Client: The Innovation Institute is a collaborative of six non-profit health systems focused on nurturing innovation and growth within the healthcare industry. Innovation Institute’s Innovation Lab assists innovators in the healthcare space with the exploration and potential commercialization of ideas from healthcare professionals to improve patient outcomes and lower healthcare costs to improve communities.

Summary: Stout provided a dynamic valuation model to help The Innovation Institute determine the best strategy for monetizing an intellectual property (IP) asset.

The Challenge: Valuing an IP Asset for Commercialization

Innovation Lab wanted to create the best plan for commercializing an IP asset. To do this, they needed to pressure test their existing valuation model for the IP asset.

The company wanted to use their valuation model to explore different types of deal structures for monetizing the IP asset. For example, should potential partners purchase the IP asset through a straight asset purchase or license it by paying an upfront fee with ongoing royalties paid to Innovation Lab?

As Stout worked with Innovation Lab, we identified the need for an entirely new model that explored what would happen if Innovation Lab retained ownership of the IP asset and built a business around it.

Because the IP asset had been used to create a prototype but had not been incorporated into any product on the market, a valuation would be particularly challenging because of the assumptions required regarding market size, penetration, maturity/saturation, and pricing.

The Solution: A Dynamic Valuation Model

Stout created a dynamic valuation model that helped Innovation Lab with the following:

• Determining the value of the IP asset
• Determining potential licensing deal terms for the IP asset
• Presenting projected financial statements and an implied total enterprise value for a hypothetical company were it to be given the IP right and begin operations

We provided the dynamic valuation model in Microsoft Excel so that Innovation Lab could easily adjust certain key assumptions that drove the model’s valuation results. By adjusting the assumptions, the company could explore the possibilities of licensing the IP asset or starting a new company.

Valuation of IP Asset and Potential Licensing

We used the Income Approach in the development of the model. Specifically, we developed a relief from royalty method through the following:

• Forecasting annual revenue associated with the use of the IP asset by a potential buyer/licensee through the expected economic life of the IP asset for two different end markets
• Identifying a range of market-based royalty rates articulated as a percentage of revenue for patents comparable to the IP asset
• Estimating royalty savings by applying a royalty rate selected to the forecasted revenue expected to use the IP asset
• Reducing royalty savings to account for corporate income taxes
• Identifying discount rates that reflect the relative risk of the cash flows based on private capital market required rates of return and risk-adjusted hurdle rates used in patent licensing negotiations
• Discounting future economic benefits attributable to the IP asset to the valuation date

We provided insights and guidance on appropriate inputs and assumptions associated with each of the above implementation steps.

Our model allowed Innovation Lab to adjust the underlying valuation assumptions and observe the effect on the IP asset’s expected value.

Additionally, for any value estimate that resulted from the model, we developed a licensing deal terms valuation model. This allowed Innovation Lab to estimate the value of any combination of upfront payment, milestone payments, and royalty rate deal terms it may wish to consider for the sale/license of the IP asset to a potential buyer/licensee.

Valuation of Hypothetical Stand-Up Company

We also included a discounted cash flow model so Innovation Lab could estimate the enterprise value of a hypothetical stand-up company. We designed this dynamic model to give Innovation Lab a comprehensive understanding of the hypothetical business’ value over different time horizons.

The model was driven by functionality and assumptions related to the following:

• Discount date (i.e., the weighted average cost of capital for the business)
• Long-term growth rate of the business
• Long-term earnings before interest, taxes, depreciation, and amortization (EBITDA) target margins
• Long-term net working capital targets
• Initial capital outlay (in order to start up business operations)
• Annual maintenance capital expenditure targets
• Assumptions regarding expected depreciation of fixed assets (i.e., tax life of fixed assets to be placed in service and bonus depreciation considerations)

We also presented valuation multiple and other financial data of a selected group of comparable public companies to provide context and support for assumptions made related to the stand-up business as well as to test the reasonableness of the implied enterprise value of the business.

Finally, we provided additional market data to support the selected discount rate for the business via various venture capital rate of return studies.

Actual indications of value generated from the dynamic model are dependent upon the client’s selection of inputs and assumptions based on their judgement and potentially considering our guidance.

Outcome: Insight Into an Ideal Commercialization Strategy

Our comprehensive dynamic valuation model allowed Innovation Lab to effectively evaluate different business models it would use to monetize its IP asset, explore potential licensing deal terms, and project financial statements for a hypothetical company.

Equipped with the model, Innovation Lab can adjust key valuation assumptions, furnished with the flexibility to run different financial scenarios, leading to informed decisions for the future use of their IP asset.