1. 1 ™ December 17, 2010 Copyright 2008 1 http://xellectip.com

2. ™ IP and Finance: Accounting and Valuation of IP Assets; IP-based Financing WIPO TRAINING OF TRAINERS PROGRAM ON EFFECTIVE INTELLECTUAL PROPERTY ASSET MANAGEMENT BY SMALL AND MEDIUM-SIZED ENTERPRISES IN DUBAI WORLD INTELLECTUAL PROPERTY ORGANIZATION Dubai, December 19 to 23, 2010 Rachna Singh Puri Xellect IP Solutions, India www.xellectip.com

3. 3 ™ Assets Wealth of a business includes: Working Capital Fixed Assets Intangible Assets –IP Assets Created by law Identifiable Transferable Have economic life -Other in-identifiable assets like know-how, work force etc December 17, 2010 Copyright 2008 3

4. 4 ™ Value Of An IP Asset Value of the FUTURE economic benefit -Ability to exclude competitors from a market -Ability to maintain/gain market share December 17, 2010 Copyright 2008 4 Value different than Price (monetary amount in trading) -Value to a buyer usually exceeds the price paid

5. 5 ™ Context of Value Is the asset in use/ not in use Validity and strength of the asset Legal, tax, financial or other business circumstance  Reason for valuation  Valuation method used December 17, 2010 Copyright 2008 5

6. 6 ™ Reasons for Valuation Transactions involving IP Assets -buying -selling -licensing -franchising -merger & acquisition, joint ventures December 17, 2010 Copyright 2007 Xellect IP Solutions 6

7. 7 ™ Selling IP Assets Permanently transfer ownership of the patent to another entity. Receive an agreed-upon payment once, with no future royalties Value obtained immediately, without having to wait any longer to realize that value progressively Avoid any unforeseen risks that will reduce the value of the IP in the future December 17, 2010 Copyright 2008 7

8. 8 ™ Licensing IP Assets Obtain the benefit of royalties for the remainder of the life of the IP Slow incremental value for longer time period Particularly useful if the company that owns the IP is not in a position to conduct business: –at all –in sufficient quantity to meet a given market need –in a given geographical area December 17, 2010 Copyright 2008 8

9. 9 ™ Licensing Opportunities December 17, 2010 Copyright 2008 9 Exclusive license: a single licensee has the right to use the IP, which cannot even be used by the owner Sole license: a single licensee and the owner have the right to use the IP Non-exclusive license: several licensees and the owner have the right to use the IP

10. 10 ™ Identifying Potential Commericalizing Entities Conduct Competitive Intelligence Find synergistic partners for: –Research collaboration –Manufacturing –Marketing Points to consider: –Technology –Market –Customer needs December 17, 2010 Copyright 2008 10

11. 11 ™ Considerations Financials –Lump Sums –Royalties Financial Administration December 17, 2010 Copyright 2008 11 Subject Matter Extent of Rights Exclusivity –Or Lack Thereof –Most Favored Licensee Territory Sub-license Improvements by –Licensee –Licensor Technical Assistance

12. 12 ™ Reasons for Valuation Financing based on IP Assets  Attracting investment  Procuring loans Borrowing against the license stream Securitization of IP assets December 17, 2010 Copyright 2008 12

13. 13 ™ Reasons for Valuation Litigation Financial Reporting Taxation Bankruptcy December 17, 2010 Copyright 2007 Xellect IP Solutions 13

14. 14 ™ Characteristics of IP Assets Trademarks –leverage the brand equity through brand extensions, franchise set-ups Patents –exclusivity for markets, technologies Designs – strong customer connect like in trademarks Copyrights –derivatives for downstream revenues from merchandizing, adaptations December 17, 2010 Copyright 2007 Xellect IP Solutions 14 Valuation method would differ for each and for combinations

15. 15 ™ Time Periods for Different Forms of IP 15 Copyrights Trademarks 5 0 y e a r sF o r e v e r Industrial Designs 1 5 years Valuation method would account for different time-periods for different assets

16. 16 ™ Standard for Valuation Fair Market Value –Based on willingness to exchange between the buyer and seller, common valuation method for most IP assets Fair Price Value –Post transaction purchase price allocation (value in-use), mostly used in litigation Who is the assumed buyer of the asset? December 17, 2010 Copyright 2008 16

17. 17 ™ Traditional Valuation Methods Transaction/Market Method –Actual price/royalty paid for a similar asset under similar circumstances Income method –Expected income stream that the asset holder would get during the lifetime of the asset Replacement Cost method –Establishes the value of the asset by calculating the cost of developing a similar asset either internally or externally Life Cycle based methods December 17, 2010 Copyright 2007 17

18. 18 ™ New Valuation Methods Option-based methods –Based on the option pricing methods initially developed for use in pricing stock options Other Methods using probabilistic estimates - Compute probability of favorable event - Compute payoff if the favorable event occurs Real Option method Monte Carlo simulations Binomial Expansion method December 17, 2010 Copyright 2007 Xellect IP Solutions 18

19. 19 ™ Limitations of Valuation methods Depends on the context Transaction method - right selection of baseline may not be available Income Method - Predictive, as good as assumptions Replacement Cost Method - Not accurate representation of value, development cost may be small, but market impact may be huge New Methods - Dependence on probabilities 19

20. 20 ™ Example 1 Transaction Method: Trademark Context: Royalty rate for trademark for a UAE health supplement company and its several overseas affiliates for Tax purpose (Test Contract)  Identify a baseline transaction and make adjustments - royalty at 8% of net sales (Base Contract) December 17, 2010 Copyright 2007 Xellect IP Solutions 19 AttributeBase ContractTest ContractAdjustment Method Adjustment LocationLatin AmericaAsiaSubjective estimate+ 0.2% Advertisement SupportNoneUpto USD 2M in year 1 Reimburse+0.2% IP strengthStrongModerateIP Firm Analysis-0.5% Term of contract5 years renewable 3 years renewableNone0 25% royalty rate (net profit) is also often used

21. 21 ™ Example 2 Income Method : Trademark Context: Trademark of a retail gasoline brand for tax planning  Identify price for similar grade unbranded gasoline  Price premium for trademark brand = USD 50 -Downward adjustments for costs for advertising, promotions, etc (APP) (0.2%)  Estimate Annual expected sales (AS) =USD 3,000,000  Time : Infinite life  Discount Rate of 20% based on typical rates of return December 17, 2010 Copyright 2007 Xellect IP Solutions 20 Trademark /Brand Premium=USD 29,880,000

22. 22 ™ Example 3 Replacement Cost Method: Patents Context: A company spends USD 250,000 per year to develop and patent a technology  Period for development: 2 years  Time cost of money :10% per annum  Risk for success (Chances for failure in market): 40% Replacement cost = (Total Funds invested + Time Cost for money )* Success Factor [500,000 + {250,000*.1 + 500,000*.1) ]*1.67 December 17, 2010 Copyright 2007 Xellect IP Solutions 21 Replacement Cost = USD 960,250

23. 23 ™ Example 4a Life Cycle Based valuation of Assets: Patents Context: Licensing, term: life of longest running patent (14.5 years), min. gross royalty : USD 100,000 per annum, payment net of tax, VAT : 16%, withholding tax 10% Net royalty revenue = 88,400 USD pa December 17, 2010 Copyright 2007 Xellect IP Solutions 22 LifeDiscount Rate NPVYear 1 st year2 nd year3 rd year14 th year 14. 514%54296788400760236538010701 77%476300 Conservative Approach

24. 24 ™ Example 4b Life Cycle Based valuation of Assets: Patents Added Context for Example 4 case: Sales and Profit estimates for the assets December 17, 2010 Copyright 2007 Xellect IP Solutions 23 Years1 st 2 nd 3 rd Sales USD Million 4.5610 5% royalty.225.300.500 75% net profit.68.901.50 NPV of future net profit = 11.3 Million

25. 25 ™ Example 5 Binomial Method: Use of decision tree method Context: non commercialized patent for a new diagnostic test device for negotiated sale December 17, 2010 Copyright 2007 Xellect IP Solutions 24 EventProbability Successful prototype development75% Hospitals agree to field test the diagnostic test device 50% Patent Effective75% Design around or a new technology50%

26. 26 ™ Example 5 Contd. December 17, 2010 Copyright 2007 Xellect IP Solutions 25 Annual Value 5000 USD 25% 75% 25% 50% 75% Prototype is not successful Hospitals Patent ineffective Design 20,000USD 40,000USD 160,000USD 320,000 USD After estimating the “expected” licensing fee, calculate the net present value using income method or any alternate method

27. 27 ™ References & Resources Acknowledgement: This presentation includes concepts and materials from several resources including: –IP Panorama – Valuing and Pricing of Technology based Intellectual Property, Richard Razgaitis, 2003 –Intangible Asset & Intellectual Property Valuation: A multidisciplinary Perspective, Paul Flignor & David Orozco, 2006 –WIPO/INN/DDK/00/5(a), Paper by Dr John Turner, Flinders Technologies Pty Ltd, 2000 – Other WIPO resources on IP Valuation December 17, 2010 Copyright 2007 Xellect IP Solutions 26

28. ™ Make your IP Assets work for you!!! Copyright 2008 December 17, 201027

29. 29 WIPO RESOURCES FOR SMEs