Comparability analysis using royalty rates

COMPARABILITY ANALYSIS USING ROYALTY RATES

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Marcia Coutinho [email protected]

Ilona Aigro [email protected]

TP Minds International – 16th March, 2016 - London

1) included or not in the definition of intangibles.


Comparability Standard

1)  “To be comparable means that none of the differences (if any) between the situations being compared could materially affect the condition being examined in the methodology (e.g. price or margin), or that reasonably accurate adjustments can be made to eliminate the effect of any such differences.” (OECD 2010, ¶ 1.33).

2)  In the case of intangible property, it is important to consider characteristics like the form of transaction (e.g. licensing or sale), the type of property (e.g. patent, trademark, or know-how), the duration and degree of protection, and the anticipated benefits from the use of the property. (OECD 2010, ¶ 1.39).



Analysis of Contractual Terms

Several factors conveyed in license agreements may affect comparability and royalty rates. Among the most common are:

•  Exclusivity

•  Duration

•  Territory

•  License rights

•  Additional payments (upfront fees, milestones, etc.)

•  Tiered or not tiered royalty rates



Royalty Rate Models

Royalty arrangements in intangible licenses may be simple or complex.

1)  A simple model is when a royalty rate is the only license payment:

License Payment = Royalty Rate * Revenue

2)  A complex model may include tiered royalty rates, upfront fees, milestone payments, and debt, warrants or equity investments by the licensee in the licensor’s business:

License Payment = (Royalty Rate * Revenue) + Additional Payments



Challenges in Finding Comparables for Intangibles

1)  Restrictive disclosure rules. To our knowledge, the U.S. is the only country that requires “material contracts” (e.g., license agreements) to be disclosed to the public.

2)  Large companies may not disclose intangible license agreements, because they may be

immaterial to the business.

3)  Confidential treatment. Most license agreements are granted confidential treatment by the SEC under which the royalty rate is not disclosed.

Use of Comparable License Agreements & Royalty Rates

1)  In general, one can find comparable license agreements and royalty rates to benchmark the license of intangibles.

2)  In fact, the number of license agreements is larger compared to the number of potentially comparable manufacturers, distributors, or service providers.

3)  E.g., we have 3,789 license agreements in Pharmaceutical and Biotech and only 581 Manufacturers (SIC code 283).1

1.  Search criteria included royalty rates based on net sales. Compustat data cover years from 2011 to 2013, with positive EBIT in all selected years.

Top Industries with Royalty Rates in the UK

7

Top Licensed IP in the UK

8



Example Using RoyaltyStat

We searched in the RoyaltyStat License Agreements Database (LADB) using the following search criteria:

•  Industry: Pharmaceutical and Biotech

•  Sub-industry: Allergies

•  Agreement Type: Patent (Including; we can also select Only) •  Royalty Base: Net Sales

•  Related Parties: Exclude



The search criteria produced 23 agreements

Royalty Rates (%)

Statistics Count Minimum Q1 Median Q3 Maximum

Unfiltered 23 1.50 2 3.50 6 16

Filtered 22 1.50 2 3.50 6 10

RoyaltyStat uses Tukey’s filter to detect outliers.

Royalty Rate (%) by License Rights

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Tiered & Not Tiered Royalty Rates (%)



Royalty Rate (%) by Additional Payments

Non-shaded median means that we have less than five observations.

Conclusion

•  We have a large number of license agreements available for the comparability analysis of contractual terms.

•  Over 17,000 unique and unredacted license agreements covering many industries, type of intangibles (patent, know-how, software, trademark), countries, and years.

In the example used:

•  Tiered royalty rates are higher than not tiered. •  Royalty rates do not vary across payment type. •  Royalty rates do not vary across license rights.

•  Variation of royalty rates as a function of contractual terms depend on the search criteria.

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COMPARABILITY ANALYSIS USING ROYALTY RATES

Thank you!


Marcia Coutinho +1202-468-3103

[email protected]

Ilona Aigro +1202-558-2356

[email protected]

Comparability analysis using royalty rates

Economy & Finance

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