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ip4inno Module 4D i
IP Valuation
Name of speaker
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Venue & date
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ip4inno is brought to you by:
• European Commission, DG Enterprise & Industry
• European Patent Office
• 19 consortium partners in the first ip4inno project
This particular module was written by:
• Bay of Thermi Ventures www.bayofthermi.com
• European Institute for Enterprise and
Intellectual Property (IEEPI) www.ieepi.org
with funding from the EC and EPO
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The Disclaimer!
This training material concerns intellectual property
and business strategies only in general terms.
This training material should not be relied upon
when taking specific business or legal decisions.
Rather, professional advice should be obtained
which suits the circumstances in question.
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IP Valuation
I.
II.
III.
IV.
Why to evaluate Intangible Assets?
The Different Valuation Methods
Factors to Keep in Mind
Exercise: Microtech Systems
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1) What are Intangible Assets? (1)
Allocation of the entreprise value (%)
Tangible assets
Buildings
Vehicles
Equipment…
Tangible assets
Goodwill
Other intangible assets
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Intangible assets
Human capital
Goodwill
Know-how
Trade secrets
Patents
Trademarks
Copyright
Design
Ernst & Young 2009
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1) What are Intangible Assets? (2)
Goodwill
Other intangible assets
Tangible assets
Ernst & Young 2009
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2) The Notion of Value
Value ≠ Price
• Price: result from the transaction seller / buyer
Willing Buyer
(Licensee)
€€€€
Willing Seller
Property
(Licensor)
• Value: how much people are ready to pay
Owner value: estimate of the value by the owner if he was
deprived of the property of the item
Purchaser value: how much the buyer could pay for it
Market value: value ≈ price of similar items already sold
Fair value: transaction equitable for both parties
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3) IP Value (1)
a) Why Valuing Intellectual Property?
Litigation
Resolution
External reporting
and accounting
Taxation
Planning
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Sales and
Licensing
Company
Valuations
Internal
Management
Raising
Finance
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3) IP Value (2)
b) Who Needs to Understand IP Valuation?
IP Valuation carried out by a broad range of stakeholders:
• Patent owners
• Technology Transfer managers
• Business management
• Investors / Banks
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4) Importance of IP Value
Influence of IP Value-Related News Events:
example of RIM share value variation during a patent suit
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USD per share
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H
B
A
F,G
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E
24
C
22
20
D
18
2005
Apr
May
Jun
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Jul
Aug
Sep
Oct
Nov
Dec
2006
Feb
Fev
Mar
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5) Fictional example: New IP for Skis
• Fictional company Ski-Tech
SA is a small-sized
materials development
company, specializing in
skiing technology
• Patented innovative “FlowRide” elastic material.
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IP Valuation
I.
II.
III.
IV.
Why to evaluate Intangible Assets?
The Different Valuation Methods
Factors to Keep in Mind
Exercise: Microtech Systems
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1) Overview of the Different Methods
Cost-based
Income-based
Market-based
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2) Cost-Based Methods (1)
a) Definition
• The pricing of an asset is based on the cost of
developing the technology asset
• Cost considerations usually include:
– R&D: salaries, materials & equipment
– IP protection
– Trials, testing and prototyping
– Marketing & advertising
– Cost of capital
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2) Cost-Based Methods (2)
b) Capitalization of Historical Costs
• How much was spent to develop technology
• Problems:
– R&D costs are difficult to count (Which personal
costs? Over which period of time? Including failures?)
– How to take into account inflation
– Cost ≠ potential value
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2) Cost-Based Methods (3)
c) Replication / Replacement Costs
• Value of total costs to replace or re-create similar
technology that may already exist
• Value paid ≤ cost of re-developing it
• For the buyer:
– avoids development effort
– minimises risk
– Avoids costs related to a
delayed market entry
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Option value
of licensing
License
expenditure
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2) Cost-Based Methods (4)
c) Replication / Replacement Costs
Practical considerations for the buyer




Can you re-develop a unique, protected asset?
Have development costs changed?
Does a license secure freedom to operate?
What is the cost of delayed time-to-market?
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2) Cost-Based Methods (5)
d) When to Use the Cost Approach
• When the asset is at very early stage of development
• When IP is easy to “design-around”
• Bookkeeping
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3) Market-Based Methods (1)
a) Definition
• Value is based on the transactions of other
purchasers & sellers in the marketplace
• Licensee/buyer is not willing to pay more than others
have paid for similar IPRs
• Fair value of a patent = Price paid in comparable,
“arm’s length” transactions
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3) Market-Based Methods (2)
b) When to Use Market Approach
• When you can find sufficient transaction information
• Similar transactions: IPR type, industry, market size
Comparison considerations:
• Technology: technical features, stage of development
• Specific clauses, financial terms
• Background: economic conditions, position of the parties
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3) Market-Based Methods (3)
c) Where to Find Transaction Data
•
•
•
•
•
•
•
•
Company web sites, Industry presentations
Company annual reports
Online databases www.Royaltysource.com, www.Windhover.com
Securities filings: SEC (US), FSA (UK)
Licensing specialists
Licensing Executives Society (LES) www.lesi.org
Royalty-rate journal: Licensing Economics Review
Court records
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3) Market-Based Methods (4)
percentage of commercial value
d) Impact of Technology Development Stage
Future successful technology
(2 to 3% of total concepts)
100%
80%
60%
Failure
for 98% of
total concepts
40%
20%
0%
Laboratory
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Detailed Design
Pilot/Prototype
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3) Market-Based Methods (5)
e) Fictional Example Market Approach: Royalty Rate
Technology
Licensor
Licensee
Royalty Base Low
High Median
F1 Fiber Cross-Hatch
for Ski Core
W
X
Gross
Revenue
3%
3%
3%
Plasma Ski Edge
System
Y
Z
Sales
4%
5%
4.5%
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3) Market-Based Methods (6)
f) Fictional Example Market Approach: Price Per Patent
Technology
Patent Life No. of
Price per
at Time
Patents Patent ($)
Patentee
Buyer
Terms ($)
Ski Core
Dampening System
for alpine skis
A
B
1.8 M
6 yrs
3
600K
Parabolic Skate
Blade for roller
blades
C
D
2.4 M
12 yrs
4
800K
Average Price Per Patent
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700K
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4) Income-Based Methods (1)
a) Definition
IPR Value
=
Ability of Technology to
Generate Future Income
Fair Value of Patent = Present Value of the expected
future income (cash flow) stream
Three key parameters:
1. Amount of the income stream
2. Duration of the income stream
3. Risk associated with the realization of the income
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4) Income-Based Methods (2)
b) Discounted Cash Flow
Discounting with an adjust Risk Rate
Time
t0
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4) Income-Based Methods (3)
b) Discounted Cash Flow
t1
t0
t2
tn
PV = I1(1+r)-1
PV = I1(1+r)-1 + I2 (1+r)-2
PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3….+ In(1+r)-n
PV = Present value of IP asset
I = Economic income projection
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n = Year
r = Risk-adjusted discount rate
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4) Income-Based Methods (4)
c) DCF Derived Methods
• Excess Earnings
total value of a Business
– value attributable to net tangible assets
= value of intangible assets
• Relief from Royalties
volume of sales
x royalty rate
= royalty revenue saved
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Forecasts
of future
revenues:
discount
rate
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4) Income-Based Methods (6)
d) IP Option Value
• Investments in patents and technology often provide value by
creating the option to invest additional funds at a later time if the
opportunity appears attractive
• The option value created through investments in patents and
technology can be estimated using decision-tree analysis and
option pricing models.
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4) Income-Based Methods (7)
e) IP Option Value: Decision Tree Analysis
Probability
Payoff
High Market Demand
25%
Probability = 80%
€ 1500
High Market Demand
Probability = 40%
Low Market Demand
Probability =25%
20%
Invest €1000
Low Market Demand
Probability = 60%
High Market25%
Demand
Probability = 50%
Low Market Demand
25%
Probability = 50%
1 chance out of 4 to obtain a capital gain
Intuitive decision is not to invest
 Rational decision?
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€ 1000
€ 750
€ 500
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4) Income-Based Methods (8)
e) IP Option Value: Decision Tree Analysis
Probability
Payoff
Expected
Payoff
High Market Demand
25%
Probability = 80%
€ 1500
€ 375
€ 1000
€ 250
€ 750
€ 188
€ 500
€ 125
High Market Demand
Probability = 40%
Low Market Demand
Probability =25%
20%
Invest €1000
Low Market Demand
Probability = 60%
High Market25%
Demand
Probability = 50%
Low Market Demand
25%
Probability = 50%
Expected value = Expected payoff – Investment
€ 938 - €1000 = -62
Rational decision is not to invest
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€ 938
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4) Income-Based Methods (8)
e) IP Option Value: Decision Tree Analysis
Probability
Payoff
Expected
Payoff
High Market Demand
35%
Probability = 80%
€ 1500
€ 525
€ 1000
€ 250
€ 750
€ 188
€ 500
€ 75
High Market Demand
Probability = 40%
Low Market Demand
Probability =25%
20%
Invest €1000
Low Market Demand
Probability = 60%
High Market25%
Demand
Probability = 50%
Low Market Demand
15%
Probability = 50%
Expected value = Expected payoff – Investment
€ 1038 - €1000 = 38
Rational decision is to invest
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€ 1038
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4) Income-Based Methods (9)
e) IP Option Value: Decision Tree Analysis
Period 1
Period 2
High Market Demand
Probability = 80%
Payoff
Expected
Payoff
€ 1500
€ 480
€ 1000
€ 80
€ 750
€ 225
€ 500
€ 150
High Market Demand
Probability = 40%
Low Market Demand
Probability = 20%
Invest €1000
Low Market Demand
Probability = 60%
High Market Demand
Probability = 50%
Low Market Demand
Probability = 50%
Expected value = € 935 - €1000 = -65
Rational decision is not to invest
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€ 935
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4) Income-Based Methods (10)
f) IP Option Value: Decision Tree with Option
Period 1
Period 2
Expected value = 2055- 1500 = 555
Rational decision is to invest
Payoff
Exp.
Payoff
High Demand
Probability = 80%
€3000
€960
Low Demand
Probability = 20%
€ 2000
€160
High Demand
Probability = 80%
€ 1500
€480
Low Demand
Probability = 20%
€ 1000
€80
€ 750
€225
€ 500
€150
Invest € 500
High Market Demand
Probability = 40%
Do not invest
Invest €1000
High Market Demand
Probability = 50%
Low Market Demand
Probability = 60%
Low Market Demand
Probability = 50%
2055€
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5) Valuation Tools: Patent Rating
• Automated tools, up to 50 econometric indices agregated:
– Global Patent Scorecard (Patent Board)
– IP score (EPO)
– Patent Factor index (Patent Café)
– Patent strength (Innography)
– IPQ (Ocean Tomo)
• Limitations:
• Often works as a black box
• Limited value for a single patent
• Strongly depends on the field of activity
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IP Valuation
I.
II.
III.
IV.
Why to evaluate Intangible Assets?
The Different Valuation Methods
Factors to Keep in Mind
Exercise: Microtech Systems
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1) How to Choose Valuation Methods
• The choice should be influenced by:
– The kind of industry
– The degree of maturity of the technology
– The degree of risk
– The IPR
– Available information / price of comparable assets
• Combine several methods to get the envelope of
values for each IP asset
• Valuation should be done on a regular basis
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2) Mistakes to Avoid: Royalty Stacking
Normal situation
Royalty Stacking
Earnings
Variable royalties
Royalties
Royalty ceiling
Royalty floor
Final earnings
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Final earnings
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IV. Exercise: Microtech Systems (1)
Table 1
Royalty Rates
Licensor
Licensee
Royalty Base
Low
High
Median
A
01
gross revenues
3%
5%
4%
B
02
gross revenues
5%
5%
5%
C
03
unknown
1%
1%
1%
D
04
net sales
5%
5%
5%
E
05
net sales
1%
2%
1.5%
F
06
net sales
10%
10%
10%
G
07
net sales
4%
4%
4%
H
08
unknown
3%
3%
3%
I
09
unknown
5%
5%
5%
J
10
net sales
7%
7%
7%
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Upfront Fee
$2.5 million
$3.5 million
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IV. Exercise: Microtech Systems (2)
1. What characteristics of your product can influence
the licensing transaction?
2. Using a market-based approach, explain what
royalty rate you could ask for.
You think 5% of the sales, no upfront fee could be
the deal. In order to convince senior management,
you should argue in terms of earnings.
3. Considering that today is the 2nd of January 2011
and that commercialization starts the 2nd of January
2012, calculate the present value of your royalties
using DCF analysis and the data in the table.
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IV. Exercise: Microtech Systems (3)
1. What characteristics of your product can influence the
licensing transaction?
-
the degree of maturity of your technology
the competitive advantage given by the speed of the
device: the speed of testing increased to what extent?
How important is the factor of speed of testing for the
prospective user & what other factors are important?
Price of a similar but slower chip on the market?
How many is needed per year by the industry?
Are there many competitors?
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IV. Exercise: Microtech Systems (4)
2. Using a market-based approach, explain what royalty
rate you could ask for
-
Gross revenue / net sales
With / without upfront fee
 Comparison of royalties based on net sales:
low : 5.4%
high: 5.6% mean: 5.5%
low maturity degree of the technology
 lower royalty rate: 5% of net sales
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3)
2012
2013
2014
2015
2016
2017
2018
Year (n)
1
2
3
4
5
6
7
Potential market
200
450
900
1080
1500
1530
1350
Market shares
10%
10%
10%
10%
10%
10%
10%
Potential sales
20
45
90
108
150
153
135
% Royalties
5%
5%
5%
5%
5%
5%
5%
Royalty earnings
1
2,25
4,5
5,4
7,5
7,65
6,75
Risk-adjusted
discount rate
25%
25%
25%
25%
25%
25%
25%
Discount factor
0.8000
0.6400
0.5120
0.4096
0.3277
0.2621
0.2097
Present Value
0,8
1,4
2,3
2,2
2,5
2,0
1,4
Total PV
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12,6
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Thank you for your attention!
<insert presenter's name & contact details>
Over 50 teaching hours of material, case studies,
exercises, links and more can be found on
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