospitals deliver products and services and
receive payment from third-party payers.
In the United States, consumer is rarely the payer or purchaser of the product—the
payer is generally a third-party private or governmental insurer. Before approving a new
medical technology for reimbursement, private and governmental payers analyze
clinical and economic data to determine the clinical value and cost-effectiveness
of the new product as compared with currently available treatments.
While working with finite resources, the ability to deal with reimbursement barriers can
be a critical business strategy. Some common reimbursement issues can occur when
introducing a new technology to The US markets:
 The absence of codes that identify the product in insurers' data systems.
 Denials because the product has been categorized as investigational (often a
function of coverage policies).
 Unwillingness of payers to approve the product and write coverage policies
because of insufficient clinical and cost-effectiveness data.
 Inadequate payment to providers.
In case of occurrence of this tape of challenges, overcoming them can take too much
cost and time. Preparation process is very important for reimbursement plan that will
help us identify opportunities and obstacles and appropriate strategies and tactics.
What we can do in preparation process? Firstly we need to have information about the
key payers (also called payer mix) that Medicare, Medicaid and private insurance
companies and get in touch with them.
We need to get a code for our device those insurers using these codes while they are
making their payments. The process requires interaction with either the American
Medical Association (AMA; Chicago, IL) or the Centers for Medicare and Medicaid
Services (CMS; Baltimore, MD). Depending upon the type and use of the technology, a
new code could take between one and three years to obtain 2
On the other hand, we need to observe changes in healthcare legislation and
regulations at the federal and state levels. It is important to identify regulatory or
legislative issues that might impact the reimbursement of the product.
Train and manage key opinion leaders.
We need to cultivate key opinion leaders (KOLs) whom physicians and clinicians that
have experience with, understand and support our product. These individuals are often
either the principal investigators during clinical trials or early product adopters. The
KOLs, when properly cultivated, can become the champions of your product and
facilitate the reimbursement process.
As we think about this process it’s difficult to manage this process with Start-up
Company. It takes time to cultivate key opinion leaders. Established companies also
can have key opinion leaders and they can easily manage this process.
Establish relationships with specialty medical societies.
Coding and payment processes are influenced by various specialty medical societies in
both formal and informal ways. In addition to other functions, specialty societies
represent the financial interests of their constituents to entities such as the AMA and
CMS, both of whom have responsibility for various components of the coding and
payment systems.
Working closely with an appropriate specialty medical society can help build support
between the clinicians that will use your product and an organization that will have
substantial influence in the reimbursement process for our product.
Again it’s difficult for a startup company to build such relationship with clinicians that will
use our product and organizations who can affect reimbursement process for our
product. Established companies already would have been working with clinicians and
organizations. So this process easily be able to manage by established company.
Evolve a publication strategy
As entities with finite resources, insurers are required to function in a cost-efficient
manner while supporting an acceptable standard of medical care. To keep pace with
changes in medical care, insurers constantly seek information on new treatments and
2
http://www.nature.com/bioent/2003/030601/full/bioent738.html
technology. When seeking information, they tend to place greater value on data
published in reputable, peer-reviewed journals than on data presented in other
formats.
Preparing a publication strategy can ensure regular dissemination of new clinical and
economic data related to your product. A successful publication strategy should include:
 A calendar that identifies the articles to be published at specific stages of product
development.
 A list of targeted journals for article submissions.
 Agreements with principal investigators to publish at regular intervals.
To maximize the effectiveness of a publication strategy for reimbursement purposes, we
should distribute published articles to medical directors and key decision-makers at
large third-party payers on a regular basis. This process can be run both by established
company and Startup Company. There are Public Relation Companies which may run
effectively this process on behalf of companies. On the other hand this process will
increase expenses and it should not be ignored that startup companies has limited
budget to run these process.
Evaluation
It is common for medical companies with products at early stages of development to
defer the reimbursement issue until product launch or delegate the responsibility to a
marketing partner. But there is a value to be placed on a sound reimbursement strategy,
which can translate directly into a company's royalty fee or acquisition price. Failure to
account for reimbursement barriers can drive companies back to the bargaining table or
even worse, out of business entirely.
When a start-up company developing medical devices requested to conduct a review of
reimbursement issues associated with its technology, payers (hospital) applicability to
the company's products needs to be determined. In addition, the potential impact of
such guidelines on product pricing, product labeling and marketing plans should also be
determined. These two issues are much easier and faster with an established company
because it has good relationships already set with many hospitals.
Availability of adequate clinical data attracts increased reimbursement and investment
from top companies. Health-care payers provide better and flexible reimbursement with
established companies but, they remain resistant with startup companies.
Reimbursement from federal programs, hospitals and practitioners continue to look for
imaging modalities that will best serve their needs as well as provide a complete patient
data. Obviously, established companies have the ability to be qualified for these
conditions more than startup companies.
A healthcare company providing diagnosis and treatment service needed to improve
contracts with regional payers in order to enhance its profitability. A start-up company
requires new healthcare financing, and subsequently additional capital to support
growth. It can get capital funds, strategic partners, and lending companies, supporting
the company until became profitable cash flow positive. This takes a long time and effort
and could be success or not. Also, it needs to scale up its operations; it was seeking
additional equity investment.
Considering the information given above, entrance to the market with Startup Company
may not the best feasible idea. All the things we have mentioned above can be provided
more effectively by an established company in a comparison with Startup Company. All
in all, licensing this technology to an established company will be the right choice from
the reimbursement perspective.
6. Licensing as a way of commercialization
Licensing is a way of developing the licensed technology into a commercial product, for
the public good and provides a fair and reasonable return for the University. It is usually
realized by making license agreements which describes the rights and responsibilities
related to the use, development and sales of commercial products covered by
intellectual property developed at University of Illinois (UIUC). A license can be granted
to either an established company or a start-up company.
An invention can be licensed to multiple licensees, either non-exclusively to several
companies or exclusively to several companies, each only for a unique field-of-use
(application) or geography. As a general principle, non-exclusive licenses are preferred
because this allows university discoveries to be widely used and avoids one company
obtaining control over an important new discovery. Such licenses are often given when
the technology has the potential to significantly benefit the wider public, and when
providing multiple licenses may accelerate its entry into the marketplace. However,
exclusive licenses are often necessary to provide incentives for companies to develop
new inventions. Besides, many licensing offices may favor exclusive licenses of
research tools and diagnostic technologies, because they find it burdensome to
negotiate, collect, and audit a large number of non-exclusive licenses.
The licensee company continues the advancement of the technology and makes other
business investments to develop the product. This process may require further
development, regulatory approvals, sales and marketing, support, training, and other
activities. The process of finding the right licensing partner may take months or even
years to complete. The amount of time will depend on the development stage of the
technology, the market for the technology, competing technologies, the amount of work
needed to bring a new concept to market-ready status, and the resources and
willingness of the licensees and the inventors.
The license agreement has terms defining the length of time the license is valid, the
markets (territory) in which the licensee can use or sell the product, whether or not
sublicenses are permitted, the nature and amount of upfront fees and royalties, and
whether or not the licensor has rights to any improvements developed by the licensee.
Below are listed some of the key issues that must be addressed when negotiating a
license agreement.
 Obligation for the licensee to share plans for commercial development
 Time limits on the development and release of the product onto the market by the
licensee
 Clear definitions of the intellectual property related to the license agreement
 Clear definitions of the types of products the licensee is permitted to develop
using the intellectual property
 The term of the license agreement (In the case of patents this is often the lifetime
of the patents)
 The payment amounts, structure, and terms
 The exclusivity and geographical scope of the license
 Guarantees or warranties on the technology
 Rights of the licensor to any improvements developed by the licensee
6.1.
Revenue Sources
Most licensing agreements have licensing fees (modest for start-ups, but it can reach
hundreds of thousands of dollars.), royalties (based on the final sale of the licensed
products), and equity. A recent study of licenses at U.S. universities demonstrated that
only 1% of all licenses yield over $1 million. However, the rewards of an invention
reaching the market are often more significant than the financial considerations alone.
Important factors in most royalty negotiations are the type of technology, the perceived
risk associated with the technology, its stage of development, the projected cost of
bringing a product to market, the size of the potential market, the anticipated profit
margin, the strength of the patent claims, whether patents have actually issued, the
prospects for pending patent applications, the estimated cost of the research that lead
to the invention, the scope of the license (exclusive or nonexclusive, field of use,
geographic scope, among others), and royalty rates for comparable inventions. Initial
fees for exclusive licenses often are under $100,000, because technologies usually are
in early stages, have uncertain commercial potential, and require considerable
investment to be developed into marketable products. Royalties can vary from 0% for
technologies or products that are licensed out at the idea stage to 10% for a product
with a captured market and distribution channel. However, royalties can also be very
high.
Other factors to consider are the life of the product and the lifetime of the intellectual
property rights being granted. The shorter the life of a product (because other better
products are expected to emerge quickly), the less the licensor can ask for up-front fees
and, to a lesser extent, royalty.
Royalty rates differ considerably and depend on the following main factors:
 The stage of development of the product when licensed out
 The type of product





The industry in which it is applied
The price at which the product can be sold
The maturity of the market
The geographical scope of the license
The term and exclusivity of the license
7. Potential Licensees and Preferences
As mentioned earlier, both start-up companies and established companies may be
attracted by the commercial potential of the new technology or product. An established
company usually evaluates the new technology in terms of its ability to fit within the
existing competencies of the company. If the company believes that the new technology
will add value or provide sustaining advantage for the company, they could be
interested in the new technology. On the other hand, start-up companies try to
determine if the technology could be an exit to be profitable large companies of
tomorrow. While an established company which has an experience in similar
technologies and markets can be a better choice in some cases, the focus and intensity
of a start-up company may make it a better option in some other cases. Therefore, the
costs and risks must be compared with the potential returns of both forming a start-up
company option and licensing it to an established company that has the necessary
infrastructure such as channels to market, sector knowledge, facilities, commercial
management, and an existing contacts network in place.
7.1.
Start-up Company
Startups can be defined as companies that have limited operating history, and typically
have potential for high growth by commercializing one or more related intellectual
properties. They attract investors based on their risk/reward potential and scalability.
The time it takes to form a start-up varies greatly and depends on many factors such as
the participants’ ability to engage in the business, the maturation of the technology and
the momentum. Rough estimations for the process are as follows:



A patent application: A few weeks to prepare and file.
Negotiation of a license agreement with the OTM: From a few weeks to a few
months.
Attracting and closing a first round of funding: several months at a minimum.
A significant amount of work has to be done to identify the customer demands and
market needs, resources and what the time and cost of bringing the technology to
market will be before starting a company that wants to build value around a technology,
attract investment and work toward an exit or ongoing, profitable company. Generating
funding is probably the most important task in this journey. It is necessary to determine
how much funding is required and from where it will come before engaging in any
business. Target market and its trends, barriers to entry, risks, the way of distributing
and marketing the product and the competitive situation of the market should be
analyzed to provide sufficient information to effectively engage investors and the
development partners.
There are some factors to consider while determining how much funding are necessary:
Time to market, employee salaries and benefits, space, equipment, travel and legal
fees. Depending on the type of company and its commercialization need, these costs
can be in the ranges indicated below [11]:
Exhibit-6: Cost items and estimated range for Startup Company
Startup needs
Cost range
Establishment of Corporate Structure
$500 - $1,000
Brand, Logo and Web Development
$1,000 - $3,000
Trademarks
$300 - $500
Business Plan Development
$4,000 - $10,000
Accounting and Bookkeeping Services
$300 - $800 per month
Management of Intellectual Property
$5,000 - $25,000 or more annually
Access to Federal Grants for Small Business
$2,000 - $10,000
Access to Capital Networks
$ Invaluable
Effective Management
$5,000 - $15,000 per month
Product Development
$35,0003
7.2.
Further developments and R&D capability
Further developments and R&D capability depends on licensee that has the capital,
skills and access to markets to exploit the technology. If the technology needs further
refinement, the licensee should have strong technical capabilities and financial strength.
If the success of the technology rests not so much on technical skills but on promoting
the product, a licensee with solid marketing skills would be the more appropriate match.
3
It was estimated from the overall expenditures divided by the number of medical companies. The estimated number can change
in terms of product to be developed. (Source: FDA Impact on U.S. Medical Technology Innovation: A Survey of Over 200 Medical
Technology Companies • November 2010)
However, the problems that may occur in terms of further development is that not all
potentially viable inventions are patented and licensed by the university. This relates to
the problem of asymmetric information between industry and science on the value of the
inventions. Firms typically cannot assess the quality of the invention, while researchers
may find it difficult to assess the commercial profitability of their inventions.
Intellectual Property Protection on top of resource partners promotes further
developments and R&D capability through growth. Protecting intellectual property
should not be thought of as a single event and maximizing its value should be thought
of in the context of an overall business strategy. Licensing the IP often gives the best
return on investment.
7.3.
Established Company
Established company can be defined as a company that has an operating history, and
typically has potential for low-moderate growth by commercializing a variety of
intellectual properties in a variety of markets. Established company may have multiple
products targeting for different industries. It has different ownership structure, much
higher revenue streams and usually much higher number of employees than startups.
Most large companies are very stifling, when it comes to innovation. They are usually
bounded themselves to be thinking in a way that new technology -even if it is the
electric light- must fit into their existing - candle holders- portfolio. This yields to finally
killing the innovation or its commercial potential.
7.4.
Differences of Start-up and Established Companies
Start-up and established companies are different organizational entities. They both have
different goals, measurements, management principles, number/quality of employees
and culture. Established companies require different set of skills; have a known
business model and growth rate of $100m/year. Start-up companies have fewer policies
and procedures in place, and lesser red tape than established companies so that they
can move fast in product development, marketing and sales and in other areas as well.
Start-up companies usually take a lot of energy and have a tendency for rapid changes.
The differences of startup and established companies from different angles are shown
in Exhibit-7 below.
Exhibit-7: The differences of startup and established companies
Start-up Company
 Horizontal
 The
founders
entrepreneurs.
Established Company
Area
Structure
 Horizontal / Vertical
are
 Have
staffs
that
exceed the hundreds


















The
founders
are
involved in every aspect
of the business. Lack of
infrastructure
Fewer
policies
and
procedure in place
Lesser red tape
Less stable
Not
stable
working
hours
Not
very
tolerable
against
individuals’
mistakes because its
impact
is
huge.
Management is usually
engineering-driven, not
professionals.
Very high commitment
and motivation
Decisions are made in
the face of uncertainty.
Decisions are made and
implemented rapidly. No
need to be 100% right
100% of the time.
Having
forward
momentum and a tight
feedback loop to help
quickly recognize and
reverse any incorrect
decisions.
Have a tempo of 10x
faster
than
an
established,
large
company
Raising a capital
Recruiting talent
Building systems
Creating
brand
exposure
Running out of capital
Having
a
major
operational setback
Better
positioned



or
thousands
responsible
for
business.
Existing
infrastructure
More stable
Definite and less
working hours
More
tolerable
against individuals’
mistakes because its
impact is not major
on business model.
Management is more
experienced
and
better trained.

Decisions are made Decision Making
and
implemented
slowly.



Management Priorities
P&L
Cash flow
Customer
satisfaction
HR
and
risk
management
Fears
Legal challenges
Profit leaks
Employee
productivity problems










competitor
Losing
control of its IP
Faster
product
development Have a lot
of energy
Tendency for
rapid
changes
No/less
experience
Lack of resources
Need VC or Angel
funding
No financial record,
skeptical against the
company
Founders’
own personal money,
Family, friends, angel
investors, and venture
capital Forced to offer
personal property as
collateral
Large investments, but
in small increments

















Unknown
industry,
unknown brand
Need to create a new
market sometimes.
Faster marketing and
sales
Focuses on
What is wrong with the
current market?
What needs weren’t
being met?
What needs to happen
to get things done right?





Slower
product
development
Less enthusiasm
Not
reluctant
for
rapid changes
Expertise on R&D
In-house resources
Modest profits
Less attractive for
venture capital with
the size of their
opportunity
Easy to find funding
with good financial
record
Predictable
revenue stream with
reasonable risk and
reasonable effort
Able
to
borrow
against its assets as
collateral
A large, lump sum
source of payment
Known
industry,
known brand
May have or need to
create a market.
Hard to overcome
current perceptions
Have
customers
already.
Really
understanding
the
needs, wants and
challenges of current
customers
allows
connecting with new
clients faster and
easier.
Able to survive for
extended periods of
losses, and recover
more easily from
sales, marketing and
Product Development
& R&D Capability
Funding
Marketing & Sales



Whole business, which
has been developed
wholly independently of
the
products
and
timelines of the other
company





Less than 10% of
startups succeed. More
than 90% fails because
of;
Self-destruction
Premature Scaling

The team size of
startups
that
scale
prematurely is 3 times
bigger
than
the
consistent startups at
the same stage.

74% of high growth
Internet startups fail due
to premature scaling.

Startups
that
scale
properly grow about 20
times
faster
than
startups
that
scale
prematurely

engineering
problems
Publicly owned or Ownership
part of a larger
holding
company’s
collection of brands
Collectively
owned
through stock sold to
the general public.
The result of super The meaning of
“innovation
product
development, instead
of being the process
of
creating
new
products.
The breakthroughs
that
comes
with
innovation
are
expected to slot into
an existing product or
project
at
the
company
Success & Reasons of
Failure
7.5.
Licensing Preferences
Before deciding to which license the new technology, there are many factors needed to
be considered thoroughly. In some cases, a startup company may be the only option if
the technology does not fit into the product offerings and markets of existing companies
and a market does not already exist for the product. But in some other cases, licensing
the technology into an established company can be only option when funding for
product development and marketing is not available. Besides, a start-up company
option presents higher risk than an established company option. The proportion of
exclusive licenses determines the probability of forming a start-up. In other words, the
start-up would have more difficulty in securing financing from investors without exclusive
rights than the start-up with exclusive rights.
To determine whether a start-up would be the most appropriate path to
commercialization, several factors mentioned below should be analyzed:
 Demand: Potential of the technology to provide multiple markets/products
opportunities. A few companies can survive on one product alone.
 Competition: Similar technology or products by other companies,
 Licensing: Possibility of established companies’ interests into new technology
 Funding: Availability of capital based on the interests of likely investors,
 Commitment: Level of commitment and the inventors’ involvement to the
commercialization process,
 Support: A true business champion’s presence for the technology and the new
business,
 Management: Passion, experience and motivation of the management team of
proposed start-up.
 Development risk: Established (large) companies in established industries are
usually unwilling to take the risk for unproven technology.
 Development costs versus investment return: The investors in the startup
usually want to obtain certain rates of return.
 Potential revenues: Are they sufficient to sustain and grow a company?
In analyzing above mentioned factors, asking several questions mentioned below will be
useful:




Is the invention a disruptive technology? If not, how would it be categorized?
How soon can a commercial product come to market?
What is the level of risk associated with the startup?
Does the technology have clear applications and a definable market?
A number of criteria which is the set of differentiating factors should be considered when
determining the appropriate commercialization strategy. Some of these are included in
the following table.
Exhibit-8: The situations for whether to choose startup or established company as a
licensee.
Established Company Desirable When Startup Company Desirable When
Nature of the Technology


Technology
represents
an
incremental
improvement
to
existing technology used by
existing and already established
companies
Technology is market ready.






It is disruptive technology.
It is platform technology
Broad range of potential applications
for technology
Technology is far from market ready.
No appropriate licensee
It is an early stage high risk
technology.
Intellectual property protection



Crowded field,
There is potential infringement risk.
Prior art and patentability (less IP
strength)
 Requirement for a number of
patents to encompass whole
competitive advantage of the new
technology to exclude others.
Marketing (potential, size etc.)



There is an existing market,
Customer loyalties exist towards
particular companies.
Well
established
distribution
channels have already been
created by existing companies










There is a dominant intellectual
property position.
There is potential (exit strategy) to
mitigate risk.
Potential for additional IP to
strengthen the value proposition.
There is no existing industry
New market with potentially high
market demand
Clearly defined and addressed need
Reasonable chance for overcoming
barriers for entry
It takes short time to market the new
technology.
Large market with significant growth
potential
Profit margins are significant.
Competition
 High competition in the market
 Little or no competition in the market
 Higher entry barriers
 Fewer entry barriers
Availability of Investment / Funding and Management

Nature of technology makes raising

Investors and funding can easily be

capital difficult in comparison with
others
No management team available


identified.
Inventors are willing to dedicate time
and resources.
Inventors have the desire to be
involved in management.
Inventor & Licensor Participation
The Inventor desires a high level of active
participation
Below, the potential advantages and disadvantages are given in terms of licensee
(either an established company or startup company).
Exhibit-9: Potential advantages and disadvantages of An Established and Startup
Company
Startup Company
Established Company


Potential Advantages




Greater focus on and commitment
to the technology
Opportunity to become an Equity
Stakeholder
More Expeditious Development of
Core Technology
Products with a radically improved
customer experience
Build things that take advantage
of
the
latest
technology/tools/delivery
techniques/pricing models/etc.
Take advantage of everything we
know right now about how to do it
better than we used to.








Making
incremental
improvements on what they are
already good at,
Relationship they have with
their existing customers
Mainly
sell
to
existing
customers.
Install base is a big company’s
biggest asset.
In house resources available
Quality Assurance system in
place
Expertise in securing regulatory
approvals
Afford to acquire all necessary
patents to have the whole
competitive advantage of the
new technology.

Potential Disadvantages









Amount of time required to start
company
Financial instability
Conflict of Interest Issues (Real
and Perceived)
Difficulty Recruiting
Quality Management
Spend money before making
money
Not being able to build something
that requires a large amount of
time and people.
Waste a lot of time and energy
trying to partner with large
companies
No
expertise
in
securing
regulatory approvals.
Products with far fewer features
than existing ones.









Cannot make investments in
new products at the expense of
quarterly revenue.
Sell stuff into accounts where
they don’t have sales coverage.
Not believing a startup could
out-execute them, even in a
niche market.
Respond
competition
very
slowly.
Ignore startups in their space
completely as a potential
competitive threat.
Believe that technology and
relationships will trump
Cannot just do things differently
from release to release to lure
in new customers,
It is important to keep existing
customers happy.
Required to make a choice
between all the alternative
technologies to walk with, but
the choice may sometimes not
be the best choice.
As for the success of startup companies, more than 90% of all fail. 80% of them fail in
the first year. 80% of those that survive fail in the first 5 years. Besides, less than 10%
of University licensees generate more than $1 million. Furthermore, over 90% of faculty
run companies fail.
8. IP (Patent) Evaluation Methods and Cost Analysis
In connection with patenting, money is always an issue. The structure of the cost
problem is the same for major industry and small SMEs, due to the nature of the
subject-matter, which persons skilled in the art and professionals regard as a
“speculative business”. Patents, like works of art, claim uniqueness. The exchange
value of an art work depends on what we imagine it to be and the importance we
assume it has for our well-being. At least as concerns art, the exchange value in
general is exaggerated by owners. The same is often true of patents. Patents can be
used and exploited in many different ways, by employing different strategies. Any cost
assessment and any prospective capital gain from patents must be regarded with
caution, as something unexpected may happen during the patent’s lifetime.
To know fair price for intellectual property we have to estimate a value. With this value
we can asses that how much can we appropriate from the investment in the intellectual
property. There are three generally accepted Quantitative evaluation methods.
8.1. Cost based method
Cost based approaches measure, quantitatively, the value of IP through the calculation
of the costs incurred if the company were to develop a similar asset either in-house or
externally. The costs to produce the IP are taken to be its value.
Historic Cost: The historic cost approach measures the costs incurred through the
development of the IP, at the time it was developed.
Replication Cost: The replication cost approach measures the amount of investment
needed to develop similar IP, at the present time, in exactly the same way and
achieving the same IP as currently exists. The whole cost of research and development
must be included in this calculation, including the costs of unsuccessful prototypes etc.
Replacement Cost: The replacement cost approach measures the amount of money
that would be needed to develop the IP as it currently exists, but as the term
“replacement” signifies, the costs of failed and unsuccessful research is not included. It
is easiest to think of this as measuring the cost of buying the already developed IP from
an external source.
When are they used?
Approaches based upon the measurement of cost are generally used in accounting,
bookkeeping and in accordance with accounting rules. It is commonly agreed that cost
based methods are only useful for bookkeeping purposes or as a supplement to an
income approach. They are only relevant in historical cost based accounting systems or
where taxation methods dictate their use.
Advantages and disadvantages of cost based methods
One advantage of the method is that IP becomes visible in the company’s books and IP
awareness is increased. The method is also a useful indicator of IP value in the case of
IP assets whose future benefit is not yet evident.
There are many pitfalls associated with using the measurement of cost to determine the
value of IP. The main disadvantage is that there is no direct correlation between cost of
development and the future revenue potential of assets. It is a fact that IP that costs the
most to produce may not necessarily be the most valuable. The same applies to IP
which is many years old and has been written down in value. This IP could still be the
most valuable to the company, even though the historical cost approach does not show
this. The measure of historic costs is unreliable with rapid technological advancement. It
is not always possible to provide accurate information on the resources spent on
development and there will always be a practical challenge to determine which costs to
include or exclude. Most importantly, cost based methods make no allowance for the
future benefits which might accrue from the IP.
8.1.1. Cost Analysis
When it comes to the cost of licensing this technology to Start-up Company and
established company, we will accumulate all the cost items during the business
operation no matter the technology is licensed to which type of company. Even though
the cost structure in different companies varies based on the specific situation and
policy. It can be assumed that the operation of the same technology and product needs
same employees and resources, like the infrastructure, Management, technology
development and sales force.
Based on the standard project structure and accumulation methods to calculate the
overall cost, the Value Chain model will be first used to analyze the business operation
cost. The cost of the business operation process will be broke down into two main
categories: Primary activities and support activities.
Exhibit-10: Value Chain Model
Based on the value chain model, the cost can be further integrated and divided into six
categories:

Sales cost,

Professional cost

Technology cost

Administration cost

Marketing cost

Wages
Based on the six categories, the estimated cost item to commercialize this technology in
Start-up Company and Established Company can be listed as below:
Exhibit-11: Estimated cost items and details
Cost Categories
Cost of sales
Professional fees
Details
Product inventory
Raw materials
Manufacturing equipment
Shipping
Packaging
Shipping insurance
Warehousing
Setting up a legal structure for your business (e.g. LLC,
corporation)
Trademarks
Copyrights
Patents
Drafting partnership and non-disclosure agreements
Technology costs
Administrative
costs
Attorney fees for ongoing consultation
Retaining an accountant
Computer hardware
Computer software
Printers
Cell phones, PDAs
Website development and maintenance
High-speed internet access
Servers, security measures
IT consulting
Various types of business insurance
Office supplies
Licenses and permits
Express shipping and postage
Product packaging
Parking
Rent
Utilities
Phones, copier, fax machine
Desks, chairs, filing cabinets
Anything else you need to have on a daily basis to operate a
business
Printing of stationery
Marketing materials
Advertising
Public relations
Sales
and
Event or trade show attendance or sponsorship
marketing costs
Trade association or chamber of commerce membership fees
Travel and entertainment for client meetings
Mailing or lead lists
Employee salaries
Payroll taxes
Wages and benefits
Benefits
Workers compensation
Considering and comparing each cost item in start-up company and established
company, because we assume that the cost structure in the two companies are
standard and same, the cost difference of two choices come from the marginal cost for
the established company. It means that, from the companies’ business operation
perspective, the cost of new technology project in the established company will become
lower because the new project in the established company can share some equity,
optimize the labor force, and employ the size advantage.
However, this marginal cost advantage is not the significant for the new product market.
The cost advantage in established company is subtle at the beginning of sales because
the technology is new and need new equipment and new staffs. Based on the study of
marketing size, because the market of this technology is quite small and the sales in the
two types of companies will not differ too much, thus marginal cost advantage in
established company will not turn to be more obvious with the expanding market and
increasing sales.
Last but not least, differences in training cost for clinicians in the hospital are significant
for two types of companies. Based on the large network and resource of established
company, the established company will employ more human resources to train the
hospital clinicians at the beginning of business to spread the product, even though the
final market results for start-up company and established company are the same.
Therefore, from cost perspective, based on the market estimation of new product, we
recommend to license the new technology to Start-up Company.
8.2.
Market based method
Market based methods value IP through comparison with prices achieved in recent
comparable or similar IP transactions between independent parties. Observing the
prices of comparable assets traded between parties in an active market gives a value to
the subject IP. The idea behind these approaches is that the market decides the
accurate price and therefore the value of the IP. Market based methods include IP
auctions, comparable market and comparable royalty rate methods.
Auction
In a perfect auction, there are many potential buyers with perfect information about all
aspects of the IP. The value of the IP is determined by the price reached through
bidding.
Comparable market value
The value of the IP is given by comparison with similar comparable independent IP or
similar transactions.
Market Value of the Technology
Number of centers*Price per Device = 103*100.000
= $10.300.000
Royalty rate
Market based valuation methods may also be based on the comparison of royalty rates
used when licensing similar IP. Many sectors often use industry averages as a basis for
setting royalty rates in license agreements or in establishing damages in litigation. The
value of the IP is given through the comparison of the subject IP with the royalty rates in
similar license agreements.
When are they used?
Market based methods are useful when a market value is required for any given subject
IP. These methods require an active market, a comparable exchange of IP between two
independent parties and sufficient access to transaction price information.c However,
there are limited formal markets for IP and the relevant pricing information is not usually
public. As a result, the use of the comparable market value approach to valuing IP is
rare. The use of comparable royalty rates are more widespread, especially as
databases of industry royalty rates and comparable transaction information have been
collated by larger IP right-holders and independent companies offering valuation
services. In the future, when IP markets become active and public, the use of market
based approaches can become more established.
Advantages and disadvantages of market based methods
Observing the market is a relatively straightforward valuation method. It is useful to
check the validity of other approaches. As well as the issues raised about the lack of IP
markets and information, there are many other disadvantages to these approaches.
Firstly, the uniqueness of IP makes direct comparison difficult. There is a risk of
comparing the subject IP with other IP which has been traded but which has still not
been utilised to the full extent possible. In these cases the IP can be undervalued.
When royalty rates are compared there are also some potential distorting problems.
Royalty rates set using returns to R&D costs, return on sales figures or industry
averages run the risk of valuing costs or other factors rather than value.
8.3.
Income based method
The most basic definition of ‘value’ is based on the ability of an asset to generate future
income, and this is especially true for IP. Income based methods measure the potential
future benefits of the subject IP in an effort to determine its worth. There are many
income based valuation methods, each with many variations according to the reason for
valuation and the type of industry. Some examples include the discounted cash flow
(DCF), risk adjusted net present value (rNPV) and relief from royalty methods.
Discounted Cash Flow (DCF)
This is the most fundamental and widespread of the income based valuation
approaches. The discounted cash flow approach attempts to determine the value of the
IP by computing the present value of future cash flows from the IP, over its useful life.
The methods under this category are all centred around evaluating these future cash
flows and then discounting them back at a discount rate to achieve a present value.
The two key factors that must be accounted for in a DCF calculation are the time value
of money and riskiness of the forecasted cash flows. These are dealt with through the
use of a specific discount rate chosen specifically for the subject IP, which accounts for
both factors at once. Alternatively, the forecasted cash flows can be adjusted to account
for their riskiness and changing riskiness over time. These are then discounted at a risk
free rate, which accounts for the time value of money. Both versions are widely used.
Risk adjusted net present value (rNPV)
This approach is an extension of the DCF method mainly used in the pharmaceutical
and biotechnology industries. It was specifically developed to deal with technical risk
during the development of IP assets, for example medicines. To account for risk, the
method adjusts the cash flows of each stage of development by fixed probability rates
based on established industry indicators. For example the statistical probability of
successfully competing the first stage of clinical trials may be 20%, second stage 30%
and so on. The cash flows are risk adjusted using these probability rates and
discounted as with the DCF method.
Relief from Royalty
The relief from royalty method measures the royalty that the company would have to
pay for licensing-in the IP being valued, from a third-party. The royalty represents the
rental charge, which would be paid to the licensor if this hypothetical arrangement were
in place. The method assumes that the value of the IP is defined as the rental charge
other companies would pay to use it. Estimating this royalty rate is only a first step, a
reliable sales forecast is also required in order to estimate the income that flows directly
from the IP. As with other income approaches, the royalty rates are then discounted
through an appropriated discount rate.
Technology Factor method
The technology factor method firstly calculates a risk-free net present value for the IP
(similarly to the DCF method) and multiplies this with a risk-factor, or “technology
factor”. The technology factor value is worked out from attributes reflecting the
commercial strengths and weaknesses of the IP. The aim is to account for technical (in
the case of technology), legal, market and economic risks related to the IP being
valued.
When are they used?
Income approaches to IP valuation are only accurate if the following variables are
available or can be accurately estimated: an income stream either from product sales or
license of the IP, an estimate of the duration of the IP’s useful life, an understanding of
IP specific risk factors for incorporation into the valuation and a valid discount rate.
Advantages and disadvantages of income based methods
The advantage of these methods is that it is relatively simple to assess the value on the
basis of the conditions set up. With the likely availability of many of the required inputs
from the firm’s financial statements and market information it may be possible to identify
and or forecast particular cash flows.
The methods are conceptually robust but can prove difficult to implement in highuncertainty environments. This task always includes some uncertainty and subjective
assumptions. A significant disadvantage of these methods is that both uncertain and
distant cash flows and the discount rate have to be estimated. For example, there is
rarely an experience base when estimating the market potential and therefore cash flow
of early stage IP developments. In addition, all risks are lumped together and are
assumed to be appropriately adjusted for in the discount rate and the probabilities of
success, rather than being dealt with individually (such as legal risk, technological risk
etc.).
A significant drawback of the relief from royalty method is that a royalty rate can always
be assumed, when in reality it may never materialize. Nevertheless, in specific
circumstances this method is useful, especially if there are suitable comparable
transactions involving third parties or industry standard royalty rates.
9. Conclusions
Regarding the question of which type of company to license the new technology, market
analysis, cost analysis, Market valuation, FDA approval analysis, and reimbursement
system analysis have done. Besides, both companies were analyzed comparatively in
terms of structure, decision making, funding, IP protection, management priorities,
product development and R&D capabilities. Based on the analysis covered in the report,
the choice is made section by section in Exhibit-12 below.
Exhibit-12: Final Comparison
Structure
FDA Approval
Startup
Company

Established
Company

Reasons for Choice
The technology is disruptive, and has very
small, niche market; therefore, startup will
be better option. It requires high
commitment and motivation, fast decision
making and rapid implementation to
commercialize this type of technology.
Established companies are more eligible
for FDA approval, faster and easier than
start-up companies. Also, their work will
be in higher quality than start-up
companies.
Established
companies
already have the equipment and
requirements that they need for training
and for preparing an appropriate
environment. So sufficient training for staff
and industry will be well done or at least
need a little adjustment. In addition, there
are many departments involved and
established companies already have
relationships that were built in many
years.
Established companies had marketed
many products. Therefore, figuring out the
appropriate
marketing
program
is
predictable. Moreover, established
companies are already well known and
have their customers. These points are
justifying why going with established
company is better for the high quality
performance and for getting FDA
approval.

Reimbursement
Marketing
Sales
&


Licensing Fee /
Up- front Fee
Royalty fees
Funding



Establishing relationships with Medicare,
Medicaid and private insurers, getting
code for our device, working closely with
appropriate specialty medical society,
cultivating key opinion leaders, observing
changes
in
healthcare
legislation/regulations at the federal and
state levels are very complicated, time
and money consuming processes.
Established companies already have
relationships with Medicare, Medicaid etc.
and they also have personnel, knowhow,
key opinion leaders so they can easily
manage these process.
For these reasons licensing this
technology to an established company will
be
the
right
choice
from
the
reimbursement perspective.
It is a small and niche market. Besides, an
established company usually intent to kill
innovations due to its current products.
There would be greater focus on
technology and commitment of the
inventors
to
the
commercialization
process if we license the technology to a
start up.
Licensing fee could be higher in an
established company option. Since startup
company needs very high level of funding
at
the
beginning
to
start
the
commercialization process, it may not
afford to give as high as that an
established company does.
They are equally the same. Royalty fees
usually depend on type of the technology,
development stage and the size of market,
not very much on the type of the
company. It has little impact on the issue
that certain type of company can make
more sales with particular type of
technology/product.
A new healthcare company required
financing to start the process, and
subsequently additional capital to support
growth. Therefore, the needed fund will be
considerably high.
In addition, sometimes even established
companies need financial support from
other big companies with ongoing sales.
To scale up its operations, it was seeking
additional equity investment. Therefore
start-up companies would need much
more funding on many phases first to
support themselves and then to go further
with marketing. Besides, getting funding
for marketing this device will take shorter
time than it could take with start-up
companies.
IP
(Patenting)
protection

It would be better to go with startup
company because of the reasons below;



Product
Development
(R&D)
It would be better to go with established
company because of the reasons below;


Nature of The
Technology

Increase
employment
opportunities for university-based
researchers
and
graduate
students and promote local
economy
by
stimulating
additional R&D and job creation.
Effectiveness
of
patents
increases royalties earned when
inventions are licensed to Startup
Company.
Further refinement of technology
needs
strong
technical
capabilities, marketing skills and
financial strength.
Asymmetry of information may
occur
due
to
lack
of
knowledgeable
personnel
in
assessing the quality of invention
and commercial profitability.
It would be better to go with startup
company because the technology is
disruptive in nature. Besides, it is at the
Licensor
Participation

Cost Analysis

Value of the
License (Market
Value)

OVERALL


very early stage of development and
carries high risk.
Startup company-choice will be slightly
better, because it will be easier to be
involved
either
in
managerial
or
commercial issues related to the product.
Besides, there will be less conflict of
interest issues.
Based on the market estimation and
study, the marginal cost advantage of
established company will not turn out to
be significant in the future. In contrast,
more cost on the training expenses at the
beginning will make the cost of product
higher in an established company, and
result in losing its scale advantage.
In all three generally accepted valuation
methods covered in the report, there is no
concrete evidence that value of license is
different for both start-up and established
companies.
STARTUP COMPANY
In conclusion, the best course of action would be to license the new dosimetry
technology/device to a startup company due to the several reasons:
 The technology is disruptive.
 Market is niche and very small.
 It requires high commitment and motivation.
 It carries high risk.
 It requires fast decision making and rapid implementation.
 The required time and effort disadvantage in FDA approval process for startup is
not considerable.
 There is high risk of established companies killing the innovation because of their
current products.
 Licensing fee does not differ much between two options.
 Royalty fees depend on the technology and market potential, not on the size of
company.
 It is easier to find VC funds for this particular technology. Therefore, startup may
not have trouble in finding funds.
 It would increase employment opportunities for university-based researchers and
graduate students and promote local economy by stimulating additional R&D and
job creation.
 It would be easier for university to get involved in development and
commercialization process.
 The marginal cost advantage of established company will not turn out to be
significant.
 The training expenses would be higher in an established company.
 Market value of the technology would be indifferent, since the technology is
disruptive and will have a niche market.
10.
References
(1) A hand Book for Inventors and Innovators/Technology Transfer at the University of
Illinois. Avijit Ghosh/Vice President for Technology and Economic Development.
(2) In the Public Interest: Nine Points to Consider in Licensing University Technology,
March 6, 2007
(3) Statement of Policy in Regard to Intellectual Property, October 4, 2010.
(4) Top Medical Device and Imaging Technologies (Technical Insights)/ Disruptive
Medical Device and Imaging Technologies for Driving Efficiencies, Improving Patient
Outcomes and Enhancing Workflow. March 2012,
(5) http://www.bmtadvisors.com/experience.htm
(6) http://www.suffolkmedicalmalpracticelawyer.com/fda/how-fda-does-approve-medical-devices.html
(7) Casto, Anne B., Principles of healthcare reimbursement, 2009
(8) Startup Guide, Office of Technology Development, Harward University
(9) An MIT Inventor’s Guide to Startups: For Faculty and Students, Massachusetts
Institute of Technology, Technology Licensing Office.
(10) Startups vs. Big Companies: Mind the Gap | Rocket Watcher: Product Marketing for
Startups, February 28, 2011
(11) Startup Guide, Technology Commercialization Office, The University of Utah.
(12) http://www.amsa.org/AMSA/Libraries/Committee_Docs/HealthCareSystemOverview.sflb.ashx
(13) http://www.nature.com/bioent/2003/030601/full/bioent738.html
(14) Frost and Sullivan, Cancer Market Analysis.
(15) BSD Medical, http://www.bsdmedical.com/professionals_find_physician.php#list
(16) USA Health System, http://www.usahealthsystem.com/cancer-ablation
(18) ICHS Hyperthermia research facilities
http://www.hyperthermia-ichs.org/hyperthermia_treatment_facilities.htm
(19) Zaharoff, Howard G., Setting Values and Royalty Rates for Medical and Life
Science Businesses, June 2012.