November 21, 1996

News from the Faculty of Graduate Studies and Research

Valuation, Pricing and Commercialization of Inventions

McGill's Office of Technology Transfer (OTT) has personnel who have developed expertise in commercializing inventions, including the valuation and pricing of those inventions. When OTT receives an invention disclosure, it works together with the inventor and industry to establish the commercial potential of the invention, as well as the process to be used for commercialization.

Technologies discovered in universities are generally at an early stage of development. This leads to some difficult questions that must be answered: What is the value of the discovery? Does the invention have as much commercial potential as the inventor claims? What is the added value from a potential industrial collaborator?

For the university and the inventor, the value of an invention is in the form of royalties, stock, upfront payment(s), commitment to fund R&D and other considerations. The two challenges are to determine fair pricing and to assess the degree of importance of a partnership between the university and the industrial partner. For the inventor and the university, the discovery is the most significant aspect, but for the industry the most important step is the development, marketing and selling of a final product derived from the invention.

The first step for valuation is the assessment of the intrinsic quality of a technology including its stage of development, its marketability and the significance of the invention. In parallel, the value is in direct relation to the intellectual property (IP) rights. The first source of value of the technology is the level of rights of ownership provided by patents, trade secrets, copyright and trademark. Obviously, if another inventor protects all or part of the same invention before we do, our invention will be less valuable. As well, other factors such as the status of the IP, the defence of the patent, infringements of the patent and the maintenance costs of the patent are components to consider when deciding on the value.

Market size, competition and the expected profits on sales also play a major role in setting the value of a technology. There are several models available for valuation of technology, which range from the Industry Standard Model (a table of comparison of recent similar "deals") to complex Risk Models, but they all adhere to the following general principles:

i) Value calculations have very wide limits because of a wide range of estimates of the magnitude, timing and risk of future net cash flows.

ii) Fair value is determined by an "up-front payment" and future royalties.

iii) The downpayment should be a small fraction of the total future estimated value, and is usually 5%-10% of the best estimate.

iv) A fair royalty can only be negotiated when reasonable estimates can be made of future net cash flow.

v) The royalty should not be capped.

vi) Royalty scales are dependent on total sales.

As you can see from the foregoing, valuation of inventions is quite a complex process and one which inventors seldom have either the time or expertise to manage. The staff at OTT do have the expertise to deal with all phases of this complex commercialization process. Talk to us at OTT--we are here to help.