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Bio Technology : October 2009
16 Australasian BioTechnology Volume 19 • Number 3 • October 2009 What value to put on technology? The valuation of technology provides many chal- lenges due to the uniqueness of each technology. In this article I will identify the critical issues in valuing technology and intellectual property. A valuation of technology may be required for the following reasons: ranking alternative projects to allocate scarce capital • resources; deciding whether to proceed to the next phase; • applications for venture capital or government assistance; • measuring value creation; • structuring a part or full disposal; • determining royalty rates and equity shares in spin- • offs; and financial reporting for tax and accounting purposes. • The critical areas where technology valuations differ from other financial valuations include: assumption of success; • cost to replicate; • project commitment; • competition/barriers to entry; • market dynamics; • alternative transaction structures; • life and timing of cashflows (inwards and outwards); and • comparable transactions. • A rigorous valuation process helps identify the 'moving parts' which drive value while helping avoid 'paralysis by analysis'. Some of the valuation issues are obvious, while others may not have been thought about during the de- velopment process. The key areas to be considered when preparing a 'base-case' valuation include: markets to be served; • size of markets; • likelihood of overcoming technical and commercial risk; • risks of competition; • date(s) of entry into the market; • expected market share; • take up rate; • time to achieve ultimate market share; • cost to finalise development; • cost to bring to market; • cost to maintain technology; and • cost to develop improvements. • Due to the varying cash outflows and inflows over a development project's life, the discounted cash flow (DCF) methodology is most often applied. In applying the DCF methodology, it is critical that the level of risk in the discount rate must reflect the risk inherent in the cash flows. In assessing the value of the technology, the key questions to be asked include: Is the whole of the technology owned by one organisation? • Is it protected? • Do other parties have any rights to this technology? • What other items are required to commercialise the • technology successfully? Is this technology transferable? • Can part of the rights for technology be transferred • or otherwise dealt with? Is it enduring? For how long? What capital expense • is required to keep it commercially attractive? Will the technology give some sustainable competitive • advantage? Is it cost effective? • What effects will the technology have on competitors? • How will they react? Are there competitive technologies? • How long will it take to get to market? • The development of technology is one issue -- the com- mercialisation and success of the commercialisation of technology is quite another. Too many times we see valuations that assume technical success and having done so, assume commercial success. A good idea does not equal positive cash flow. To be of most use, the technology valuation process should set out to answer specific management questions. The process should be orientated towards examining the critical issues with the derivation of the technology valu- ation range being a by-product. In most valuations, the valuation range is very dependent upon the assumptions made. The level of risk will vary depending on whether the technology is early stage or more developed. For further advice and consultation, please contact Hamish Blair on (03) 9669 7107 or firstname.lastname@example.org By Hamish Blair, Senior Adviser, Leadenhall Presenter at AusBiotech 2009 2.00pm – 3.30pm, Thursday 29 October Valuing and Commercialising Intellectual Property AusBioFEATURE --- AusBiotech 2009