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Unlocking Value Through Licensing Arrangements

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Unlocking Value Through Licensing Arrangements

Valuing Licensing Arrangements

As the costs associated with bringing a product to market continue to increase, medical device and pharmaceutical companies are considering a variety of options ranging from costly mergers and acquisitions that require relatively long timeframes for completion, to licensing arrangements that can be accomplished quickly at a fraction of the cost.  The licensing of products, services and other intangible assets (e.g., intellectual property) offers life sciences companies the ability to quickly and cost-effectively respond to product and market opportunities.

Within the life sciences industry, a broad range of intangible assets can be licensed, including, but not limited to:

Marketing Operational
Trade Name / Trademarks Programs / Software
De-Identified Patient Health Information Patents / Intellectual Property
Real World Example:

ABC Company identified XYZ Company’s “De-Identified Patient Health Information” as an opportunity to market ABC’s new program to XYZ’s customers.  Given the significant challenges of a merger or acquisition, both companies entered into a licensing arrangement that allowed the flexibility to collaborate on certain services.  As a result, both companies were quickly and cost-effectively able to leverage their intangible assets and derive benefit.  Furthermore, ABC Company was able to target their marketing efforts to patients that would derive immediate benefit from their program.

Licensing arrangements are valued similarly to other assets or businesses through consideration of the income, market and cost approaches.  Notwithstanding, it is significant to note that there are some slight variances in terms of the methodology utilized for each approach when valuing intangible assets.  The income and market approaches are often blended under a hybrid method, commonly referred to as the Relief-From-Royalty Method.  This method utilizes a future cash flow stream (income approach) derived from a royalty rate observed from the market (market approach). Under the cost approach, the Cost-To-Recreate Method is typically employed.  This methodology accumulates costs associated with the development time (indirect costs) and capital outlays (direct costs) associated with the intangible asset.

FMV PITFALL

Given the unique nature of intangible assets, and the overlay of healthcare guidelines (Stark law and Anti-Kickback Statute), the valuation of these types of arrangements involve some significant complexities.  The Relief-From-Royalty Method is limited by the availability of comparable transaction data, the need to isolate license payments and the requirement to avoid valuing referral volume.  The Cost-To-Recreate Method requires the ability to obtain accurate historical data and records, determine development time and assess obsolescence.