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Transcript of Presented at: National Meeting of the American Chemical Society San Diego, CA April 3, 2001...
Presented at: National Meeting of the American Chemical
Society San Diego, CA April 3, 2001
Presented by:
Anthony Breitzman, VP/CTOPatrick Thomas, Research Analyst
CHI Research, Inc.10 White Horse Pike
Haddon Heights, NJ 08035www.chiresearch.com
Identifying Undervalued Companies Via Patent Analysis As a Means of Highlighting
Merger/Acquisition Targets
2
Introduction
Mergers and acquisitions take place for a variety of reasons, including strategic growth, expansion into new markets, or because the target company is attractively priced and contains know-how the suitor would like to obtain.
In this presentation we will concentrate on the third issue; that is, the use of patent analysis in the valuation of companies.
3
Key Questions in Analyzing Mergers between Technology Based
Companies1. Does the merger make sense in technological terms?
– Are the firms technologically compatible?– Does the merger fill a technological gap?
2. Are the financial terms of the merger appropriate?– Is the buying firm getting a fair price?– Is there a best target in terms of technology and price?
Patent analysis can help frame both issues.
4
Overview
Slide 5: Introduction to patent analysis
Slides 6-9: Traditional uses of patent analysis in M&A Situations
Slides 10-22: Use of patent analysis in valuing companies
5
Patent Analysis Basics
Patent and Patent Family counts can be used to measure the level of R&D activity.
Impact or value of R&D activity can be measured by weighting patent activity against patent indicators such as citation counts, number of equivalent documents, renewal decisions, science linkage, innovation speed, etc.
For more on patent analysis see CHI Publication List: http://www.chiresearch.com/pubs.htm papers 146, 113, 103 among others.
6
Traditional Uses of Patent Analysis in M&A Situations
Targeting
Due Diligence
Technological Compatibility
And now
Valuation
7
Recent Targeting Examples
A large pharmaceutical company wishes to identify small biotech firms with strong genomics capabilities.
A South American cosmetics company wishes to manufacture anti-perspirants in Europe. Which European firms have the technological capabilities and might be viable acquisition targets?
A large semiconductor firm wants to invest in firms doing bioinformatics. Who has the best and are they for sale?
8
Due-Diligence Examples
Is the firm everything it seems technologically? Are the key inventors still with the firm? We once did a due-diligence analysis where the key inventor was moved to the parent company, before the sale of a subsidiary.
We once killed an acquisition of a hearing-aid company. The target had a strong sales network, but its technology was all analog while the competition was going digital.
9
Technological Compatibility Examples
Is the acquisition active in the same areas as the acquiring company? Does the firm fill a technological niche or gap that the acquiring company needs filled?
Recently we showed that the Glaxo-SmithKline merger was a good technological fit because both companies are active in largely the same treatment areas, but Glaxo would gain entry into a number of new areas. Also their strengths are complimentary. SmithKline would strengthen Glaxo’s weaker pharmaceutical technology, while Glaxo’s strong biotechnology and basic chemistry research would strengthen SmithKline’s weaker standing in those areas.
10
Basic Idea of Valuation Methodology
Once a target or targets are identified, what is a reasonable price for that target?
Patent analysis can be used in the following way:1. All players in the technology can be identified via patent
activity.
2. A market-to-book value can be identified for the publicly traded subset.
3. Regression analysis can be used to correlate market-to-book values with patent impact indicators.
4. A target price is set based on where the target fits among its peers in patent indicators.
5. If the company is public, and its target price is above its actual price, than it is undervalued, and is a good buy.
11
Valuation Example 1 – Who is the best Biotech Target?
Name Ticker
Tech Score
Percentile (1)
Market Price Per
SharePrice/Book
(MTB)
Tech Score MTB
Tech-Score Price
2/28/01 (2)
Value Percentile 2/28/01 (3)
Heska Corp. HSKA 81 1.06 1.21 3.50 3.07 97Emisphere Technologies Inc EMIS 99 23.50 2.11 12.51 139.09 95Ribozyme Pharmaceuticals Inc. RZYM 76 7.88 1.56 3.32 16.79 91Curis Inc CRIS 65 5.50 1.12 3.08 15.05 91Synaptic Pharmaceutical Corp. SNAP 70 4.81 1.37 3.20 11.18 91Caliper Technologies Corp CALP 100 25.50 3.01 58.31 493.89 89Incyte Pharmaceuticals Inc. INCY 48 16.81 1.77 2.77 26.36 69Affymetrix Inc. AFFX 98 57.28 19.29 9.18 27.27 43Chiron Corp CHIR 73 46.81 4.91 3.24 30.95 41Enzon, Inc. ENZN 94 63.56 20.84 4.93 15.05 39Cephalon Inc. CEPH 83 55.06 15.16 3.58 12.99 34Tularik Inc. TLRK 54 26.06 4.65 2.87 16.09 33Genzyme Corp. GENZ 55 87.94 6.03 2.90 42.29 29Genentech Inc DNA 48 52.50 4.87 2.79 30.04 28Corvas International, Inc. CVAS 69 10.06 14.17 3.19 2.26 26ICOS Corp ICOS 73 54.13 34.48 3.23 5.07 25Cell Therapeutics Inc CTIC 28 23.81 3.71 2.45 15.71 19Millenium Pharmaceuticals MLNM 52 33.75 9.10 2.85 10.57 19Immunomedics Inc IMMU 58 12.94 15.40 2.97 2.49 17Biogen Inc. BGEN 39 71.56 9.98 2.62 18.78 10Human Genome Sciences Inc. HGSI 41 54.94 12.72 2.67 11.53 9Invitrogen Corp. IVGN 33 80.50 19.87 2.54 10.29 5
12
Footnotes to Previous Slide
1. Technology Score is a linear combination of various patent indicators. These are then percentile ranked by industry so that companies with a percentile score of 100 have the strongest technology indicators within the industry.
2. Regression analysis is used to determine the MTB level for a company with a particular tech. score within an industry. Once an MTB is determined, a price-per-share can be easily determined.
3. By comparing a company's actual price with its tech-score price, one can determine whether a company is over or under-valued in the market.
13
Example 2: Glaxo Purchased SmithKline at a Bargain Price
Using Tech Prices: 1 SmithKline share = $3.511 Glaxo share = $6.72
Therefore: 1 SmithKline share = 0.5223 ($3.51/$6.72) Glaxo shares
Terms of merger: 1 SmithKline share = 0.4552 Glaxo shares
SmithKline was overvalued, but not as much as Glaxo. By doing a stock swap, Glaxo used overvalued stock to pay for less overvalued shares of SmithKline.
14
Example 3: Acuson Case Study. In Ultrasound Technology Acuson is One of the Most Prolific
Patenters, Its Patents are Highly Influential, and Have the Closest Links to Scientific Research
Number of US Patents 1995-99
0 20 40 60 80 100 120
Toshiba
Boston Scientific
Hewlett Packard/Agilent
Philips/ATL
Siemens
Acuson
General Electric
Current Impact Index
0
1
2
3
4
Ge
ne
ral
Ele
ctri
c
Acu
so
n
Sie
me
ns
Ph
ilip
s/A
TL
HP
/Ag
ilen
t
Bo
sto
nS
cie
ntif
ic
To
sh
iba
Average Science Links Per Patent
0
2
4
6
8
10
Ge
ne
ral
Ele
ctri
c
Acu
so
n
Sie
me
ns
Ph
ilip
s/A
TL
HP
/Ag
ilen
t
Bo
sto
nS
cie
ntif
ic
To
sh
iba
15
Example 3: Acuson Case Study. Acuson is at the Center of the Latest Developments in Ultrasound
Technology
Company in selected set Company receiving most cites
Company not in selected set Company receiving 2nd most cites
Acuson
Boston Scientific
Hewlett PackardIncl. Agilent
Siemens
GEPhilips
Incl. ATLFujitsu
Toshiba
9
7
170
154
6
2513
10
37
36
13
13
4
8
(Linkage Map shows Citation Relationships Between Companies)
16
Example 3: Acuson Case Study. Acuson’s Patents are Influential both Inside and Outside the
Ultrasound Industry
Patent Title: Ultrasonic Harmonic Imaging System and MethodCiting Citing
Year Year
2000 06034922 06036643 06122223 06056943 2000Schering AG 06122222 06036644
06120448 06019960
06117082 Alliance
06116244 Pharmaceutical
06104670
06048316
06042545
06027448
1999 05961464 05908389 06009046 1999Hewlett 05879303 06005827
Packard 05957852
05933389
05897500
05882306
Acuson
Corp.
1998 05833613 1998Koninklijke
Philips
Electronics
Starting 1998 05740128 1998 StartingPatent Acuson Patent
17
Example 3: Acuson Case Study. On August 15th, CHI selected Acuson for inclusion in Nike Securities’
Patent Quality Trust
0
5
10
15
20
25
1/15/00 2/15/00 3/15/00 4/15/00 5/15/00 6/15/00 7/15/00 8/15/00 9/15/00
Acu
son
Sh
are
Pri
ce (
$)
August 15th: CHI Identifies Acuson as an Undervalued Company for Nike's Patent Quality Trust
September 27th: Siemens has $23 a share bid for Acuson accepted
Siemens Purchased Acuson at a 50% Premium on September 27th
18
Example 3: Acuson Case Study. Key Facts
Patent analysis showed that Acuson’s ultrasound technology was very good relative to its peers.
Its stock price indicated it was undervalued relative to its industry and its technological quality.
The conclusion at the time (August 2000) was that Acuson was ripe for either a takeover or a substantial rise in stock price.
19
Can the Acuson Example be Generalized?
Yes. The method can and has been generalized to identify undervalued companies whose stocks should rise.
The method is the subject of a recently issued and another pending patent.
The basic idea of the method is that once a company’s industry is identified, one can always tell 1) whether its patents are as good or better than its peers and 2) whether this is reflected in its stock price.
20
Companies Undervalued Based on Patent Scores are More Likely to Experience Increased Market-to-Book
(and hence increased stock prices).
Percent of Companies with Increased Market to Book2 Years after Patent Evaluation
0
10
20
30
40
50
60
70
80
90
100
1990 1991 1992 1993 1994 1995 1996 1997
Year of Evaluation
undervalued
overall
overvalued
21
$100 invested in the most undervalued companies (refreshed each year) would return over 2000% in 10
years.
100
500
900
1300
1700
2100
2500
Dec 90 Dec 91 Dec 92 Dec 93 Dec 94 Dec 95 Dec 96 Dec 97 Dec 98 Dec 99 Dec 00
ITL 20 Undervalued NASDAQ
S&P500 ITL 20 Overvalued
22
But how does it perform in a bear market?
Year 2000 % Return
Jan - Mar 27, 2001 % Return
CHI 20 Undervalued 23% 9%NASDAQ -39% -20%
S&P500 -11% -11%Dow Jones Ind. Avg. -6% -8%
The market has been unkind overall so far this year, but the undervalued companies have done well.
23
For More Information and Related Papers Visit:
www.Chiresearch.com
Or Contact:
Tony Breitzman VP/CTOCHI Research, Inc.10 White Horse Pike Haddon Heights, NJ 08035
Ph: 856.546.0600 Fax: 856.546.9633E-mail: [email protected]