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Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( ) SMEs Division ( www.wipo.int/sme/ ) www.wipo.int/sme/ World Intellectual Property.

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Presentation on theme: "Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( ) SMEs Division ( www.wipo.int/sme/ ) www.wipo.int/sme/ World Intellectual Property."— Presentation transcript:

1 Basics of Patent Valuation Guriqbal Singh Jaiya Director SMEs Division ( ) SMEs Division ( ) World Intellectual Property Organization (WIPO)

2 Inventions Of no economic value if not exploited Generally of higher economic value if protected by a patent (family of patents) and exploited Leveraging: Unlike a tangible product, an inventions or a patent may be licensed several times over to many others for the same or different purposes, in the same or different geographical areas, for the same or different duration; easier to license if patented

3 Phases of an Invention Investment Phase –development –filing and prosecuting patents Return on Investment Phase –commercialization –generating income

4 Stages of Technology 1 embryonic stage of development new and needing further development market proven about to be supplemented or replaced by new developments

5 Stages of Technology 2 untested idea –outcome completely unknown working model (bench top) –works in laboratory environment and justifies further development prototype –feasibility shown, commercialization still not sure commercialized –market success still not guaranteed

6 Commercializing Patents by... own manufacture and own marketing of patented product licensing of patent (portfolio) selling of (part of) the patent (portfolio) Permutations/combinations of above

7 Challenges in Valuation 1 Computing the value of a patent –always difficult; beauty/eye of the beholder ($$$) –more difficult in early stages than at the stage of marketing a technology/product –legal, technical and commercial risks change greatly during its legal life span patent (granted with or without examination) technology/product does not work customer unable or unwilling to pay a profitable price

8 Challenges in Valuation 2 Computing the value of a patent –claims: quality of drafting; defensive/offensive –part of a bundle or not (royalty stacking; core or not;defensive/offensive/prestige) –freedom to operate/use; convoyed sales; standard –complementary assets (other patents, know how, skills, equipment, networks, etc) –disputes (ownership; validity; scope) –risk of obsolescence (balance legal/economic life)

9 Motivations For IP Valuation (1) Traditional Bank Financing Angel/Venture Capital Investing Licensing Sale, Merger, Acquisition Employee Compensation, Gift Bankruptcy/Liquidation IP Investment Holding Company

10 Motivations For IP Valuation (2) Taxation/Transfer Pricing Insurance Joint Ventures/Strategic Alliances Estate Duty Capital Markets/Securitization Enforcement/Litigation Off-balance sheet financing

11 Valuation:Those Interested are... Employees Investors Shareholders Investment Bankers IPO Specialists Wall Street analysts Merger & Acquisition Interests Licensees, Franchisees Internal asset Managers International affiliates The Media Other Stakeholders

12 Standards of Value... Fair Market Value Market Value Insurable Value Fair Value Collateral Value Ad Valorem Value Acquisition Value Use Value Investment Value

13 Valuation Of a Company Of its IP Assets Due Diligence (Evaluate, Valuation) Accounting of Intangibles (Balance sheet)

14 Valuation Steps A. Data Collection and Analysis (Due Diligence) B. Valuation Methods C. Economic Life Analysis D. Value Conclusion E. Reporting

15 Due Diligence... Cost of Valuation: May be high! Expensive: To be amortized over the life of the loan as a higher rate of interest Expertise: Quality of in-house or external valuation expert; team effort When (Timing) How often (Periodicity)

16 IP Valuation Methods Cost Approach Market Approach Income Approach Judicial Approach

17 Cost Approach Economic principle of substitution Reproduction cost (Exact replica) Replacement cost (Different form or appearance)

18 Cost Approach COMPONENTS Materials Labor Overheads Intangible Asset Developer’s profit/reward Entrepreneurial Incentive

19 Cost Approach OBSOLESCENCE Physical Functional Technological Economic

20 Market Approach Expected sale price at a specific time, in a particular market, based on comparable arm’s length market transactions Extensive knowledge of comparable data required

21 Income Approach Present Value of Future Income Stream Future Income Stream (Economic Income) Duration (Life: Legal, contractual, judicial, physical, technological, functional, analytical, economic) Risk (Uncertainty of receiving expected income; interest rates and investment climate)

22 Methods to Determine Income Stream Residual Earnings Approach Excess Earnings Approach Loss of Income Approach Relief From Royalty Approach Stock Options (Black- Scholes/Merton Approach)

23 Residual Earnings Approach Business Unit Scale Technology Scale Product Scale Trademark or Patent Scale

24 Residual Earnings Approach Methods Monte Carlo Knowledge Capital Score Card Tech Factor Method Crystal Ball Technology Risk and Reward Unit Metrics Technology Review Patent

25 Judicial Approach Hypothetical Negotiation Between Willing Seller and Buyer Georgia Pacific Factors (15)

26 Georgia Pacific Factors (Patent) 1. Commercial success, current popularity, and profitability of Patented Product (PP); 2. Advantages of PP over old products; 3. Nature of patented invention, character of products embodying invention, benefits to those using the invention; 4. Likely profit margin on PP; 5. Portion of profit credited to patented invention;

27 Georgia Pacific Factors (Patent) 6. Benefit to non-patented items by sale of PP; 7. Duration and other terms and conditions of patent license; 8. Extent to which infringer has made use of the patented invention; 9. Prior and existing licenses under the patent; 10. Terms for licensing other technologies by licensee;

28 Georgia Pacific Factors (Patent) 11. Patent owner’s licensing and marketing policy; 12. Commercial relationship between the licensor and licensee; 13. Nature and scope of license: territories, field of use, exclusivity, etc; 14. Industry specific practices for comparable patents (established royalty agreements); and 15. Opinion of Experts

29 Trademark or Brand-related Bundle Logo and Logotype Sub-brands Domain Names Trade dress Related Copyrights Secondary trademarks Advertising Concepts Graphics Labeling and Packaging design Product shapes Web-based assets

30 Attributes Affecting TM Value 1 Age Use Potential for Expansion Potential for Exploitation Associations Connotations Timeliness Quality

31 Attributes Affecting TM Value 2 Profitability Expenses of promoting Means of promoting Market share Market potential Name recognition

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