Patent Valuation Slides


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Patent Valuation Slides. Originally presented at Global IP Convention 2011, Bangalore, India.

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Patent Valuation Slides

  1. 1. Understanding Patent Valuation Methods <ul><li>Hasit Seth </li></ul><ul><li>coofluence </li></ul>coofluence (c) coofluence research, 2011
  2. 2. Introductions <ul><li>Hasit Seth </li></ul><ul><li>Email: [email_address] </li></ul><ul><li>B.S.c, LL.M. (Franklin Pierce), LL.M. (Mumbai, Gold Medal) </li></ul><ul><li>Past: IP Law firms in US, Asia Patent Manager with EATON, IPVALUE, Bombay High Court </li></ul><ul><li>IP - Prosecution, Litigation, Licensing, Consulting </li></ul><ul><li>coofluence : IP eLearning Course Licensing </li></ul>coofluence (c) coofluence research, 2011
  3. 3. coofluence <ul><li>We create course content that you can license for training your organization - IP, Negotiations & Law </li></ul>coofluence (c) coofluence research, 2011
  4. 4. Patents Background <ul><li>It is a “Right to Exclude”. </li></ul><ul><li>An Asset based on right </li></ul><ul><li>Intellectual or Intangible vs. “real” property </li></ul>coofluence (c) coofluence research, 2011
  5. 5. Asset & Value <ul><li>Asset: “An item of a value owned” </li></ul><ul><ul><li>Item </li></ul></ul><ul><ul><li>Value </li></ul></ul><ul><ul><li>Owned </li></ul></ul><ul><li> </li></ul>coofluence (c) coofluence research, 2011
  6. 6. Patent Assets <ul><li>Patents are assets because: </li></ul><ul><ul><li>Item: Right to Exclude </li></ul></ul><ul><ul><li>Value: Can be transferred for value </li></ul></ul><ul><ul><li>Ownership: Vesting of Right In Inventor </li></ul></ul>coofluence (c) coofluence research, 2011
  7. 7. Value <ul><li>If patents are assets, they have a “value” </li></ul><ul><li>But what is “value”? </li></ul><ul><ul><li>An economic value is the worth of a good or service as determined by the market (Wikipedia) </li></ul></ul><ul><li>Value has transactional existence </li></ul>coofluence (c) coofluence research, 2011
  8. 8. Quantum <ul><li>If patents as assets have a value, question arises: </li></ul><ul><ul><li>What is the value of a particular patent? </li></ul></ul>coofluence (c) coofluence research, 2011
  9. 9. Uniqueness & Value <ul><li>Patent by definition is given to an unique invention </li></ul><ul><li>Hence, one patent’s value would have no correlation to value of another patent unless the underlying inventions are coorelated </li></ul>coofluence (c) coofluence research, 2011
  10. 10. Value Determination How are these assets valued?
  11. 11. Value of Gold
  12. 12. Why Value Patents? <ul><li>M&A - “Worth paying $5m extra for 10 key patents on blue LEDs”? </li></ul><ul><li>Settlement - Worth settling a patent litigation because defendant is offering $1m? </li></ul><ul><li>Royalty - If 10 year term is left, what is a “fair royalty” to ask for a semi-conductor patent? </li></ul>coofluence (c) coofluence research, 2011
  13. 13. Value of This Patent?
  14. 14. Value of This Patent?
  15. 15. Three Main Methods <ul><li>Cost Methods </li></ul><ul><li>Income Methods </li></ul><ul><li>Market Methods </li></ul>coofluence (c) coofluence research, 2011
  16. 16. Cost Method <ul><li>Historical Cost </li></ul><ul><ul><li>Cost of development (R&D, Labor, Interest, etc) </li></ul></ul><ul><ul><li>Cost of patenting </li></ul></ul><ul><ul><li>Maintenance costs </li></ul></ul><ul><li>Will APPLE license its touch screen patents if I offer to pay them their “historical cost” of development? </li></ul>coofluence (c) coofluence research, 2011
  17. 17. Cost Method <ul><li>Replacement Cost </li></ul><ul><ul><li>What will it cost to recreate something from scratch? </li></ul></ul><ul><li>E.g., XYZ makes a patented toy airplane. If ABC does its own R&D to create a non-infringing alternative it will cost $1m. Is ABC’s offer to license XYZ’s toy patent for $0.75m a fair value offer? What should XYZ do? </li></ul>coofluence (c) coofluence research, 2011
  18. 18. Income Method <ul><li>Value of a patent is a factor of the income it can generate. </li></ul><ul><li>E.g, ABC patented a new pain-killer drug in 2001. Average sales have been $1m per year. ABC seeks $10m for the remaining 10 years of the term. Is that a fair value to pay? </li></ul>coofluence (c) coofluence research, 2011
  19. 19. Income Method <ul><li>What if market for that particular pain killer is declining due to doctors preferring another pain-killer? </li></ul><ul><li>Does valuation still hold? </li></ul><ul><li>This is one risk, how would you include many others risks into the model? </li></ul>coofluence (c) coofluence research, 2011
  20. 20. Income Methods <ul><li>Discounted Cash Flow (DCF) </li></ul><ul><ul><li>What cash-flows are expected at period intervals? (E(CFt)) </li></ul></ul><ul><ul><li>What is the risk rate? (r) </li></ul></ul><ul><ul><li>PV (Present Value) of the expected cash flows (Damodaran) </li></ul></ul>coofluence (c) coofluence research, 2011
  21. 21. Resources <ul><li>Aswath Damodaran’s site is a goldmine of information on general valuation (not much directly on IP): </li></ul><ul><li> </li></ul>coofluence (c) coofluence research, 2011
  22. 22. Market Methods <ul><li>COMPARABLE TRANSACTIONS </li></ul><ul><li>What was the value of similar patents sold in similar circumstances? </li></ul><ul><li>Difficulty: Data about valuation is usually confidential. </li></ul>coofluence (c) coofluence research, 2011
  23. 23. Real Options <ul><li>Financial option: </li></ul><ul><ul><li>A right to buy/sell but not an obligation </li></ul></ul><ul><li>A firm has a right to make investment at periodic times but not an obligation to buy/sell, hence they hold “options”. </li></ul><ul><li>This flexibility is not possible to model in a DCF valuation where only RoR can be tweaked. </li></ul>coofluence (c) coofluence research, 2011
  24. 24. NORTEL PORTFOLIO <ul><li>Anybody here who does not know GOOGLE? </li></ul><ul><li>Most of us also know Google backed Android mobile OS </li></ul><ul><li>Google is up against Apple (iOS) and now Microsoft+Nokia. And, perhaps, patent aggregators too! </li></ul>coofluence (c) coofluence research, 2011
  25. 25. Nortel Patent Chest <ul><li>What was at stake? 6,000 Patents and Patent Applications. </li></ul><ul><li>3G & 4G patents of bankrupt Nortel </li></ul><ul><li>Bidding model </li></ul><ul><li>Bidders: RIM, Apple & Google </li></ul><ul><li>Google’s bid $900m in April 1st week, 2011 </li></ul><ul><ul><li>Rough cut: $150K per patent. How? </li></ul></ul>coofluence (c) coofluence research, 2011
  26. 26. Models <ul><li>Seller’s valuation model is not automatically acceptable to a buyer </li></ul><ul><li>Methodology can be disputed </li></ul><ul><li>Simple models using industry accepted valuation standards will have more “buy-in” </li></ul>coofluence (c) coofluence research, 2011
  27. 27. Questions <ul><li>Write to me at [email_address] and please do visit us at: www. coofluence .com </li></ul><ul><li>All images are from public domain ( All trademarks are owned by their respective owners. </li></ul>coofluence (c) coofluence research, 2011