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IP Asset Valuation and IP Audit


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									IP Asset Valuation and IP Audit

                 T C James
National Intellectual Property Organisation
• To give a general introduction to the concepts
  of IP valuation and IP Audit
• To briefly explain IP valuation and the key
  definitions like assets, IP assets, value and IP
  valuation, the differences between various
  methods deployed to value IP assets, IP audit,
  the preparations, procedures and results of an
  IP audit.

                     tcjames@nipo.in             2

               tcjames@nipo.in   3
• An economic resource.
• Anything tangible or intangible that is capable of
  being owned or controlled to produce value and
  that is held to have positive economic value is
  considered an asset.
• An item of economic value owned by an
  enterprise that could be converted into cash
• “An asset is a resource controlled by the
  enterprise as a result of past events and from
  which future economic benefits are expected to
  flow to the enterprise”
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           Two Kinds of Assets
• Tangible
  – Building
  – Machinery
• Intangible
  – Goodwill
  – Intellectual Property

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                     IP Assets
•   Intangible asset – knowledge based
•   Legal Right to exclude others from using
•   Limited duration
•   Assignable/ Licensable/Transferable
    – Can be bought, sold, licensed, or given away free
• Multi-usable
• Use does not exhaust

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     Factors driving the intellectual
• Intellectual property derives its value from a
  wide range of significant parameters such as
  – Market share
  – Barriers to entry
  – Legal Protection
  – IP’s profitability
  – Industrial and economic factors
  – Growth projections
  – New Technologies

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            Risks in IP Assets
•   New Patents
•   Revocation of Patents
•   Infringement Suits
•   Trade Secrets
•   Weak Enforcement Regimes

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• Valuation is a process of determining value
  or worth of an asset
• Valuation often combines objective and
  subjective considerations

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                 IP Valuation
• IP valuation dependent on various factors
  – Use of the IP assets
  – Market share of company
  – Openness of economy
  – Legal protection of IP
     • Enforcement cost
  – Economic growth
  – Profile of economy

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          Use of IP Valuation 1
• For commercial transactions
• For pricing product
• For evaluating potential merger or acquisition
• For identifying and prioritizing assets that drive
• For strengthening positions in technology transfer
• For making informed financial decisions on IP
  maintenance, commercialization and donation

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         Use of IP Valuation 2
• For evaluating the commercial prospects for
  early stage Research & Development (R&D)
• For evaluating R&D efforts and prioritizing
  research projects
• For Financing securitisation
• For litigation
• For tax planning

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        Benefits of IP Valuation
• Can give a better idea of the overall value of the
• Can provide a tool to measure and manage the
• Can provide security and backing for lenders
• Can provide taxation benefits (taxation
• Can reduce the proportion of business’ net worth
  attributed to goodwill – important when selling a

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    IP Valuation Methodologies
• Transactional/Market Approach
• Cost Approach
• Income Approach

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         Transactional Method
• Sales comparison approach
• It is based on actual price paid for a similar or
  comparable IP under similar/comparable
• Need complete data
• Problem in getting full details
• Two steps: screening and adjustments
• Screening is identifying third party transactions
• Adjustments are in Location, Advertising support,
  IP strength and period of licence

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               Market Approach
• When
  – Focus is on market transactions – sales/licenses
  – IP transaction details highly confidential
  – Assets typically not comparable
     •   Different underlying IP assets
     •   Different compensation structures
     •   Different geographic territories
     •   Different market potentials/degree of success

                           tcjames@nipo.in               16
              Income Method
• Intrinsic value
• Ability to generate cash flow
  – Income Approach: Based on the income-
    producing capability of underlying IP asset
     • Seeks to establish the net present value (hence
       use of discounted cash flow [DCF])
     • Decision tree analysis (DTA)-based on an
       underlying DCF analysis and moves further to take
       into consideration flexibility available.

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               Income Approach
•   PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3….+ In(1+r)-n
•   Where PV = Present value of IP asset
•   I = Economic income projection
•   r = Discount rate
•   n = Year

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   Variables in Income Approach
• An income stream either from product sales
  or licensure of the patent
• An estimate of the duration of the patent’s
  useful life
• An understanding of patent specific risk
  factors and incorporating those into the
• A discount rate

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 Discounted Cash Flow (DCF) Method
• Attempts to determine the value of the IP by computing
  the present value of cash flows, attributable to that piece
  of IP, over the useful life of the asset.
• Does not capture the unique independent risks associated
  with patents. All risks are lumped together and are
  assumed to be appropriately adjusted for in the discount
  rate and the probability of success, rather than being
  broken out and dealt with individually (i.e., such as legal
  risk, technological risk, piracy, etc.)
• Further, often DCF fails to consider dependencies on
  properties held by others. In roughly 40 percent of cases,
  patents depend on other patents or property held in the
  public domain

                           tcjames@nipo.in                      20
              Cost Method
• Estimates the value of underlying IP asset
  basing on historical cost incurred in
  developing the asset
• Two approaches
• Replacement Cost: The cost to develop similar
  functionality to the subject IP outside the
  scope of the legal protection
• Reproduction cost: Cost of reproducing the IP
  product or service or procedure
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         Cost Approach: When?
• Has limited value
• Used for
  – Patents
  – Software
  – Designs
• When
  – Asset is newly created with limited protection
  – Commercially untested
  – Where reproduction cost best estimate of value
     • Buyer unwilling to pay more than cost to recreate or
       engineer around protected design

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       Cost Approach: Factors?
• Components of Cost Value Assessment
  – Materials
  – Labour
  – Overhead
  – Developer’s/entrepreneur’s profit
  – Taxes

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         Calculating Net Value
• Net present value
  – Calculating the future value of intellectual
    asset (investment) at present time

  – NPV= A(1 + r)-n       i.e. NPV = A[1/(1 + r)n]

     where: NPV= net present value (i.e. DCF);
                  A= amount expected at year n; r
    = risk factor

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      Factors Considered in Patent
              Valuation 1
• Qualitative and quantitative characteristics of
  the patent(s), including the specific patent
• Earnings capacity and profitability relating to
  the patent(s)
• The impact of known blocking patents
• Any current or previous licensing of the patent
• Legal rights and restrictions to the patent(s),
  including foreign patent protection
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      Factors Considered in Patent
              Valuation 2
• Contracts associated with the patent(s)
• Competition, barriers to entry and risks
  associated with the patent(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Alternative uses for the patent(s)

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   Factors Considered in Trade Mark
             Valuation 1
• Qualitative and quantitative characteristics of the
• Earnings capacity and profitability relating to the
• Market share supported by, or as a result of the
• Market recognition analysis of the trademark(s)
• Legal rights and restrictions to the trademark(s)
• Contracts associated with the trademark(s)

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   Factors Considered in Trade Mark
             Valuation 2
• Competition, barriers to entry and risks
  associated with the trademark(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Exploitation opportunities of the trademark(s)
  into new markets/products

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Factors Considered in Brand Valuation
• Qualitative and quantitative characteristics of the
  brand name(s)
• Earnings capacity and profitability relating to the
  brand name(s)
• Market share supported by, or as a result of the
  brand name(s)
• Market recognition analysis of the brand name(s)
• Legal rights and restrictions to the brand name(s)

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Factors Considered in Brand Valuation
• Contracts associated with the brand name(s)
• Competition, barriers to entry and risks
  associated with the brand name(s)
• Product life cycles and positioning
• Historical growth and prospects for the future
• Exploitation opportunities of the brand
  name(s) into new markets/products

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             IP Audit: What is It?
• A systematic review of the IP assets owned, used or
  acquired by a business
• IP Audit reveals
   – How the IP assets are being used or not used
   – Whether the IP assets used by it are owned by the
     company or others
   – Whether these IP assets are infringing the rights of others
     or others are infringing on those rights, and determine, in
     the light of all this information
   – What actions are required to be taken w.r.t. each IP asset,
     or portfolio of such assets to serve the relevant business
     goals of the company

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            IP Audit: Objective
• To uncover under-utilized IP assets
• To identify any threats to a company’s bottom line
• To enable business planners to devise informed
  strategies that will maintain and improve the
  company’s market position
  “Overall purpose of an IP audit is to identify and
  assess all of the company’s intangible assets in order
  to conduct a SWOT (Strengths, Weaknesses,
  Opportunities, and Threats) analysis to determine the
  valuable core assets and optimize their usage through
  a systematic long-term strategy”

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           Steps ion IP Audit 1
• First Step: Investigation
  All things created, developed or used by the
  organisation such as, inventions, formulas,
  processes, devices or other technologies,
  creative works, such as music, books or
  computer video games, business information,
  including advertising, promotional materials,
  customer lists, prospect lists, pricing
  information, sales figures, financial projections
  and other materials
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            Steps in IP Audit 2
• Second Step: Identification
• Identify the readily identifiable IP
  – Trademarks
  – Copyrights
  – Designs
  – Patents
  – Product/process Know-how
  – Trade Secrets

                      tcjames@nipo.in    35
          Steps in IP Audit- 3
• Third Step: Categorisation
  – Owner
  – Licensee
  – Licensor
  – Domestic
  – Foreign

                    tcjames@nipo.in   36
           Steps in IP Audit 4
• Fourth Step: Itemize external or market
  – company brand
  – product brands
  – company and product get-up
  – Goodwill
  – product certification
  – export certifications
  – Regulatory approvals

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            Steps in IP Audit - 5
•   Fifth Step: Examine Enforceability
•   Legal Provisions and Economics
•   Administrative Action
•   Legal Steps
    – Civil Procedures
    – Criminal Procedures

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         An Inventory of IP Audit
• Whether or not your IP rights are registered;
• Whether you have any intellectual property issues and
  what to do to address them;
• Who owns the rights and, if you not, identify any conditions
  that apply to their use;
• An assessment of whether your IP is being used effectively;
• Whether your rights are being challenged or threatened by
• Whether you have an effective IP management and
  maintenance plan in place; and
• Records of your IP creation and ownership.

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  Content of an IP Audit Report 1
• Inventory issues
   – A catalogue of intellectual property assets, including
     disclosures, patents, trademarks, trade secrets, contracts,
     agreements, and so on
• Rights issues
   – An understanding of rights that have been acquired, and
     whether they have been properly maintained; an
     understanding of those rights that have not been acquired
     and whether or not they should be
• Ownership issues
   – Does the company have clear ownership over these
     assets? Has title been properly assigned by

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  Content of an IP Audit Report 2
• Infringement issues
   – Are patents being used for which the company does not
     have rights?
• Strategic issues
   – Are these assets being properly managed and exploited in
     alignment with the strategic objectives of the company?
     Are there restrictions to their use?
• Deficiency issues
   – Are there patentable technologies currently not
     protected? Are there copyright and trademark registration
     applications to be filed? Are there affidavits of continued
     use of trademarks, maintenance fees to keep patents in
     force, and so on?

                           tcjames@nipo.in                      41
      When to do an IP Audit?
• General Purpose Audit:
  – As part of an ongoing IP asset management
• Event Driven:
  – When a business is being bought, or sold
  – When you are enforcing or defending your IP

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       Dow Chemical Company
• IP Audit and asset management programme
  started in 1992
• Classified entire IP portfolio including 30,000
• A team of 9 people worked for 12 months
  analysing the patents and recommending
  maintenance or abandonment
• $ 40 million saving by abandoning some patents
• Started licensing which grew from $ 25 M to $
  250 M in 5 years.

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               Remember ...
• In 2005, Qualcomm generated about 58% of its
  $5.7 billion in revenue from the sale of
  Qualcomm‐designed wireless chips, which are
  manufactured by third parties under contract
• Since 1993, IBM has been making some US$1
  billion per year from licensing non‐core
  technologies, which otherwise would have
  remained unused.
• Honeywell, in 2000, received a then record award
  of damages of US$127 million from Minolta for
  technology it hadn’t itself commercialized.

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              Remember ...
• The Coca‐cola brand is estimated to be worth
  US$80 billion.
• US company Texas Instruments earns more
  from licensing its unused patent rights than
  from its products
      Need IP Valuation, Audit and an Asset
    Management strategy to optimise income
                      and profit

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