Ip aspects of valuation malaysia

MONETISING
INTELLECTUAL PROPERTY
ASPECTS OF VALUATION OF IP RIGHT
Chumphol Mahattanakul
CLJ Events
10 April 2013 09:00 am – 11:00 am

Outlines
• IP System
• IP Embodiment
• IP Valuation
• IP Strategy
• IP Audit

IP System
• IP system is a set of activities to
encourage and protect persons or
parties of concerns in relation to
invention, innovation and creation
along the social and economic
development path
• IPRs which are intangible assets as
derived from IPs are systematically
governed by competent functioning
bodies e.g. WIPO, WTO (via TRIPs)
and NPOs in
- Administration
- Codification
- Regulation
- Enforcement
- Dispute Resolution
- Marketplace Regulation

IP Embodiment
• IP embodiment comprises IP business partners
and their respective IP actions/functions or
interactions.
• IP business partners cover the following players
whose activities or functions are interrelated or
mutually made or strategically overlapped with
each others such as IP/technology development
companies, licensing agents, patent licensing and
enforcement companies, privateers, institutional
IP aggregators/IP acquisition funds, litigation
finance/investment firms, IP brokers, IP-based
merger & acquisition advisory firms, IP auction
houses, IP-backed lending firms, online
IP/technology exchanges, royalty stream
securitization firms, IP transaction exchanges,
etc.
• IP functions are engaged in variety of
arrangements for monetization or securitization
of IP from which IP business models are
structured for the sake of industrial and
economic development, and for benefits to all
concerned parties.

IP Business Partners
IP/Technology Development
Companies – Entities engaged in R&D
activities and produce IP often not
used for manufacturing themselves but
licensed to one or more operating
companies for their further activities in
bringing physical products or services
to marketplace. In case the IP creators
provide consulting services to the
licensees to integrate the technology
into the licensee’s products or
processes, they are considered beyond
the scope of intermediaries between
patent owner and patent
licensee. They will be intermediaries
when they form a link between the IP
creator and those who commercially
deploy it in the form of products and
services. In some cases, they do both
manufacturing and licensing.
Licensing Agents - entities functioning
as intermediaries by helping IP owners
find licensees. Also called IP advisory,
IP consulting, IP management or
technology transfer firms. They may
merely act as consultants where the
patent owner gets involved in the
licensing process, or function more like
IT companies where the patent owner
outsources patent monetization and
sets aside day-to-day licensing
operations, but collects a major part of
revenue from licensing. They can be of
“carrot” licensing or “stick” licensing
activities. In the latter case, these
entities tend to be engaged in activities
like PLEC business model.

IP Business
Partners
(cont’d)
• Patent Licensing and Enforcement
Companies (PLECs) - own one or more
patent portfolios, attempt to license
them through targeted letter-writing
campaigns and then file patent
infringement suits against those letter
recipients who refuse to enter into non-
exclusive licenses. PLECs are often called
non-practicing entities (NPEs) or patent
trolls. PLECs might have purchased the
patents they are asserting or it is
otherwise founded by the inventor(s) of
the asserted patent portfolio. As for the
latter, they are not
intermediaries. PLECs earn revenue
both from license fees and from the IP
awards market.

IP Business Partners (cont’d)
• Privateers - Operating companies who have
been spinning groups of patents to PLECs to
generate additional revenue, by means of
outsourcing patent-monetization function,
that helps save the costs incurred in cross
license and counter-claim exposure, and avoid
anti-competitive regulations and bad publicity,
etc.
• Institutional IP Aggregators/Acquisition Funds
– private equities who operate as general
partners of a limited partnership and raise
money either from large technology
companies or from the institutional investors
and even high-net-worth individuals. The
investors are promised above average ROI
from selective, targeted or large-scale patent
purchases with the goal of instituting licensing
programs and/or employing various arbitrage
strategies.

IP Business
Partners (cont’d)
• Litigation Finance/Investment Firms –
functioning alike both PLECs and IP
Acquisition Funds. Like IP Acquisition
Funds - general partners of a limited
partnership and raise money from large
institutional investors and high-net-
worth individuals. Like PLECs – with a
view to acquiring a financial interest in
patent portfolios for assertion by taking
the form of targeted letter-writing
campaigns, followed with patent
infringement suits against those letter
recipients who refuse to enter into non-
exclusive licenses. Variances in the
model (and from a PLEC) include the
level and nature of ownership or
participation (e.g., equity vs. debt) that
the firm takes in the patent portfolios
being asserted or in the patent-owning
entity itself (typically an LLC formed for
the purpose of assertion).

IP Business
Partners (cont’d)
• IP Brokers – function as same as
Licensing Agents with key distinctions
that they seek to help IP owners find
buyers rather than licensees; and
operate both on the sell-side and the
buy-side (assisting technology
companies in acquiring patents having
“strategic” (i.e. defensive) value vis-à-
vis their competitors). A typical “one hit
and done” engagement term between
an IP Brokerage firm and an IP owner is
shorter than that of a Licensing Agent
firm because once the IP is sold, the IP
Broker takes a percentage of the sale as
a success fee, without any opportunity
for recurring revenue. In contrast, buy-
side brokerage engagements can
continue indefinitely as the broker’s
client strengthens and extends its IP
position over time.

IP Business
Partners
(cont’d)
• IP-Based M&A Advisory Firms – Entities
operating like investment banking (or 2nd
generation IP investment banking) by advising
technology companies in their M&A activities
and earning fees based on the value of the entire
deal (or apportioned according to the value of
the IP within the deal of either sell-side or buy-
side, focusing on IP assets; followed with
services e.g. IP due diligence, IP integration and
operations as a result of M&A activity, IP deal
structuring advisory and general consultations
related to contemplated investments, mergers,
acquisitions, divestitures, joint ventures and
other corporate transactions. It involves not just
maximizing IP value in the context of a
“traditional” corporate acquisition or divestiture,
but actually sourcing the transaction based, at
least in part, on IP considerations. By this, the IP
investment banker assist operating companies in
identifying potential acquisition targets or
acquirors with complimentary IP assets.

IP Business
Partners (cont’d)
• IP Auction Houses – Entities attempting
to do for the IP marketplace (like
Christie’s and Sotheby’s auction houses
did for the antique and art marketplace)
holding multi-lot, live auctions for
patents with the intent of providing a
marketplace for facilitating the
exchange of such historically-illiquid
assets. With various auction formats
and structures, such auctions enable
sellers to offer one or more patents
according to a pre-determined set of
terms and conditions and allow the
auction house to charge listing fees,
attendance fees, buyers’ premiums
and/or sellers’ commissions. Also, other
entities aim to be the “eBay of patents”
by offering online patent auctioning
services.

IP Business
Partners (cont’d)
• On-Line IP/Technology Exchanges, Clearing
houses, Bulletin Boards, and Innovation
Portals - Functioning like the former B2B
web sites; offer web platforms and
interfaces specialized for patent and other
IP assets. (Like online classifieds Craig’s List,
but this is provided for IP.) There are
variances such as whether listing fees are
charged to patent owners/sellers in addition
to, or versus, back-end fees for successful
patent sale or licensing
transactions. Additional variances include
whether these sites are public and
browseable for free, or whether they are
private, “member’s only” sites that require
registration (and presumably a registration
and/or annual membership fees). Some of
these sites also offer forums, bounties,
challenges and idea exchange platforms
that aim to spur innovation and thus create
new IP.

IP Business
Partners (cont’d)
• IP-Backed Lending Firms - Entities that
provide financing for IP owners, either
directly or as intermediaries, usually in the
form of loans (i.e., debt financing), where
the security for the loan is either wholly or
partially IP assets (i.e., IP
collateralization). Thus, these parties often
function as intermediaries between
borrowers and commercial lending
institutions, such as banks. Unlike
traditional bankers who focus on accounts
receivable (i.e. Factoring) and tangible
assets, however, these IP-backed financiers
take into account a borrower’s IP assets or
target company’s (potential or actual) IP
assets in structuring a financing
transaction. Variances in this model include
entities who deploy their own capital (and
thus resemble IP investment firms) or who
maintain a network of technology-specific
or industry-specific investors to whom they
refer IP owners (and thus resemble patent
brokers).

• Royalty Stream Securitization Firms - Entities providing a
consultation and/or capital to patent owners in performing IP
securitization financing transactions. In such transactions, an
entity sells their IP underlying the transaction to a bankruptcy
remote entity or SPV, and the SPV grants a license back the IP to
the original owner. Then, SPV issues IP-backed notes/securities
to investors to raise cash/fund for IP owner at the agreed-upon
purchase price. The notes are then backed by the expected
future royalties to be earned from licensing the underlying IP (to
the original patent owner and/or third parties). By this, the
original IP owner obtains funds raised at much more cheaply
than a loan backed by its traditional assets. The IP-backed notes
are generally higher-rated commercial paper reflecting the
quality of the IP and not necessarily the overall creditworthiness
of the original IP owner.

IP Business Partners In Securitization
• Securitization - A technique that isolates income-
producing assets from bankruptcy risk by
assigning them to SPV which then issues debt
securities payable from the cash flows generated
by the assets.
• Debt securities achieve ratings which are set
aside from the rating of the sponsor (transferor
company/institution). Issuance is made to
respond to investor demand for different
maturities and credit qualities. Normally, the
highest ratings can be achieved via wrapping
securities with relevant financial guarantees.

IP Business Partners - Securitization Schematic Diagram

IP Business
Partners -
Securitization
of SME Assets
• A means for encouraging the
private sector credit with a
flexible and efficient off-
balance sheet funding source
• Reduce a cost of capital
• Diversify asset exposures
• Improve asset-liability
management
• Eliminate credit constraints
• Overcome the agency costs of
asymmetric information where
one has information over the
other
x • A
Y • B
Z
• C
• D

IP Business Partners - SME Assets Securitization
Implementation
• Germany: The securitization of
SME loan initiated in 1998 by
Deutsche Bank followed by
other commercial banks in
2000 (Jobst, 2007). To reduce
the financing cost of SMEs,
KfW has been commissioned
by the government to
implement the securitization
scheme to raise the financing
for SMEs.
• Japan: Securitization of SME
loan is one of the program
implemented by Japan Finance
Corporation for Small and
Medium Enterprise (Tsukahara,
2006).
• Malaysia: Securitization started in
1986 when the government set up a
mortgage financing body called
National Mortgage Corporation
(Cagamas) to function as SPV
between the house mortgage lenders
and investors of long-term funds.
Apart from mortgages securitized by
Cagamas, securitization for other
assets has not been very strong in
Malaysia (Rosalan, 2008). The
transaction is governed by the
Securities Commission Act 1993. In
2001, SC issued Guidelines on the
Offering of Asset-Backed Securities
which provides the criteria for
securitization deals. In 2007,
Cagamas pioneered the securitization
of SME loans via the issuance of
RM600 million credit-linked notes by
its wholly owned subsidiary, Cagamas
SME Bhd. (Wan Azhar, 2007)

IP Business Partners - SME Assets Securitization
Implementation
• Thailand: Secondary Mortgage
Corporation (SMC) established in 1997
under the Royal Decree of Secondary
Mortgage Corporation with its initial
capital of Baht 1,000 million, as a state
enterprise financial institution under
the Ministry of Finance with its major
objective to develop the secondary
market for housing mortgage loan
under the principal of asset
securitization for fund raising activities
for the adequate and stable expansion
of housing mortgage financing, and to
expand lending activities of housing
loan market in order to resolve the
problems faced by the real estate
sector during the country’s economic
downturn period.
• Scheme: SMC purchased a pool of housing
loans from financial institutions in the
primary market, and securitized them by
issuing Mortgage-Backed Securities which are
to be sold to both local and foreign investors.
The pool of loans will be transferred to SPV
as established by SMC in order to segregate
the risk of pools of loans from SMC risk and
loan originators. Then, SPV will issue MBS
instrument backed up by the said transferred
pool of housing loans. Investors in MBS
instrument will receive both interest and
principal repayment generated from cash
flow stream collected from loan borrowers
under the specified terms and conditions.
MBS can achieve a credit rating from rating
agency, and also to be attached with credit
enhancement scheme, such as the
repayment of loan interest and principal is
insured by reliable credit insurance
institution, to level up the confidence.

• IP Transaction Exchanges & Trading Platforms/IP
Transaction Best Practices Development Communities
In further attempts to make IP a more liquid asset
class, plans have been announced to create traded
exchanges (whether physical or online locations)
similar to the NYSE and NASDAQ where yet-to-be-
created IP-based financial instruments would be listed
and traded much like stocks are today. Another variant
involves an on-line trading platform where IP buyers
and sellers can come together to execute transactions
based on a set of agreed rules developed by a “best
practices” steering committee composed of major
corporate buyers and buyer-sellers.

IP Exchange
• Innovation – a fast decaying rate of innovation/product
has forced the companies to learn as to how to
accelerate every aspects of businesses, particularly with
IT business
• Speed
once product was launched, a plagiarism prevails e.g. knock-
off and reverse engineering
production, marketing campaign and distribution plans can
never last for six months but to be substantially shortened to
only, for example; 6 weeks, instead
• Protection – consideration angle of being worth the
effort of regional or global patenting
“If only two can be chosen out of the three,
what’re yours based on economic aspect?”

IP Business Partners - Coase Theorem
• When looking at how to deal with
protection for intellectual property,
we look at transaction cost, and
that is the Coase theorem. The
Freidman book clearly states that
copyright protection is cheap and
easy to enforce, and patent
protection has high transaction
costs and is hard to enforce. If
there is a very small amount that
you are copying, there is a high
transaction cost of getting
permission. This just makes sense,
the smaller affect that you will
have on revenues and profits, the
lower the copyright holder’s
incentive to get that lost revenue
from you. It would take him time,
in both finding where you copied
his work and how many times you
copied it and for what purpose.
• Freidman looks at “how an item
must be useful before it can get a
patent”. No matter what to do in
the area of productivity, people
have very little incentive to come
up with uses for things, and rather
just get as many patents as you can
and then when someone discovers
a use for it, you get paid. But this
runs into a problem in that no one
will be looking for uses. There is no
incentive for it. This has been an
excellent chapter to read in the fact
that it relates directly to both law
and economics, and we can use
the analytical tools it gives us for
any other form of property rights
that we want to look at.

- IP Exchange
• The patent exchange idea: Implied valued –
based patent tax is to be paid by IP owner to a
central IP market-making body to meet the
administration costs. By issuing a good-faith
binder, the 3rd party could challenge the IP
valuation at higher level. If agreed, IP owner
will pay the patent tax at higher level in return
for retention. Otherwise, the 3rd party will buy
the IP at higher valuation on which the patent
tax is based.

IP Business
Partners (cont’d)
• University Technology Transfer
Intermediaries
These are entities that function
as IP Development Companies,
IP Acquisition Funds, Licensing
Agents and/or Patent Brokers,
but focus on the niche university
technology transfer (i.e.,
licensing) market. The choice to
focus on the university market
by such entities is not surprising
given that in the 2011 fiscal year,
U.S. universities and research
institutes spent over $61 billion
in R&D, filed over 13,000 U.S.
patent applications and had over
$2.5 billion in licensing revenue.

• Defensive Patent Pools, Funds
and Alliances – Of several types
of defensive entities, one was
established in response to PLEC
and Institutional Patent
Aggregator/IP Acquisition
Fund. In acquiring patents,
entities focus on one
technology/ industry segment.
With a “catch and release”
approach, this model results in
multiple operating companies
joining forces to create an
independent entity to
acquire
potentially “problematic” patents via
auctions, brokers or direct sale, and
license them to willing entity to share
the financial cost of acquiring the
patents and the management
overhead of pool administration, and
then sell them at a profit. Another is
“library fund,” where a group of
corporate investors pool capital to buy
patents that may be “of interest” to
certain large operating companies
who are known to be aggressive in
asserting patent claims against
competitors. If the alliance members
are sued by one of these companies,
they can “check out” the patents to
use in a counterattack (not useful
against asserters who have no
infringement exposure.)

• Technology/IP Spinout Financing
- best described as being
organized as a traditional venture
capital (VC) or private equity firm,
but specializing in spinning out
promising (non-core) IP which has
become “stranded” within larger
technology companies, or
creating JVs between large
technology companies to
commercialize the technology
and monetize the associated
IP. Thus, the revenue is as same
as a traditional VC or PE firm –
achieving a high ROI once a
portfolio company is sold, goes
through an IPO (Initial Public
Offer) or even evolves into an IP
licensing company.
• Analytics Software and Services
Firms - Entities providing advanced
patent search and analytics software
tools that allow patent owners,
prospective buyers, attorneys,
investors and other players in the IP
marketplace to obtain various due
diligence intelligence and data points
about a single patent or patent
portfolio. These software tools and
platforms provide varied outputs
related to patent “quality” such as
validity probabilities, maintenance
fee-related life expectancies, various
infringement-related metrics, prior
art analysis, “related patent” analysis,
citation-related metrics, etc. These
entities earn revenue from pure
software sales/licenses, as well as
consulting fees.

• IP Insurance Carriers - Typical
commercial insurance under
Commercial General Liability policies
carried by businesses do not cover IP
claims. Insurance carriers currently
market three basic types of IP
policies:
– First-Party IP Coverage, which
protects the value of an insured’s
direct loss sustained when its
revenue streams are diminished
from a direct and resultant
impact upon its IP rights;
– IP Defense Cost (Defense
Coverage), which protects a
company against allegations that
it improperly used the IP of
another; and
– IP Abatement Coverage
(Enforcement Coverage), which
funds an attack on a party that
improperly uses the insured’s IP.
• What items can be insured?
IP-Rich Products’ future revenue
streams; Licensing Revenue;
Royalty Receipts
IP “Value” – accounting
principles
R&D Expenditure
Financial Investment
Loan Arrangement
Transaction involving IP rights,
etc.

• Analytics Software and
Services Firms - Entities
providing advanced
patent search and
analytics software tools
that allow patent owners,
prospective buyers,
attorneys, investors and
other players in the IP
marketplace to obtain
various due diligence
intelligence and data
points about a single
patent or patent
portfolio. These software
tools and platforms
provide varied outputs
related to patent “quality”
such as validity
probabilities,
maintenance fee-related
life expectancies, various
infringement-related
metrics, prior art analysis,
“related patent” analysis,
citation-related metrics,
etc. These entities earn
revenue from pure
software sales/licenses, as
well as consulting fees.

• Patent-Based Public Stock Index
Publishers – As an evolution of the
established Analytics Software and
Services business, once the
entities offering these software
tools and platforms realized that
nearly 80% of the value of a U.S.
publicly-traded company now
comes from intangible assets, and
that they possessed tools to
measure the “quality” of arguably
the largest part of those IAs, it’s
obviously that another potential
source of revenue would be the
creation of formalized stock
indexes based on their existing
software tools and platforms. Put
in different terms, the analytics
software and services industry
theorized that investing in stocks
with valuable patents may allow
investors to commit a meaningful
and sustainable portion of their
assets to IP and allow them to
outperform other investment
strategies. They sought out
different algorithms to create
baskets of stocks using the
“quality” of a publicly-traded
company’s patents as the primary
selection factor. Revenue from
such an emerging business model
includes the sale of equity
research and the licensing of such
indexes to ETF, mutual fund and
other investable financial
instrument issuers.

IP as a subset of
Intangible Assets
• Intangible Assets are those encompassing
domains of Intellectual Capital (IC), Intellectual
Assets (IA) and Intellectual Property (IP)
• Intangible Assets = IC + IA + IP, where
IC – Knowledge with potential for value
embodied in people, processes and
customers that comprises reputation,
goodwill, business relationships, customer
relations, licenses, branding and human
resources
IA – Knowledge providing value that
comprise skills, know-how, inventions data,
processes, market data, information
unorganized
IP – Knowledge legally identified
comprises patents (e.g. technology and
design), know-how implemented,
trademarks, copyrights, trade secrets,
geographical indications

IP Parameters
• Values defined by situation
• Bankruptcy – Fair Valuation
— Liquidation – assumes a distressed
sale (appropriate when
debtor is dead or mortally wounded).
— Going concern – cash realized from a
sale over a reasonable period of time.
• Fair Market Value
— Tax Definition
— Willing buyer and willing seller
— Neither under compulsion to buy or
sell
— Both having reasonable knowledge of
relevant facts
• Fair Value
— Definition for financial reporting
purposes
— Current transaction between
marketplace participants
— Both able and willing to transact
Value-Affecting Factors
• IP - Cash Flow
– Revenues
– Costs
– Profits
• Remaining Life
— Economic
— Statutory
— Stage of Development
• Market/Industry Factors
— Growing or Maturing
— Competitive
Environment
— Uncertainty/Risk

IP Economic Characteristics
Economic Characteristics
• Not of a diminishing value by time of
exploitation
• Not always be restricted to a single user, but
likely to be applicable to multi-users, IP value
can be managed on a multi-disciplinary basis
to gain benefits as desired for all partners
• Not necessarily depend on IP asset-creating
or inventing investment cost, but rather on
commercialization ignition spark after project
completion, and perhaps or more likely to be
associated with other assets
• Be context specific (e.g. internal
development, JV, sale or licensing) with
relevant time specific parameters (e.g.
historical, current or potential)
• Devalued after achieving the saturation of S-
Curve
Value Sources
• Direct Use
— Manufacture and/or Marketing of
Products
• Indirect Use
— Strategic Alliance/JV Opportunities
• Licensing/Sale
— Additional source of revenue
• Strategic/Defensive
— Building up higher entry barrier
against competitors
• Tax
— Built-in-gains to offset 382 limitations
/197 benefits /Donations

Patent Rights
• A patent gives the patent owner
the "exclusive right" to stop others
from making, using, selling or
offering for sale the product, or
process of making the product, that
is described by the patent claims. It
is important to note that a patent
does not give the patent owner the
right to exploit the patented
invention himself. The patent
owner has only the "exclusive
right" to stop others from doing so.
• In other words, just because you
obtain a patent on your product
does not mean that you can
actually use the product. You may
be blocked by an earlier patent
owner who exercises the "exclusive
right" granted to him under his
patent. This is an important
distinction and the following
example will help to explain it.
•
Suppose the invention covered by your patent
is a chair with four legs, a seat, a back
and a pair of rockers -- a rocking chair.
Under your patent, you have the exclusive
right to stop others from making, using,
selling or offering for sale your patented
rocking chair. Assume the rockers on your
rocking chair are unique and covered by
an earlier patent to someone else. The
rocker patent owner has the exclusive
right under his patent to stop others
(including you) from using his patented
rockers. Use of the patented rockers on
your rocking chair would constitute
infringement of the rocker patent.
So while you received a patent for your
rocking chair, you will not be able to
actually make, use, sell or offer for sale
the chair without first obtaining permission
from the rocker patent owner. The rocker
patent owner is not required to give you
permission, however, and can keep your
rocking chair off of the market if he
chooses to do so. It might make better
sense for the rocker patent owner to
participate in your success by giving his
permission in exchange for a licensing
fee.

Patent Pooling
• The patent system has been
recognized of negative
outcome on account of being
a tool more likely to stifle
than protect innovation. This
negative sentiment stemmed
from the recent victory of
Apple over Samsung.
• As for the future role and
efficacy of the patent system,
product and technology
licensing is not anathema
(vehement disagreement) to
the qualities of fairness and
transparency.
• Patent pooling is a proven,
effective tool that helps the
industry better manage its
patent licensing. By “pooling”
patents from many license
holders, licensors are likely
able to lower transaction
costs and administrative
overhead, and benefit from a
centralized model that
encourages patent bundling
and fair play. Licensees
likewise enjoy advantages in
the form of lower royalty fees
and a single point of contact
that eliminates the need to
negotiate separately with
multiple license holders.

IP Valuation
Characteristics
- IP assets are of intangible
unique characteristics with
their inherent values,
depending upon:
– Widely varying terms &
conditions
– Inherently dissimilar
– IP transfers are often
motivated by unique
strategic considerations
– Details of IPR transfers are
usually not widely
disseminated
IP Valuation
- not much a matter of science
but rather a matter of art or
external judgment:
– Purpose – Why are we
valuing the asset?
– Description – What is the
asset?
– Application – How will the
asset be used?
– Standard – Who is the
assumed buyer of the asset?

IP Valuation
• IP valuation is involved in
the process itself with IP
driving parameters (e.g.
market share, barriers to
entry, legal protection, IP’s
profitability, industrial and
economic factors, growth
projection, remaining
economic life and new
technologies).
• The process is concerned about
gathering of information and in-
depth understanding of economy,
industry and specific business
that directly affect the IP value.
• Information are used for
structuring a financial model that
can generate the specific values
based on internationally-
accepted standards (e.g. USPAP,
IVSC, GAAP, IFRS and FASB),
where either or combination of
the following approaches are
taken into account, that is, cost
approach, market approach,
income approach, direct
approach, and pay-off approach.

IP Valuation
• Monetization and valuation
are indispensable to each
other from basic
marketplace to complicated
one.
• Sale, licensing, with some
variation or combination of
sale and licensing are basic
part of IP monetization
among large, medium and
small companies and among
non-practicing entities using
various IP business models
in the marketplace.
• Known IP business models
are auction and IP
infringement insurance in
their certain marketplaces
in which patents stay
dominant.
• Other IAs like brand loyalty
and customer relations will
definitely help driving the
acquisition activities in
which intellectual capital
and skills of human
resources are specifically
targeted in the advanced
technology sector like IT.

IP Valuation
• A monetization is mechanized in
debt-financing marketplace, with
an exchange between revenue
stream as generated by the
pledged income-producing IP and
fund or loan as provided by IP
financier.
• A securitization is invented to issue
a note/bond secured with revenue
stream as generated by the subject
IP in return for a fund from
investors. Bowie Bonds is for
example.
• As IP valuation is rather art prone,
not only a valuation of variant IP’s
inherent uniqueness, but its
transferability course of action is
also concerned with uncertainties
prevailing in many circumstances
e.g. valuations of patent portfolio
or trademarks for a brand.
The following are challenges in
determining IP value:
Lack of data consistency and
accuracy
Lack of patent-related
metadata e.g. data supporting
the apparent data or
configuration data
Limited legal linkages
Patent and non-patent
reference visibility
Lack of standard or accepted
metrics

IP Valuation
• IAs generate incremental returns for
the business either through revenue
increase or cost reduction, whereas
most of the IP valuation methods
emphasize a capturing of the values
of those additional returns.
• IP valuation approaches:
– Market approach – comparable
market transactions needed
– Cost approach – using main costs
and associated costs assumed in
replacement or reproduction of
the subject IP asset, and its
depreciation
– Income approach – determining
the income of IP asset by also
taking into consideration
anticipated utilization expenses
besides its revenue generated
– Excess operating profits –
determining the additional
profits pertinent to IP possession
compared to competitors who do
not.
– Premium pricing method –
figuring out the price difference
between a branded and
unbranded product, net of
marketing or supporting costs to
achieve the revenue.
– Cost savings method –
calculating the present value of
the cost savings anticipated from
IP ownership
– Royalty savings method –
assuming the non-ownership
scenario where the business
needs to license it to earn the
returns that it is earning.
– Pay-Off Method (POM)

IP Valuation for Financial Reporting
• Being essential for fulfilling
various information as
demanded by the interest
group or investors.
• If it just provides information
about the company itself
covering an ability to create
profit, cash flows and changes
on capital, as well as its
tangible and financial assets
and liabilities.
Where are the intangible
assets?
What the real value of the
company in focus is?
• Lack of relevant information
on intangible assets (including
intellectual assets) will disable
the possibility for investors or
external users to perceive
real value of the company and
adequate decision making.

IP Valuation for Financial Reporting (cont’d)
What criteria should be
accepted?
• Too rigid - results in
undervalued pricing with
respect to market price
• Leniently – results in over-
pricing
U.S. Financial Accounting
Standards Board (FASB) – 2001
Generally Accepted Accounting
Principles (GAAP)

IP Valuation As A Transaction Strategy
• A strategic valuation
of IP is rendered
when considering
buying, selling,
assigning or
transferring the
asset in a licensing
arrangement or
acquisition.
• Transaction strategy
often ends with ‘go
on’ or ‘stop’
recommendation.
• That is, at what price
to enter into this
proposed
transaction?

IP Valuation in
Financing
• Information and
Data Required
a) What are the
expected annual
revenues from
licensing and other
contractual
arrangements?
b) What historical
revenue numbers
are available to
support these
future projections?
c) What is the term
over which these
revenues are
expected to be
received, and will
the
d) y diminish or
increase over
time?
e) Provide a pro
forma schedule
showing these
projected
revenues over the
expected term of
receipt ; identify
the licensees or
other obligors
which will be
responsible for
these revenues,
and show how the
revenues shown
on the pro forma
are allocated
among these
various
licensees/obligors
f) Provide a brief
summary of the
licenses or other
contractual
arrangements
under which these
revenues are
payable, including,
inter alia, for each,
Financing: An
increasing area of
activity is the
financing of IP assets.
This can be achieved
through a number of
ways, including
borrowing against the
license stream (similar
to Factoring) of IP

IP Valuation
• Assets that may be valued using the cost
of creation method include:
– Internal Software
– Patents
– Trademarks
– Copyrights
– Subscriptions
– Customer lists
– Service contracts, etc.
Cost of Creation — The
cost of creation method of
valuing intangible assets
relies on calculating what it
would cost another
business to duplicate a
given asset today. This
method does not measure
an asset’s future impact on
profits; it merely looks at
what it would cost to
create the asset from
scratch at a particular
point in time.

IP Valuation –
Cost-based
method
Disadvantages
– There is no direct correlation between cost
of development and the future revenue
potential of assets. IP that costs the most to
produce may not necessarily be the most
valuable.
– Likewise, IP which is many years old and has
been written down in value could still be the
most valuable to the company, even though
the historical cost approach does not show
this. The measure of historic costs is
unreliable with rapid technological
advancement.
– It is not always possible to provide accurate
information on the resources spent on
development and there will always be a
practical challenge to determine which costs
to include or exclude.
– Cost-based methods make no allowance for
the future benefits which might accrue from
the IP.
Advantages
- IP becomes
visible in the
company’s books
- IP awareness is
increased.
- Regarded as a
useful indicator of
IP value in the
case of IP assets
whose future
benefit is not yet
evident.

IP Valuation –
Cost-based
Method
When are they used?
They are generally used in
accounting, bookkeeping and in
accordance with accounting rules.
They are only useful for bookkeeping
purposes or as a supplement to an
income approach. They are only
relevant in historical cost-based
accounting systems or where
taxation methods dictate their use.

IP Valuation – Income–Based Method
• Capitalization of Income or Savings
Method — The capitalization method
measures the future benefits
intangible assets will bring to a
company, when those benefits will be
generated and for how long. The
capitalization rates used in this
method should reflect the risk
associated with the intangible asset
being valued.
• In addition to the income an intangible
asset may bring to a company, the
benefits may also include savings to
the company as a result of owning the
asset, or not having to pay a royalty to
someone else who owns the asset or
of efficiencies generated by the asset.
• Assets that work well with this
method include:
– Trade names
– Customer lists
– Commercial Software
– Patents
– Trademarks
– Brand names, etc.
• The capitalization method works well
for all of these assets when they are
relatively new. As they come closer to
the end of their economic usefulness,
however, other methods of valuing
them may become more appropriate.

IP Valuation – Income-Based Method
• Advantages
– It is simple to assess the
value on the basis of the
conditions set up. With the
likely availability of many of
the required inputs from the
firm’s financial statements
and market information it
may be possible to identify
and or forecast particular
cash flows.
– In specific circumstances this
method is useful, especially if
there are suitable
comparable transactions
involving third parties or
industry standard royalty
rates.
• DisadvantagesDisadvantagesDisadvantagesDisadvantages
– Although the methods are conceptually
robust, they can prove difficult to implement
in high-uncertainty environments. This task
always includes some uncertainty and
subjective assumptions.
– There are both uncertain and distant cash
flows and the discount rate have to be
estimated. For example, there is rarely an
experience base when estimating the
market potential and therefore cash flow of
early stage IP developments.
– All risks are summed together and
assumed to be appropriately adjusted for in
the discount rate and the probabilities of
success, rather than being dealt with
individually (such as legal risk, technological
risk etc.).
– A significant drawback of the relief from
royalty method is that a royalty rate can
always be assumed, when in reality it may
never materialize.
– It ignores changes in the time value of
money and maintenance Cost.
– Does not account for market demand.

IP Valuation – Income-Based Method
When are they used?
• Income approach to IP valuation is only
accurate if the following variables are
available or can be accurately estimated:
– an income stream either from product sales or
license of the IP
– an estimate of the duration of the IP’s useful life
– an understanding of IP specific risk factors for
incorporation into the valuation and a valid
discount rate.

IP Valuation - DCF
• Discounted Cash Flow — The discounted cash
flow method is good for assets with
predictable life spans and future financial
benefits, including:
– Contracts (current and future yearly benefits);
– Subscriptions and service contracts; and
– Patent royalties.
• The DCF method can be applied to savings
flows as well as to income flows.

Exhibition on DCF Calculation
The sources of risk are the revenue growth rate and the variable costs as a percentage of sales.The average of the
DCF is known as the net present value (NPV) and standard deviation as volatility. The results show that the average
DCF is positive (about 40), whereas the probability of a negative DCF is about 15%. The decision as to whether to
proceed or not with this project will therefore depend on the risk perspective (tolerance) of the decision-maker. This
example has also been extended to calculate the distribution of bonus payments on the assumption that a bonus is
paid whenever the net DCF is larger than a fixed amount (such as 50).
• 1 2 3 4 5 6 7 8 9 10
• Revenue 100 105.0 110.3 115.8 121.6 127.6 134.0 140.7 147.7 155.1
• % growth 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0% 5.0%
• Average 5% 5% 5% 5% 5% 5% 5% 5% 5%
• S.D. (Volatility ) 8% 8% 8% 8% 8% 8% 8% 8% 8%
• Fixed Cost 35 35 35 35 35 35 35 35 35 35
• Variable Cost 50 53 55 58 61 64 67 71 74 78
• Variable Cost 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3% 50.3%
• min 48% 48% 48% 48% 48% 48% 48% 48% 48% 48%
• ml 50% 50% 50% 50% 50% 50% 50% 50% 50% 50%
• max 54% 54% 54% 54% 54% 54% 54% 54% 54% 54%
• Profit/Cash Flow 15 17 20 22 25 28 32 35 38 42
• DCF 12% 139.6
• Investment 100
• Net DCF (NPV) 39.6 Average N/A
• p(<=0) N/A
• Bonus limit 50
• Bonus 0.0 p(>0) 37.4

IP Valuation - DCF Method
• Limitations of DCF Methods
Use of DCF based method can become
inordinately complex when;
In situation where a decision may have to be
taken continuously
The discount rate need to change continuously
varying with underlying IP asset value and time
Proponents of use of real option methods for IP
valuation argue DCF based methods do not address
issue of managerial flexibility

Monte Carlo Method
• Monte Carlo method is
understood as any
technique of statistical
sampling employed to
approximate solutions to
quantitative problems.
• Evaluates how possible future
outcomes can affect a current
decision.
Assign appropriate probabilities
to different outcome
• Very useful in considering IP with
no prior commercialized track
record (new or unique in the
market)
• Useful in considering intrinsic
uncertainty in underlying earnings
potential of IP asset
• Based on DCF method
• Usually used in income
projection sensitivity analysis
• Addresses a situation where
more than one analysis variables
are related e.g. price of
product/service and market
penetration
• Each simulation exercise one or
more variable is changed

Monte Carlo Method
• Procedural Process
– Identify inputs (e.g. market
size, cost of goods sold)
– Identify useful life time
– Choose discount rate
– Choose minimum,
maximum
– Prescribe randomness
through distribution (e.g.
uniform, normal,
triangular, etc) and
probability
– Enter into model
– Run sensitivity analysis
– Make a decision
• Variables used
– Capital investment needed to
develop a technology
– Time needed to deliver
product to the market
– Potential market size
– Potential product/license
revenue
• Sensitivity analysis is useful in
highlighting key uncertainty
• Identifying such uncertainty
provide an opportunity to reduce
them which greatly improves
quality of prediction

Monte Carlo Method
Challenges
– More complex in
manual computation
– Prone to be Garbage-
In Garbage-Out
(GIGO)
Benefits
– Able to identify
probability of specific
outcome
– Able to identify variables
which have influence in
the model (e.g. net
present value)
– Add more flexibility to
the model
– Obtain clear charts and
reports

IP Valuation –
Option Pricing-
Based Method
Option pricing based methods
The theory behind option pricing was
primarily developed for use in pricing financial
options but can also be applied to a number
of other situations other than directly
financial assets. The valuation of IP still in
development or being commercialized is one
such framework. Option based methods
essentially belong in the income based
methods category as they too use expected
future cash flows to measure value.
The basic definition of an option is a right but
not an obligation, at or before some specified
time, to purchase or sell an underlying asset
whose price is subject to some form of
random variation. Options are priced using
the Black-Scholes option-pricing model,
which is a mathematical model for the
valuation of options.
Real Options Method (Non-
financial Options)
Real (non-financial) option
valuation methods treat the
development as well as
commercialization of IP as a series
of options. As the IP is developed
and commercialized, many
decisions about investment
timing, when to patent,
abandonment, direction of
research etc. must be made. The
information to make these
decisions is often not available at
the time of valuation, but
becomes available later. The real
options method, using the Black-
Scholes model, takes into account
the flexibility of these future
decisions.

IP Valuation - OPT
Black-Scholes Model

IP Valuation
OPT vs Real Option
OPT
• Time to expiry
• Exercise price of the
financial option on share
• Current price on the
underlying share
• Standard deviation of
the underlying share
return
• Risk free interest rate
Real Option
• Time to invest in
• Investment cost of
real option project
• Present value of
project cash flows
• Standard deviation of
project value (volatility)
• Risk free interest rate

IP Valuation – Option Pricing-Based Method
Advantages
It incorporates the value
associated with the uncertainty
and accounts for the flexibility
inherent in the development of IP.
The value associated with the
uncertainty of cash flows and the
ability to manage the
development of the IP is
accounted for. Like the DCF
method it values the stream of
cash flows but it also accounts for
acquired knowledge. As a result, it
provides a more complete
evaluation than the DCF as it
captures more than simply cash
flows and static costs.
Disadvantages
The main disadvantage of the
real options method is the
complexity of the model. It is
difficult to understand and the
evaluation can be costly to
perform. Some experts doubt the
accuracy of options based models
for use with real investments
such as IP. The main arguments
are that option based models
over-value IP through the
inclusion of non-viable
development as well as
commercialization decisions.

IP Valuation – Option Pricing-Based Method
When are they used?
• The real options method is
applicable when confronting a
high degree of uncertainty or
being in the situation of
complexity, adding some
managerial flexibility, and not all
the information is known at a
particular time.
• Based on Black-Scholes
model used in valuing options
on financial assets.
• It is increasingly used in the
biotechnology as well as
pharmaceutical industries and
early stage IP developments.
Conclusion
• Monte Carlo Simulation
uses a random number
generation to simulate
reality
• Possible to generate
thousands possible
scenarios
• Made easy by
availability of software
packages

IP Valuation –
Market-Based
Method
Auction In a perfect auction, there are
many potential buyers with perfect
information about all aspects of the IP.
The value of the IP is determined by the
price reached through bidding.
Comparable market value The value of
the IP is given by comparison with similar
comparable independent IP or similar
transactions.
Comparable royalty rate Market based
valuation methods may also be based on
the comparison of royalty rates used
when licensing similar IP. Many sectors
often use industry averages as a basis for
setting royalty rates in license
agreements or in establishing damages
in litigation. The value of the IP is given
through the comparison of the subject IP
with the royalty rates in similar license
agreements.
Market-based methods value
IP through comparison with
prices achieved in recent
comparable or similar IP
transactions between
independent parties.
Observing the prices of
comparable assets traded
between parties in an active
market gives a value to the
subject IP. The idea behind
these approaches is that the
market decides the accurate
price and therefore the value
of the IP. Market based
methods include IP auctions,
comparable market and
comparable royalty rate
methods.

IP Valuation – Market-Based Method
Advantages
Observing the market is
a relatively
straightforward
valuation method. It is
useful to check the
validity of other
approaches.
Disadvantages
- Lack of IP markets and
information
- Uniqueness of IP makes
direct comparison difficult
Disadvantages (Cont’d)
- There is a risk of comparing the subject
IP with other IP which has been traded
but which has still not been utilized in full
stretch. In these cases the IP can be
undervalued.
- When royalty rates are compared, there
are also some potential distorting
problems. Royalty rates set using returns
to R&D costs, return on sales figures or
industry averages run the risk of valuing
costs or other factors rather than value.
- Search for a comparable market
transaction is futile
– Lack of compatibility
– IP transactions are part of a larger
transaction and details are kept
extremely confidential, it is never
possible to find a transaction

IP Valuation – Market-Based Method
When are they used?
Market based methods are useful when a market value is
required for any given subject IP. These methods require an
active market, a comparable exchange of IP between two
independent parties and sufficient access to transaction price
information.
There are limited formal markets for IP and the relevant
pricing information is not usually public. As a result, the use of
the comparable market value approach to valuing IP is rare. The
use of comparable royalty rates are more widespread, especially
as databases of industry royalty rates and comparable
transaction information have been collated by larger IP right-
holders and independent companies offering valuation services.
In the future, when IP markets become active and public, the
use of market based approaches can become more established.

IP Valuation – Royalty Savings Method
• Execution of the Royalty Savings method in a scenario of M&A
-- Select an appropriate royalty rate (as a percent of revenue)
• Search for agreements regarding the licensing of comparable technologies
• Review of the royalties paid as for the use of the comparable technologies,
and a comparison relative to the insured patent
• Analyze the company’s excess earnings, and hence its ability to pay a
royalty and still generate a fair return
– Project the expected future annual revenue attributable to the IP;
– Calculate the royalties that the owner is relieved from paying by
multiplying the projected annual revenue by the royalty rate;
– Reduce the royalties by the taxes that would be due on the
incremental profit created by the relief from paying royalties;
– Discount the after-tax annual royalty savings to present value at the
appropriate discount rate;
– Sum the discounted after-tax royalty savings to estimate the value of
the Intellectual Property.

IP Valuation – Royalty Savings Method
• Execution of the Royal Savings Method under a scenario of
owning IP and in a development process for technological
feasibility or market commercialization .
– The application of this approach is in the same manner as
detailed in the M&A scenario, with the exception of
probability weighting the expected future royalty income
to reflect the uncertainty associated with the project
achieving technological feasibility.
– Application of this approach assumes that the owner
would license the rights to the IP in exchange for future
royalty payments to a third party during or at the end of
the R&D phase, rather than commercializing and
marketing the completed product using its own resources.

IP Valuation – Pay-off Method (POM)
• POM is an analysis method that is suitable for cases, where
the value information is in the form of scenarios. It is about
the way to create a distribution from values of, usually
three value scenarios, minimum possible value scenario,
and maximum possible value scenario.
• Observe that the best guess scenario is the most likely one
and assigning it full degree membership in the set of
expected outcome. Decide that the maximum possible
(optimistic) and the minimum possible (pessimistic)
scenarios are the upper and lower bounds of the
distribution. Do not consider values higher than the
optimistic scenario and lower than pessimistic scenario.
Assume the shape of the POM distribution is triangular.
Calculate a real option value for the patent under analysis
directly from the pay-off distribution by using fuzzy pay-off
method for real option valuation.

IP Valuation – Qualitative Evaluation Method
• Qualitative evaluation methods
provide a value guide for the
subject IP through the rating
and scoring of different factors
related to the IP. These factors
or “value indicators” can
influence the value of the IP
both positively and negatively.
Patent information related
value indicators used to
suggest the existence of strong
correlation between patent
value and standardized
indicators observable in patent
information documents.
Evaluation of value indicators:
IPScore is used to value
technology, patents and patent
portfolios internally, within
companies. The tool provides a
framework for evaluating and
strategically managing patents.
It consists of five categories:
legal, technology, market,
finance and strategy, each of
which has 5-10 associated
index questions. Each question
relates to a different value
indicator. Each question is rated
1-5 according to the patents
strengths and weaknesses.
Together, the 40 or so value
indicators form a whole picture
of the patent and its relative
risks and opportunities. These
are then displayed in various
tables and graphical forms to
be used by management for
making strategic decisions.

IP Valuation – Qualitative Evaluation Method
• Advantages
- Simplicity is the main advantage
of patent information related and
non-patent value indicators. Once
the relevant information has been
researched and is available in a
useable form its relatively easily to
classify and evaluate the IP without
the need for complex methods.
- Data for the evaluation is often
publicly available. With sufficient
expertise it is possible to value IP
belonging to other parties. As a
result, these qualitative methods
facilitate the comparison and
ranking of IP within a company’s
own portfolio or against
competitors’ IP.
• Disadvantages
- Valuing IP using patent information
related value indicators have many
drawbacks. For example simply counting
citations avoids taking a stand on
questions such as how and why citations
arise and what type of information they
convey. Focusing on simple counts
deliberately ignores any added
information within the network of
citations. Using value indicators as a proxy
for value is only as useful as the level of
expertise of those who are conducting the
valuation. One must also decide which
indicators are relevant to the value of a
particular IP, and which are not. The
quality and realism of the qualitative
evaluation in IPScore, for example, is
greatly dependent on the quality of
information used.

IP Strategy
To optimize the value
of IP assets, value
creation function
can be simply
formulated where
profitability rests
upon price and
cost mechanism.
The price will be
rising on account
of strategic
management such
as product
uniqueness,
product
differentiation,
monopolistic
competition,
higher barrier to
entry, innovation
and branding.
Cost savings can
be achieved if
granted tax
incentives and
other tax
privileges, and due
to economy of
scale and skilled
work force.
Σ Profiti
= (Pricei – Costi)
x Volumei

IP Strategy
SWOT analysis provides
self assessment through
internal audit that reveals
strengths and weaknesses,
while taking opportunities
from the external factors
like technological progress,
government laws and
regulation, life styles,
demography, political and
economic situation; and
escaping the risks from IP
infringement, the act of
not pursuing IP
circumvention and
plagiarism.
Qualitative evaluation
methods are most often
used for the purpose of
internal IP management.
They are most useful for
comparing, categorizing
and ranking IP within a
portfolio or vis-à-vis
competitors’ IP. They are
also useful for assessing
the risks and opportunities
of IP.

IP Audit
IP audit is a strategic
exercise where IP assets are
to be inventoried and then
mapped against the current
business and future
strategic priorities. Within
an audit process through a
classification or taxonomy,
IP assets will be categorized
in manner that actionable
information is provided for
IP asset optimization by
means of technical analyses
(e.g. SWOT).
Taxonomy can assist the
Company in determining the
extent to which current and
future products are
protected (e.g. to identify
the existence of strategic
gaps in the portfolio and
pockets of non-core IP), and
further performing
competitive assessment
(e.g. to determine the
position and trajectory of
rivals’ portfolios).

IP Audit (cont’d)
understanding
entire business
strategy
to align IP
strategy with
business goals
to identify key
target
markets,
products and
technologies
IP assets
identification
To ensure not
missing all
relevant IP
assets
IP assets
categorization
Using
taxonomy to
assess the
strength and
relevancy of
IP
IP assessment
competitive
(e.g. SWOT,
GAP,
trajectories)
opportunity
(e.g. licensing
and sale,
utilization
across SBUs)
and risk (e.g.
litigation)
process and
control (e.g.
best practices,
strategic
patenting,
licensing
compliance)
IP audit
process which
is used to
support the IP
business plan
needs these
essential steps
of action:

Ip aspects of valuation malaysia

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