Principles of Intellectual Property (IP) Valuation NATIONAL SEMINAR Intellectual Property Rights (IPRs) and its Role in Economic Development organized by the World Intellectual Property Organization (WIPO) in cooperation with the Industrial Property Office of the State Organization for Registration of Deeds and Properties of the Judiciary of the Islamic Republic of Iran Tehran, April 26 to 28, 2014 Principles of Intellectual Property (IP) Valuation Arvind Viswanathan Xellect IP Solutions LLP, India www.xellectip.com

Seven Rays of IP Exclusivity™

Wealth of a business includes: Working Capital Fixed Assets Intangible Assets IP Assets created by law Identifiable Transferable Have economic life

Value of Technology at Different Stages 3000 Raw Ideas = 1 Commercial Success* Launches Value Major Developments Significant Developments Small Projects Ideas Submitted Raw Ideas Stages of Technology Development *: Greg Stevens and James Burley, 3,000 Raw Ideas = 1 Commercial Success, Research Technology Management, 40(3), May-June 1997, 16-27.

Scalability (Manufacturability) Customers Competition Categories of Risks Technological R & D Scalability (Manufacturability) Market Customers Competition Legal (IP) Regulatory (Government or Societal)

Technology Adoption Rate Time from invention to 25% penetration of U.S. households 35 Telephone TV 25 15 PC Cell Phone 5 Internet 1876 1927 1976 1980s 1990

Value of the FUTURE economic benefit VALUE OF AN IP ASSET Value of the FUTURE economic benefit Ability to exclude competitors from a market Value is different than Price (monetary amount in trading) Value to a buyer usually exceeds the price paid

Standard for Valuation Fair Market Value Based on willingness to exchange between the buyer and seller Fair Price Value Post transaction purchase price allocation (value in-use) Who is the assumed buyer of the asset?

Legal, tax, financial or other business circumstance Context of Value Is the asset in use Or not in use Legal, tax, financial or other business circumstance Validity and strength of the asset Infringement/Freedom to Operate issues Reason for valuation Valuation method used

Corporate valuation for shareholders Mergers & Acquisitions Reasons for Valuation Corporate valuation for shareholders Mergers & Acquisitions Privatization of public equity Fund raising Initial Public Offering Financial Reporting Acquisition of IP itself Licensing-in or Licensing-out Investment in IP itself (e.g. for further development)

Parameters for IP Valuation Nature of IP Asset Patents, Trademarks, Copyright, Designs, Trade Secrets For whom is the Valuation being done What is the purpose of valuation Date of Valuation Method of Valuation

Breadth of Scope & Coverage Legal Factors Value of an IP Asset governed by 2 Chief Legal Factors Breadth of Scope & Coverage Enforcing Capability Function of: Treaties the Country Part of Availability of Quality Litigating Personnel Courts Capable of handling subject Resources available to the Owner Money, Time, Will Words Used in the Document Technical Feasibility Geographies Covered Proper Maintenance

IP Valuation Methods Transaction Method: Actual price paid for a similar intangible under similar circumstances Income method: Most commonly used patent valuation method. The method focuses on the expected income stream that the patent holder would get during the lifetime of the patent Replacement Cost method: Establishes the value of the patent by calculating the cost of developing a similar asset either internally or externally. Market method: Based on the value of comparable transactions made in the market. Option-based methods: Based on the option pricing methods initially developed for use in pricing stock options. Other Methods using probabilistic estimates: Real Option method Monte Carlo simulations Binomial Expansion method

Understanding the Context for IP Valuation IP BASED FINANCING FOR Attracting investment Procuring loans Borrowing against the license stream Securitization of IP assets GENERATING REVENUES FROM IPRs: Manufacturing and selling the end-product Selling the IP rights Licensing the IP Rights Franchising the business

Value comparisons then used for deciding on proposals to go ahead with Value of Technology Predicted value Based on a number of probabilistic considerations Usually, value best utilized as a starting point for negotiations for transactions Alternately, used for comparing values of technology proposals Value comparisons then used for deciding on proposals to go ahead with

A Typical Valuation Report Provide a narrative summary: Analyze and explain the basic business model, plan and strategy and show how the IP contributes to the bottom line of your business. How do you make money and what role does the IP play in it? Relate your income streams to your IP : What were the returns from IP-protected business segments? How do your trade secrets/patents contribute to the new/improved/superior/better-functionality or features of your services/products as compared with those of your competitors? How do/does your trademark(s) contribute to your company's or your company's products'/services' image, recognition, reputation or branding strategy in the market in developing customer loyalty or attracting new customers? Do you use industrial designs to protect the unique look or packaging of your products? How do your trade secrets, such as know-how or business ideas, make your company unique? Relate the IP to your position in the market: Does the ownership of IP help you to gain/secure/improve your market share or profits? Are you using IP as an entry barrier to keep competitors out of a particular market? Does the IP of your competitors pose a threat to your business? Do you have "freedom to operate" in using your own new ideas, concepts, inventions and innovations, without being required to take prior permission (which may involve making a payment) of someone else (say, a competitor) to develop a new/improved product/service or add new features to an existing product/service? Does your IP provide you with some form of exclusivity in the market, and, if yes, for how long? Source: www.wipo.int