Ip valuation presentation

MONETISING INTELLECTUAL PROPERTY

ASPECTS OF VALUATION OF IP

Chumphol Mahattanakul

Outlines

• IP System

• IP Embodiment

• IP Valuation

• IP Strategy

• IP Audit

IP System

• IP system is a set of activities toencourage and protect persons orparties of concerns in relation toinvention, innovation and creationalong the social and economicdevelopment path

• IPRs which are intangible assets asderived from IPs are systematicallygoverned by competent functioningbodies e.g. WIPO, WTO (via TRIPs)and NPOs in

- Administration

- Codification

- Regulation

- Enforcement

- Dispute Resolution- Marketplace Regulation

IP Embodiment

• IP embodiment comprises IP business partnersand their respective IP actions/functions orinteractions.

• IP business partners cover the following playerswhose activities or functions are interrelated ormutually made or strategically overlapped witheach others such as IP/technology developmentcompanies, licensing agents, patent licensing andenforcement companies, privateers, institutionalIP aggregators/IP acquisition funds, litigationfinance/investment firms, IP brokers, IP-basedmerger & acquisition advisory firms, IP auctionhouses, IP-backed lending firms, onlineIP/technology exchanges, royalty streamsecuritization firms, IP transaction exchanges,etc.

• IP functions are engaged in variety ofarrangements for monetization or securitizationof IP from which IP business models arestructured for the sake of industrial andeconomic development, and for benefits to allconcerned parties.

IP Business PartnersIP/Technology DevelopmentCompanies – Entities engaged in R&Dactivities and produce IP often notused for manufacturing themselves butlicensed to one or more operatingcompanies for their further activities inbringing physical products or servicesto marketplace. In case the IP creatorsprovide consulting services to thelicensees to integrate the technologyinto the licensee’s products orprocesses, they are considered beyondthe scope of intermediaries betweenpatent owner and patentlicensee. They will be intermediarieswhen they form a link between the IPcreator and those who commerciallydeploy it in the form of products andservices. In some cases, they do bothmanufacturing and licensing.

Licensing Agents - entities functioningas intermediaries by helping IP ownersfind licensees. Also called IP advisory,IP consulting, IP management ortechnology transfer firms. They maymerely act as consultants where thepatent owner gets involved in thelicensing process, or function more likeIT companies where the patent owneroutsources patent monetization andsets aside day-to-day licensingoperations, but collects a major part ofrevenue from licensing. They can be of“carrot” licensing or “stick” licensingactivities. In the latter case, theseentities tend to be engaged in activitieslike PLEC business model.

IP Business Partners (cont’d)

• Patent Licensing and EnforcementCompanies (PLECs) - own one or morepatent portfolios, attempt to licensethem through targeted letter-writingcampaigns and then file patentinfringement suits against those letterrecipients who refuse to enter into non-exclusive licenses. PLECs are often callednon-practicing entities (NPEs) or patenttrolls. PLECs might have purchased thepatents they are asserting or it isotherwise founded by the inventor(s) ofthe asserted patent portfolio. As for thelatter, they are notintermediaries. PLECs earn revenueboth from license fees and from the IPawards market.

IP Business Partners (cont’d)• Privateers - Operating companies who have

been spinning groups of patents to PLECs togenerate additional revenue, by means ofoutsourcing patent-monetization function,that helps save the costs incurred in crosslicense and counter-claim exposure, and avoidanti-competitive regulations and bad publicity,etc.

• Institutional IP Aggregators/Acquisition Funds– private equities who operate as generalpartners of a limited partnership and raisemoney either from large technologycompanies or from the institutional investorsand even high-net-worth individuals. Theinvestors are promised above average ROIfrom selective, targeted or large-scale patentpurchases with the goal of instituting licensingprograms and/or employing various arbitragestrategies.

IP Business Partners (cont’d)

• Litigation Finance/Investment Firms –functioning alike both PLECs and IPAcquisition Funds. Like IP AcquisitionFunds - general partners of a limitedpartnership and raise money from largeinstitutional investors and high-net-worth individuals. Like PLECs – with aview to acquiring a financial interest inpatent portfolios for assertion by takingthe form of targeted letter-writingcampaigns, followed with patentinfringement suits against those letterrecipients who refuse to enter into non-exclusive licenses. Variances in themodel (and from a PLEC) include thelevel and nature of ownership orparticipation (e.g., equity vs. debt) thatthe firm takes in the patent portfoliosbeing asserted or in the patent-owningentity itself (typically an LLC formed forthe purpose of assertion).

IP Business Partners (cont’d)

• IP Brokers – function as same asLicensing Agents with key distinctionsthat they seek to help IP owners findbuyers rather than licensees; andoperate both on the sell-side and thebuy-side (assisting technologycompanies in acquiring patents having“strategic” (i.e. defensive) value vis-à-vis their competitors). A typical “one hitand done” engagement term betweenan IP Brokerage firm and an IP owner isshorter than that of a Licensing Agentfirm because once the IP is sold, the IPBroker takes a percentage of the sale asa success fee, without any opportunityfor recurring revenue. In contrast, buy-side brokerage engagements cancontinue indefinitely as the broker’sclient strengthens and extends its IPposition over time.

IP Business Partners (cont’d)

• IP-Based M&A Advisory Firms – Entitiesoperating like investment banking (or 2nd

generation IP investment banking) by advisingtechnology companies in their M&A activitiesand earning fees based on the value of the entiredeal (or apportioned according to the value ofthe IP within the deal of either sell-side or buy-side, focusing on IP assets; followed withservices e.g. IP due diligence, IP integration andoperations as a result of M&A activity, IP dealstructuring advisory and general consultationsrelated to contemplated investments, mergers,acquisitions, divestitures, joint ventures andother corporate transactions. It involves not justmaximizing IP value in the context of a“traditional” corporate acquisition or divestiture,but actually sourcing the transaction based, atleast in part, on IP considerations. By this, the IPinvestment banker assist operating companies inidentifying potential acquisition targets oracquirors with complimentary IP assets.

IP Business Partners (cont’d)

• IP Auction Houses – Entities attemptingto do for the IP marketplace (likeChristie’s and Sotheby’s auction housesdid for the antique and art marketplace)holding multi-lot, live auctions forpatents with the intent of providing amarketplace for facilitating theexchange of such historically-illiquidassets. With various auction formatsand structures, such auctions enablesellers to offer one or more patentsaccording to a pre-determined set ofterms and conditions and allow theauction house to charge listing fees,attendance fees, buyers’ premiumsand/or sellers’ commissions. Also, otherentities aim to be the “eBay of patents”by offering online patent auctioningservices.

IP Business Partners (cont’d)

• On-Line IP/Technology Exchanges, Clearinghouses, Bulletin Boards, and InnovationPortals - Functioning like the former B2Bweb sites; offer web platforms andinterfaces specialized for patent and otherIP assets. (Like online classifieds Craig’s List,but this is provided for IP.) There arevariances such as whether listing fees arecharged to patent owners/sellers in additionto, or versus, back-end fees for successfulpatent sale or licensingtransactions. Additional variances includewhether these sites are public andbrowseable for free, or whether they areprivate, “member’s only” sites that requireregistration (and presumably a registrationand/or annual membership fees). Some ofthese sites also offer forums, bounties,challenges and idea exchange platformsthat aim to spur innovation and thus createnew IP.

IP Business Partners (cont’d)

• IP-Backed Lending Firms - Entities thatprovide financing for IP owners, eitherdirectly or as intermediaries, usually in theform of loans (i.e., debt financing), wherethe security for the loan is either wholly orpartially IP assets (i.e., IPcollateralization). Thus, these parties oftenfunction as intermediaries betweenborrowers and commercial lendinginstitutions, such as banks. Unliketraditional bankers who focus on accountsreceivable (i.e. Factoring) and tangibleassets, however, these IP-backed financierstake into account a borrower’s IP assets ortarget company’s (potential or actual) IPassets in structuring a financingtransaction. Variances in this model includeentities who deploy their own capital (andthus resemble IP investment firms) or whomaintain a network of technology-specificor industry-specific investors to whom theyrefer IP owners (and thus resemble patentbrokers).

IP Business Partners (cont’d)• Royalty Stream Securitization Firms - Entities providing a

consultation and/or capital to patent owners in performing IPsecuritization financing transactions. In such transactions, anentity sells their IP underlying the transaction to a bankruptcyremote entity or SPV, and the SPV grants a license back the IP tothe original owner. Then, SPV issues IP-backed notes/securitiesto investors to raise cash/fund for IP owner at the agreed-uponpurchase price. The notes are then backed by the expectedfuture royalties to be earned from licensing the underlying IP (tothe original patent owner and/or third parties). By this, theoriginal IP owner obtains funds raised at much more cheaplythan a loan backed by its traditional assets. The IP-backed notesare generally higher-rated commercial paper reflecting thequality of the IP and not necessarily the overall creditworthinessof the original IP owner.

IP Business Partners In Securitization

• Securitization - A technique that isolates income-producing assets from bankruptcy risk byassigning them to SPV which then issues debtsecurities payable from the cash flows generatedby the assets.

• Debt securities achieve ratings which are setaside from the rating of the sponsor (transferorcompany/institution). Issuance is made torespond to investor demand for differentmaturities and credit qualities. Normally, thehighest ratings can be achieved via wrappingsecurities with relevant financial guarantees.

IP Business Partners - Securitization Schematic Diagram

IP Business Partners -Securitization of SME Assets

• A means for encouraging theprivate sector credit with aflexible and efficient off-balance sheet funding source

• Reduce a cost of capital

• Diversify asset exposures

• Improve asset-liability management

• Eliminate credit constraints

• Overcome the agency costs ofasymmetric information whereone has information over theother

x • A

Y • B

Z• C

• D

IP Business Partners - SME Assets Securitization Implementation

• Germany: The securitization ofSME loan initiated in 1998 byDeutsche Bank followed byother commercial banks in2000 (Jobst, 2007). To reducethe financing cost of SMEs,KfW has been commissionedby the government toimplement the securitizationscheme to raise the financingfor SMEs.

• Japan: Securitization of SME loan is one of the program implemented by Japan Finance Corporation for Small and Medium Enterprise (Tsukahara, 2006).

• Malaysia: Securitization started in1986 when the government set up amortgage financing body calledNational Mortgage Corporation(Cagamas) to function as SPVbetween the house mortgage lendersand investors of long-term funds.Apart from mortgages securitized byCagamas, securitization for otherassets has not been very strong inMalaysia (Rosalan, 2008). Thetransaction is governed by theSecurities Commission Act 1993. In2001, SC issued Guidelines on theOffering of Asset-Backed Securitieswhich provides the criteria forsecuritization deals. In 2007,Cagamas pioneered the securitizationof SME loans via the issuance ofRM600 million credit-linked notes byits wholly owned subsidiary, CagamasSME Bhd. (Wan Azhar, 2007)

IP Business Partners - SME Assets Securitization Implementation

• Thailand: Secondary MortgageCorporation (SMC) established in 1997under the Royal Decree of SecondaryMortgage Corporation with its initialcapital of Baht 1,000 million, as a stateenterprise financial institution underthe Ministry of Finance with its majorobjective to develop the secondarymarket for housing mortgage loanunder the principal of assetsecuritization for fund raising activitiesfor the adequate and stable expansionof housing mortgage financing, and toexpand lending activities of housingloan market in order to resolve theproblems faced by the real estatesector during the country’s economicdownturn period.

• Scheme: SMC purchased a pool of housingloans from financial institutions in theprimary market, and securitized them byissuing Mortgage-Backed Securities which areto be sold to both local and foreign investors.The pool of loans will be transferred to SPVas established by SMC in order to segregatethe risk of pools of loans from SMC risk andloan originators. Then, SPV will issue MBSinstrument backed up by the said transferredpool of housing loans. Investors in MBSinstrument will receive both interest andprincipal repayment generated from cashflow stream collected from loan borrowersunder the specified terms and conditions.MBS can achieve a credit rating from ratingagency, and also to be attached with creditenhancement scheme, such as therepayment of loan interest and principal isinsured by reliable credit insuranceinstitution, to level up the confidence.

IP Business Partners (cont’d)

• IP Transaction Exchanges & Trading Platforms/IPTransaction Best Practices Development CommunitiesIn further attempts to make IP a more liquid assetclass, plans have been announced to create tradedexchanges (whether physical or online locations)similar to the NYSE and NASDAQ where yet-to-be-created IP-based financial instruments would be listedand traded much like stocks are today. Another variantinvolves an on-line trading platform where IP buyersand sellers can come together to execute transactionsbased on a set of agreed rules developed by a “bestpractices” steering committee composed of majorcorporate buyers and buyer-sellers.

IP Business Partners (cont’d) IP Exchange

• Innovation – a fast decaying rate of innovation/producthas forced the companies to learn as to how toaccelerate every aspects of businesses, particularly withIT business

• Speed once product was launched, a plagiarism prevails e.g. knock-

off and reverse engineering production, marketing campaign and distribution plans can

never last for six months but to be substantially shortened toonly, for example; 6 weeks, instead

• Protection – consideration angle of being worth theeffort of regional or global patenting

“If only two can be chosen out of the three,what’re yours based on economic aspect?”

IP Business Partners - Coase Theorem

• When looking at how to deal withprotection for intellectual property,we look at transaction cost, andthat is the Coase theorem. TheFreidman book clearly states thatcopyright protection is cheap andeasy to enforce, and patentprotection has high transactioncosts and is hard to enforce. Ifthere is a very small amount thatyou are copying, there is a hightransaction cost of gettingpermission. This just makes sense,the smaller affect that you willhave on revenues and profits, thelower the copyright holder’sincentive to get that lost revenuefrom you. It would take him time,in both finding where you copiedhis work and how many times youcopied it and for what purpose.

• Freidman looks at “how an itemmust be useful before it can get apatent”. No matter what to do inthe area of productivity, peoplehave very little incentive to comeup with uses for things, and ratherjust get as many patents as you canand then when someone discoversa use for it, you get paid. But thisruns into a problem in that no onewill be looking for uses. There is noincentive for it. This has been anexcellent chapter to read in the factthat it relates directly to both lawand economics, and we can usethe analytical tools it gives us forany other form of property rightsthat we want to look at.

IP Business Partners (cont’d) - IP Exchange

• The patent exchange idea: Implied valued –based patent tax is to be paid by IP owner to acentral IP market-making body to meet theadministration costs. By issuing a good-faithbinder, the 3rd party could challenge the IPvaluation at higher level. If agreed, IP ownerwill pay the patent tax at higher level in returnfor retention. Otherwise, the 3rd party will buythe IP at higher valuation on which the patenttax is based.

IP Business Partners (cont’d)

• University Technology Transfer IntermediariesThese are entities that functionas IP Development Companies,IP Acquisition Funds, LicensingAgents and/or Patent Brokers,but focus on the niche universitytechnology transfer (i.e.,licensing) market. The choice tofocus on the university marketby such entities is not surprisinggiven that in the 2011 fiscal year,U.S. universities and researchinstitutes spent over $61 billionin R&D, filed over 13,000 U.S.patent applications and had over$2.5 billion in licensing revenue.

IP Business Partners (cont’d)

• Defensive Patent Pools, Fundsand Alliances – Of several typesof defensive entities, one wasestablished in response to PLECand Institutional PatentAggregator/IP AcquisitionFund. In acquiring patents,entities focus on onetechnology/ industry segment.With a “catch and release”approach, this model results inmultiple operating companiesjoining forces to create anindependent entity toacquire

potentially “problematic” patents viaauctions, brokers or direct sale, andlicense them to willing entity to sharethe financial cost of acquiring thepatents and the managementoverhead of pool administration, andthen sell them at a profit. Another is“library fund,” where a group ofcorporate investors pool capital to buypatents that may be “of interest” tocertain large operating companieswho are known to be aggressive inasserting patent claims againstcompetitors. If the alliance membersare sued by one of these companies,they can “check out” the patents touse in a counterattack (not usefulagainst asserters who have noinfringement exposure.)

IP Business Partners (cont’d)

• Technology/IP Spinout Financing- best described as beingorganized as a traditional venturecapital (VC) or private equity firm,but specializing in spinning outpromising (non-core) IP which hasbecome “stranded” within largertechnology companies, orcreating JVs between largetechnology companies tocommercialize the technologyand monetize the associatedIP. Thus, the revenue is as sameas a traditional VC or PE firm –achieving a high ROI once aportfolio company is sold, goesthrough an IPO (Initial PublicOffer) or even evolves into an IPlicensing company.

• Analytics Software and ServicesFirms - Entities providing advancedpatent search and analytics softwaretools that allow patent owners,prospective buyers, attorneys,investors and other players in the IPmarketplace to obtain various duediligence intelligence and data pointsabout a single patent or patentportfolio. These software tools andplatforms provide varied outputsrelated to patent “quality” such asvalidity probabilities, maintenancefee-related life expectancies, variousinfringement-related metrics, priorart analysis, “related patent” analysis,citation-related metrics, etc. Theseentities earn revenue from puresoftware sales/licenses, as well asconsulting fees.

IP Business Partners (cont’d)

• IP Insurance Carriers - Typicalcommercial insurance underCommercial General Liability policiescarried by businesses do not cover IPclaims. Insurance carriers currentlymarket three basic types of IPpolicies:

– First-Party IP Coverage, whichprotects the value of an insured’sdirect loss sustained when itsrevenue streams are diminishedfrom a direct and resultantimpact upon its IP rights;

– IP Defense Cost (DefenseCoverage), which protects acompany against allegations thatit improperly used the IP ofanother; and

– IP Abatement Coverage(Enforcement Coverage), whichfunds an attack on a party thatimproperly uses the insured’s IP.

• What items can be insured?

IP-Rich Products’ future revenuestreams; Licensing Revenue;Royalty Receipts

IP “Value” – accounting principles

R&D Expenditure

Financial Investment

Loan Arrangement

Transaction involving IP rights, etc.

IP Business Partners (cont’d)

• Analytics Software andServices Firms - Entitiesproviding advancedpatent search andanalytics software toolsthat allow patent owners,prospective buyers,attorneys, investors andother players in the IPmarketplace to obtainvarious due diligenceintelligence and datapoints about a singlepatent or patentportfolio. These softwaretools and platforms

provide varied outputsrelated to patent “quality”such as validityprobabilities,maintenance fee-relatedlife expectancies, variousinfringement-relatedmetrics, prior art analysis,“related patent” analysis,citation-related metrics,etc. These entities earnrevenue from puresoftware sales/licenses, aswell as consulting fees.

IP Business Partners (cont’d)• Patent-Based Public Stock Index

Publishers – As an evolution of theestablished Analytics Software andServices business, once theentities offering these softwaretools and platforms realized thatnearly 80% of the value of a U.S.publicly-traded company nowcomes from intangible assets, andthat they possessed tools tomeasure the “quality” of arguablythe largest part of those IAs, it’sobviously that another potentialsource of revenue would be thecreation of formalized stockindexes based on their existingsoftware tools and platforms. Putin different terms, the analyticssoftware and services industry

theorized that investing in stockswith valuable patents may allowinvestors to commit a meaningfuland sustainable portion of theirassets to IP and allow them tooutperform other investmentstrategies. They sought outdifferent algorithms to createbaskets of stocks using the“quality” of a publicly-tradedcompany’s patents as the primaryselection factor. Revenue fromsuch an emerging business modelincludes the sale of equityresearch and the licensing of suchindexes to ETF, mutual fund andother investable financialinstrument issuers.

IP as a subset of Intangible Assets

• Intangible Assets are those encompassingdomains of Intellectual Capital (IC), IntellectualAssets (IA) and Intellectual Property (IP)

• Intangible Assets = IC + IA + IP, where

IC – Knowledge with potential for valueembodied in people, processes andcustomers that comprises reputation,goodwill, business relationships, customerrelations, licenses, branding and humanresources

IA – Knowledge providing value thatcomprise skills, know-how, inventions data,processes, market data, informationunorganized

IP – Knowledge legally identifiedcomprises patents (e.g. technology anddesign), know-how implemented,trademarks, copyrights, trade secrets,geographical indications

IP Parameters• Values defined by situation

• Bankruptcy – Fair Valuation

— Liquidation – assumes a distressed sale (appropriate when

debtor is dead or mortally wounded).

— Going concern – cash realized from a sale over a reasonable period of time.

• Fair Market Value

— Tax Definition

— Willing buyer and willing seller

— Neither under compulsion to buy or sell

— Both having reasonable knowledge of relevant facts

• Fair Value

— Definition for financial reporting purposes

— Current transaction between marketplace participants

— Both able and willing to transact

Value-Affecting Factors• IP - Cash Flow

– Revenues– Costs– Profits

• Remaining Life— Economic

— Statutory— Stage of Development

• Market/Industry Factors— Growing or Maturing— Competitive

Environment— Uncertainty/Risk

IP Economic Characteristics

Economic Characteristics• Not of a diminishing value by time of

exploitation

• Not always be restricted to a single user, butlikely to be applicable to multi-users, IP valuecan be managed on a multi-disciplinary basisto gain benefits as desired for all partners

• Not necessarily depend on IP asset-creatingor inventing investment cost, but rather oncommercialization ignition spark after projectcompletion, and perhaps or more likely to beassociated with other assets

• Be context specific (e.g. internaldevelopment, JV, sale or licensing) withrelevant time specific parameters (e.g.historical, current or potential)

• Devalued after achieving the saturation of S-Curve

Value Sources• Direct Use

— Manufacture and/or Marketing of Products

• Indirect Use— Strategic Alliance/JV Opportunities

• Licensing/Sale— Additional source of revenue

• Strategic/Defensive— Building up higher entry barrier

against competitors• Tax

— Built-in-gains to offset 382 limitations /197 benefits /Donations

Patent Rights• A patent gives the patent owner

the "exclusive right" to stop othersfrom making, using, selling oroffering for sale the product, orprocess of making the product, thatis described by the patent claims. Itis important to note that a patentdoes not give the patent owner theright to exploit the patentedinvention himself. The patentowner has only the "exclusiveright" to stop others from doing so.

• In other words, just because youobtain a patent on your productdoes not mean that you canactually use the product. You maybe blocked by an earlier patentowner who exercises the "exclusiveright" granted to him under hispatent. This is an importantdistinction and the followingexample will help to explain it.

•

Suppose the invention covered by your patentis a chair with four legs, a seat, a backand a pair of rockers -- a rocking chair.Under your patent, you have the exclusiveright to stop others from making, using,selling or offering for sale your patentedrocking chair. Assume the rockers on yourrocking chair are unique and covered byan earlier patent to someone else. Therocker patent owner has the exclusiveright under his patent to stop others(including you) from using his patentedrockers. Use of the patented rockers onyour rocking chair would constituteinfringement of the rocker patent.

So while you received a patent for yourrocking chair, you will not be able toactually make, use, sell or offer for salethe chair without first obtaining permissionfrom the rocker patent owner. The rockerpatent owner is not required to give youpermission, however, and can keep yourrocking chair off of the market if hechooses to do so. It might make bettersense for the rocker patent owner toparticipate in your success by giving hispermission in exchange for a licensingfee.

Patent Pooling

• The patent system has beenrecognized of negativeoutcome on account of beinga tool more likely to stiflethan protect innovation. Thisnegative sentiment stemmedfrom the recent victory ofApple over Samsung.

• As for the future role andefficacy of the patent system,product and technologylicensing is not anathema(vehement disagreement) tothe qualities of fairness andtransparency.

• Patent pooling is a proven,effective tool that helps the

industry better manage itspatent licensing. By “pooling”patents from many licenseholders, licensors are likelyable to lower transactioncosts and administrativeoverhead, and benefit from acentralized model thatencourages patent bundlingand fair play. Licenseeslikewise enjoy advantages inthe form of lower royalty feesand a single point of contactthat eliminates the need tonegotiate separately withmultiple license holders.

IP ValuationCharacteristics

- IP assets are of intangible unique characteristics with their inherent values, depending upon: – Widely varying terms &

conditions – Inherently dissimilar – IP transfers are often

motivated by unique strategic considerations

– Details of IPR transfers are usually not widely disseminated

IP Valuation- not much a matter of science

but rather a matter of art orexternal judgment:– Purpose – Why are we

valuing the asset? – Description – What is the

asset?– Application – How will the

asset be used? – Standard – Who is the

assumed buyer of the asset?

IP Valuation

• IP valuation is involved inthe process itself with IPdriving parameters (e.g.market share, barriers toentry, legal protection, IP’sprofitability, industrial andeconomic factors, growthprojection, remainingeconomic life and newtechnologies).

• The process is concerned aboutgathering of information and in-depth understanding of economy,industry and specific businessthat directly affect the IP value.

• Information are used forstructuring a financial model thatcan generate the specific valuesbased on internationally-accepted standards (e.g. USPAP,IVSC, GAAP, IFRS and FASB),where either or combination ofthe following approaches aretaken into account, that is, costapproach, market approach,income approach, directapproach, and pay-off approach.

IP Valuation • Monetization and valuation

are indispensable to each other from basic marketplace to complicated one.

• Sale, licensing, with somevariation or combination ofsale and licensing are basicpart of IP monetizationamong large, medium andsmall companies and amongnon-practicing entities usingvarious IP business modelsin the marketplace.

• Known IP business modelsare auction and IPinfringement insurance in

their certain marketplacesin which patents staydominant.

• Other IAs like brand loyaltyand customer relations willdefinitely help driving theacquisition activities inwhich intellectual capitaland skills of humanresources are specificallytargeted in the advancedtechnology sector like IT.

IP Valuation• A monetization is mechanized in

debt-financing marketplace, withan exchange between revenuestream as generated by thepledged income-producing IP andfund or loan as provided by IPfinancier.

• A securitization is invented to issuea note/bond secured with revenuestream as generated by the subjectIP in return for a fund frominvestors. Bowie Bonds is forexample.

• As IP valuation is rather art prone,not only a valuation of variant IP’sinherent uniqueness, but itstransferability course of action isalso concerned with uncertainties

prevailing in many circumstancese.g. valuations of patent portfolioor trademarks for a brand.

The following are challenges indetermining IP value:

Lack of data consistency andaccuracy

Lack of patent-relatedmetadata e.g. data supportingthe apparent data orconfiguration data

Limited legal linkages

Patent and non-patentreference visibility

Lack of standard or acceptedmetrics

IP Valuation• IAs generate incremental returns for

the business either through revenueincrease or cost reduction, whereasmost of the IP valuation methodsemphasize a capturing of the valuesof those additional returns.

• IP valuation approaches:– Market approach – comparable

market transactions needed– Cost approach – using main costs

and associated costs assumed in replacement or reproduction of the subject IP asset, and its depreciation

– Income approach – determining the income of IP asset by also taking into consideration anticipated utilization expenses besides its revenue generated

– Excess operating profits –determining the additional profits pertinent to IP possession

compared to competitors who do not.

– Premium pricing method –figuring out the price difference between a branded and unbranded product, net of marketing or supporting costs to achieve the revenue.

– Cost savings method –calculating the present value of the cost savings anticipated from IP ownership

– Royalty savings method –assuming the non-ownership scenario where the business needs to license it to earn the returns that it is earning.

– Pay-Off Method (POM)

IP Valuation

IP Valuation for Financial Reporting

• Being essential for fulfillingvarious information asdemanded by the interestgroup or investors.

• If it just provides informationabout the company itselfcovering an ability to createprofit, cash flows and changeson capital, as well as itstangible and financial assetsand liabilities.

Where are the intangible assets?

What the real value of the company in focus is?

• Lack of relevant informationon intangible assets (includingintellectual assets) will disablethe possibility for investors orexternal users to perceivereal value of the company andadequate decision making.

IP Valuation for Financial Reporting (cont’d)

What criteria should be accepted?

• Too rigid - results in undervalued pricing with respect to market price

• Leniently – results in over-pricing

U.S. Financial Accounting Standards Board (FASB) – 2001

Generally Accepted Accounting Principles (GAAP)

IP Valuation As A Transaction Strategy

• A strategic valuationof IP is renderedwhen consideringbuying, selling,assigning ortransferring theasset in a licensingarrangement oracquisition.

• Transaction strategy often ends with ‘go on’ or ‘stop’ recommendation.

• That is, at what price to enter into this proposed transaction?

IP Valuation in Financing

• Information and Data Required

a) What are the expected annual revenues from licensing and other contractual arrangements?

b) What historical revenue numbers are available to support these future projections?

c) What is the term over which these revenues are expected to be received, and will the

d) y diminish or increase over time?

e) Provide a proforma scheduleshowing theseprojectedrevenues over the

expected term ofreceipt ; identifythe licensees orother obligorswhich will beresponsible forthese revenues,and show how therevenues shownon the pro formaare allocatedamong thesevariouslicensees/obligors

f) Provide a briefsummary of thelicenses or othercontractualarrangementsunder which theserevenues arepayable, including,inter alia, for each,

Financing: Anincreasing area ofactivity is thefinancing of IP assets.This can be achievedthrough a number ofways, includingborrowing against thelicense stream (similarto Factoring) of IP

IP Valuation

• Assets that may be valued using the cost of creation method include:

– Internal Software

– Patents

– Trademarks

– Copyrights

– Subscriptions

– Customer lists

– Service contracts, etc.

Cost of Creation — Thecost of creation method ofvaluing intangible assetsrelies on calculating what itwould cost anotherbusiness to duplicate agiven asset today. Thismethod does not measurean asset’s future impact onprofits; it merely looks atwhat it would cost tocreate the asset fromscratch at a particularpoint in time.

IP Valuation –Cost-based

method

Disadvantages– There is no direct correlation between cost

of development and the future revenuepotential of assets. IP that costs the most toproduce may not necessarily be the mostvaluable.

– Likewise, IP which is many years old and hasbeen written down in value could still be themost valuable to the company, even thoughthe historical cost approach does not showthis. The measure of historic costs isunreliable with rapid technologicaladvancement.

– It is not always possible to provide accurateinformation on the resources spent ondevelopment and there will always be apractical challenge to determine which coststo include or exclude.

– Cost-based methods make no allowance forthe future benefits which might accrue fromthe IP.

Advantages

- IP becomesvisible in thecompany’s books

- IP awareness isincreased.

- Regarded as auseful indicator ofIP value in thecase of IP assetswhose futurebenefit is not yetevident.

IP Valuation –Cost-based Method

When are they used?

They are generally used inaccounting, bookkeeping and inaccordance with accounting rules.They are only useful for bookkeepingpurposes or as a supplement to anincome approach. They are onlyrelevant in historical cost-basedaccounting systems or wheretaxation methods dictate their use.

IP Valuation – Income–Based Method

• Capitalization of Income or SavingsMethod — The capitalization methodmeasures the future benefitsintangible assets will bring to acompany, when those benefits will begenerated and for how long. Thecapitalization rates used in thismethod should reflect the riskassociated with the intangible assetbeing valued.

• In addition to the income an intangibleasset may bring to a company, thebenefits may also include savings tothe company as a result of owning theasset, or not having to pay a royalty tosomeone else who owns the asset orof efficiencies generated by the asset.

• Assets that work well with this method include:

– Trade names

– Customer lists

– Commercial Software

– Patents

– Trademarks

– Brand names, etc.

• The capitalization method works wellfor all of these assets when they arerelatively new. As they come closer tothe end of their economic usefulness,however, other methods of valuingthem may become more appropriate.

IP Valuation – Income-Based Method

• Advantages

– It is simple to assess thevalue on the basis of theconditions set up. With thelikely availability of many ofthe required inputs from thefirm’s financial statementsand market information itmay be possible to identifyand or forecast particularcash flows.

– In specific circumstances thismethod is useful, especially ifthere are suitablecomparable transactionsinvolving third parties orindustry standard royaltyrates.

• Disadvantages– Although the methods are conceptually

robust, they can prove difficult to implementin high-uncertainty environments. This taskalways includes some uncertainty andsubjective assumptions.

– There are both uncertain and distant cashflows and the discount rate have to beestimated. For example, there is rarely anexperience base when estimating themarket potential and therefore cash flow ofearly stage IP developments.

– All risks are summed together andassumed to be appropriately adjusted for inthe discount rate and the probabilities ofsuccess, rather than being dealt withindividually (such as legal risk, technologicalrisk etc.).

– A significant drawback of the relief fromroyalty method is that a royalty rate canalways be assumed, when in reality it maynever materialize.

– It ignores changes in the time value ofmoney and maintenance Cost.

– Does not account for market demand.

IP Valuation – Income-Based Method

When are they used?

• Income approach to IP valuation is onlyaccurate if the following variables areavailable or can be accurately estimated:– an income stream either from product sales or

license of the IP

– an estimate of the duration of the IP’s useful life

– an understanding of IP specific risk factors forincorporation into the valuation and a validdiscount rate.

IP Valuation - DCF

• Discounted Cash Flow — The discounted cashflow method is good for assets withpredictable life spans and future financialbenefits, including:– Contracts (current and future yearly benefits);

– Subscriptions and service contracts; and

– Patent royalties.

• The DCF method can be applied to savingsflows as well as to income flows.

Exhibition on DCF Calculation

The sources of risk are the revenue growth rate and the variable costs as a percentage of sales.The average of the DCF is known as the net present value (NPV) and standard deviation as volatility. The results show that the average DCF is positive (about 40), whereas the probability of a negative DCF is about 15%. The decision as to whether to proceed or not with this project will therefore depend on the risk perspective (tolerance) of the decision-maker. This example has also been extended to calculate the distribution of bonus payments on the assumption that a bonus is paid whenever the net DCF is larger than a fixed amount (such as 50).

• 1 2 3 4 5 6 7 8 9 10• Revenue 100 105.0 110.3 115.8 121.6 127.6 134.0 140.7 147.7 155.1• % growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% • Average 5% 5% 5% 5% 5% 5% 5% 5% 5% • S.D. (Volatility ) 8% 8% 8% 8% 8% 8% 8% 8% 8%

• Fixed Cost 35 35 35 35 35 35 35 35 35 35• Variable Cost 50 53 55 58 61 64 67 71 74 78• Variable Cost 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% • min 48% 48% 48% 48% 48% 48% 48% 48% 48% 48% • ml 50% 50% 50% 50% 50% 50% 50% 50% 50% 50% • max 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%

• Profit/Cash Flow 15 17 20 22 25 28 32 35 38 42

• DCF 12% 139.6• Investment 100• Net DCF (NPV) 39.6 Average N/A• p(<=0) N/A• Bonus limit 50• Bonus 0.0 p(>0) 37.4

IP Valuation - DCF Method

• Limitations of DCF MethodsUse of DCF based method can become

inordinately complex when; In situation where a decision may have to be

taken continuously

The discount rate need to change continuously

varying with underlying IP asset value and time

Proponents of use of real option methods for IP

valuation argue DCF based methods do not addressissue of managerial flexibility

Monte Carlo Method

• Monte Carlo method isunderstood as anytechnique of statisticalsampling employed toapproximate solutions toquantitative problems.

• Evaluates how possible future outcomes can affect a current decision.

Assign appropriate probabilities to different outcome

• Very useful in considering IP withno prior commercialized trackrecord (new or unique in themarket)

• Useful in considering intrinsicuncertainty in underlying earningspotential of IP asset

• Based on DCF method

• Usually used in income

projection sensitivity analysis

• Addresses a situation where more than one analysis variables are related e.g. price of product/service and market penetration

• Each simulation exercise one or more variable is changed

Monte Carlo Method

• Procedural Process– Identify inputs (e.g. market

size, cost of goods sold)– Identify useful life time– Choose discount rate– Choose minimum,

maximum– Prescribe randomness

through distribution (e.g. uniform, normal, triangular, etc) and probability

– Enter into model– Run sensitivity analysis– Make a decision

• Variables used– Capital investment needed to

develop a technology– Time needed to deliver

product to the market– Potential market size– Potential product/license

revenue

• Sensitivity analysis is useful inhighlighting key uncertainty

• Identifying such uncertaintyprovide an opportunity to reducethem which greatly improvesquality of prediction

Monte Carlo Method

Challenges – More complex in

manual computation– Prone to be Garbage-

In Garbage-Out (GIGO)

Benefits– Able to identify

probability of specific outcome

– Able to identify variables which have influence in the model (e.g. net present value)

– Add more flexibility to the model

– Obtain clear charts and reports

IP Valuation –Option Pricing-Based Method

Option pricing based methods

The theory behind option pricing wasprimarily developed for use in pricing financialoptions but can also be applied to a numberof other situations other than directlyfinancial assets. The valuation of IP still indevelopment or being commercialized is onesuch framework. Option based methodsessentially belong in the income basedmethods category as they too use expectedfuture cash flows to measure value.

The basic definition of an option is a right butnot an obligation, at or before some specifiedtime, to purchase or sell an underlying assetwhose price is subject to some form ofrandom variation. Options are priced usingthe Black-Scholes option-pricing model,which is a mathematical model for thevaluation of options.

Real Options Method (Non-financial Options)

Real (non-financial) optionvaluation methods treat thedevelopment as well ascommercialization of IP as a seriesof options. As the IP is developedand commercialized, manydecisions about investmenttiming, when to patent,abandonment, direction ofresearch etc. must be made. Theinformation to make thesedecisions is often not available atthe time of valuation, butbecomes available later. The realoptions method, using the Black-Scholes model, takes into accountthe flexibility of these futuredecisions.

IP Valuation - OPTBlack-Scholes Model

IP Valuation OPT vs Real Option

OPT• Time to expiry • Exercise price of the

financial option on share • Current price on the

underlying share• Standard deviation of

the underlying share return

• Risk free interest rate

Real Option• Time to invest in• Investment cost of

real option project• Present value of

project cash flows• Standard deviation of

project value (volatility)• Risk free interest rate

IP Valuation – Option Pricing-Based Method

Advantages It incorporates the value

associated with the uncertaintyand accounts for the flexibilityinherent in the development of IP.The value associated with theuncertainty of cash flows and theability to manage thedevelopment of the IP isaccounted for. Like the DCFmethod it values the stream ofcash flows but it also accounts foracquired knowledge. As a result, itprovides a more completeevaluation than the DCF as itcaptures more than simply cashflows and static costs.

Disadvantages

The main disadvantage of thereal options method is thecomplexity of the model. It isdifficult to understand and theevaluation can be costly toperform. Some experts doubt theaccuracy of options based modelsfor use with real investmentssuch as IP. The main argumentsare that option based modelsover-value IP through theinclusion of non-viabledevelopment as well ascommercialization decisions.

IP Valuation – Option Pricing-Based Method

When are they used?• The real options method is

applicable when confronting ahigh degree of uncertainty orbeing in the situation ofcomplexity, adding somemanagerial flexibility, and not allthe information is known at aparticular time.

• Based on Black-Scholesmodel used in valuing optionson financial assets.

• It is increasingly used in thebiotechnology as well aspharmaceutical industries andearly stage IP developments.

Conclusion• Monte Carlo Simulation

uses a random number generation to simulate reality

• Possible to generate thousands possible scenarios

• Made easy by availability of software packages

IP Valuation –Market-Based Method

Auction In a perfect auction, there aremany potential buyers with perfectinformation about all aspects of the IP.The value of the IP is determined by theprice reached through bidding.

Comparable market value The value ofthe IP is given by comparison with similarcomparable independent IP or similartransactions.

Comparable royalty rate Market basedvaluation methods may also be based onthe comparison of royalty rates usedwhen licensing similar IP. Many sectorsoften use industry averages as a basis forsetting royalty rates in licenseagreements or in establishing damagesin litigation. The value of the IP is giventhrough the comparison of the subject IPwith the royalty rates in similar licenseagreements.

Market-based methods valueIP through comparison withprices achieved in recentcomparable or similar IPtransactions betweenindependent parties.Observing the prices ofcomparable assets tradedbetween parties in an activemarket gives a value to thesubject IP. The idea behindthese approaches is that themarket decides the accurateprice and therefore the valueof the IP. Market basedmethods include IP auctions,comparable market andcomparable royalty ratemethods.

IP Valuation – Market-Based Method

Advantages Observing the market is a relatively straightforward valuation method. It is useful to check the validity of other approaches.

Disadvantages - Lack of IP markets and information- Uniqueness of IP makes direct comparison difficult

Disadvantages (Cont’d)

- There is a risk of comparing the subjectIP with other IP which has been tradedbut which has still not been utilized in fullstretch. In these cases the IP can beundervalued.

- When royalty rates are compared, thereare also some potential distortingproblems. Royalty rates set using returnsto R&D costs, return on sales figures orindustry averages run the risk of valuingcosts or other factors rather than value.

- Search for a comparable markettransaction is futile

– Lack of compatibility

– IP transactions are part of a largertransaction and details are keptextremely confidential, it is neverpossible to find a transaction

IP Valuation – Market-Based Method

When are they used? Market based methods are useful when a market value is

required for any given subject IP. These methods require anactive market, a comparable exchange of IP between twoindependent parties and sufficient access to transaction priceinformation.

There are limited formal markets for IP and the relevantpricing information is not usually public. As a result, the use ofthe comparable market value approach to valuing IP is rare. Theuse of comparable royalty rates are more widespread, especiallyas databases of industry royalty rates and comparabletransaction information have been collated by larger IP right-holders and independent companies offering valuation services.

In the future, when IP markets become active and public, theuse of market based approaches can become more established.

IP Valuation – Royalty Savings Method • Execution of the Royalty Savings method in a scenario of M&A

-- Select an appropriate royalty rate (as a percent of revenue)• Search for agreements regarding the licensing of comparable technologies• Review of the royalties paid as for the use of the comparable technologies,

and a comparison relative to the insured patent• Analyze the company’s excess earnings, and hence its ability to pay a

royalty and still generate a fair return

– Project the expected future annual revenue attributable to the IP;

– Calculate the royalties that the owner is relieved from paying bymultiplying the projected annual revenue by the royalty rate;

– Reduce the royalties by the taxes that would be due on theincremental profit created by the relief from paying royalties;

– Discount the after-tax annual royalty savings to present value at theappropriate discount rate;

– Sum the discounted after-tax royalty savings to estimate the value ofthe Intellectual Property.

IP Valuation – Royalty Savings Method

• Execution of the Royal Savings Method under a scenario of owning IP and in a development process for technological feasibility or market commercialization .

– The application of this approach is in the same manner asdetailed in the M&A scenario, with the exception ofprobability weighting the expected future royalty incometo reflect the uncertainty associated with the projectachieving technological feasibility.

– Application of this approach assumes that the ownerwould license the rights to the IP in exchange for futureroyalty payments to a third party during or at the end ofthe R&D phase, rather than commercializing andmarketing the completed product using its own resources.

IP Valuation – Pay-off Method (POM)

• POM is an analysis method that is suitable for cases, wherethe value information is in the form of scenarios. It is aboutthe way to create a distribution from values of, usuallythree value scenarios, minimum possible value scenario,and maximum possible value scenario.

• Observe that the best guess scenario is the most likely oneand assigning it full degree membership in the set ofexpected outcome. Decide that the maximum possible(optimistic) and the minimum possible (pessimistic)scenarios are the upper and lower bounds of thedistribution. Do not consider values higher than theoptimistic scenario and lower than pessimistic scenario.Assume the shape of the POM distribution is triangular.Calculate a real option value for the patent under analysisdirectly from the pay-off distribution by using fuzzy pay-offmethod for real option valuation.

IP Valuation – Qualitative Evaluation Method

• Qualitative evaluation methodsprovide a value guide for thesubject IP through the ratingand scoring of different factorsrelated to the IP. These factorsor “value indicators” caninfluence the value of the IPboth positively and negatively. Patent information related

value indicators used tosuggest the existence of strongcorrelation between patentvalue and standardizedindicators observable in patentinformation documents.

Evaluation of value indicators:IPScore is used to valuetechnology, patents and patentportfolios internally, withincompanies. The tool provides a

framework for evaluating andstrategically managing patents.It consists of five categories:legal, technology, market,finance and strategy, each ofwhich has 5-10 associatedindex questions. Each questionrelates to a different valueindicator. Each question is rated1-5 according to the patentsstrengths and weaknesses.

Together, the 40 or so valueindicators form a whole pictureof the patent and its relativerisks and opportunities. Theseare then displayed in varioustables and graphical forms tobe used by management formaking strategic decisions.

IP Valuation – Qualitative Evaluation Method

• Advantages

- Simplicity is the main advantageof patent information related andnon-patent value indicators. Oncethe relevant information has beenresearched and is available in auseable form its relatively easily toclassify and evaluate the IP withoutthe need for complex methods.

- Data for the evaluation is oftenpublicly available. With sufficientexpertise it is possible to value IPbelonging to other parties. As aresult, these qualitative methodsfacilitate the comparison andranking of IP within a company’sown portfolio or againstcompetitors’ IP.

• Disadvantages

- Valuing IP using patent informationrelated value indicators have manydrawbacks. For example simply countingcitations avoids taking a stand onquestions such as how and why citationsarise and what type of information theyconvey. Focusing on simple countsdeliberately ignores any addedinformation within the network ofcitations. Using value indicators as a proxyfor value is only as useful as the level ofexpertise of those who are conducting thevaluation. One must also decide whichindicators are relevant to the value of aparticular IP, and which are not. Thequality and realism of the qualitativeevaluation in IPScore, for example, isgreatly dependent on the quality ofinformation used.

IP StrategyTo optimize the value

of IP assets, valuecreation functioncan be simplyformulated whereprofitability restsupon price andcost mechanism.The price will berising on accountof strategicmanagement suchas productuniqueness,productdifferentiation,monopolisticcompetition,higher barrier toentry, innovationand branding.

Cost savings canbe achieved ifgranted taxincentives andother taxprivileges, and dueto economy ofscale and skilledwork force.

Σ Profiti

= (Pricei – Costi)

x Volumei

IP StrategySWOT analysis providesself assessment throughinternal audit that revealsstrengths and weaknesses,while taking opportunitiesfrom the external factorslike technological progress,government laws andregulation, life styles,demography, political andeconomic situation; andescaping the risks from IPinfringement, the act ofnot pursuing IPcircumvention andplagiarism.

Qualitative evaluationmethods are most oftenused for the purpose ofinternal IP management.They are most useful forcomparing, categorizingand ranking IP within aportfolio or vis-à-viscompetitors’ IP. They arealso useful for assessingthe risks and opportunitiesof IP.

IP Audit

IP audit is a strategicexercise where IP assets areto be inventoried and thenmapped against the currentbusiness and futurestrategic priorities. Withinan audit process through aclassification or taxonomy,IP assets will be categorizedin manner that actionableinformation is provided forIP asset optimization bymeans of technical analyses(e.g. SWOT).

Taxonomy can assist theCompany in determining theextent to which current andfuture products areprotected (e.g. to identifythe existence of strategicgaps in the portfolio andpockets of non-core IP), andfurther performingcompetitive assessment(e.g. to determine theposition and trajectory ofrivals’ portfolios).

IP Audit (cont’d)

understanding entire business strategy to align IP

strategy with business goals

to identify key target markets, products and technologies

IP assets identification To ensure not

missing all relevant IP assets

IP assets categorization Using

taxonomy to assess the strength and relevancy of IP

IP assessment competitive

(e.g. SWOT, GAP, trajectories)

opportunity (e.g. licensing and sale, utilization across SBUs) and risk (e.g. litigation)

process and control (e.g. best practices, strategic patenting, licensing compliance)

IP audit process which is used to support the IP business plan needs these essential steps of action:

Thank You