Licensing & IP Valutation

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By Ruth Fischer

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Licensing & IP Valutation

  1. 1. Licensing and IP Valuation Ruth Fisher, PhD www.QuantAA.com
  2. 2. Outline <ul><li>When and Why You Need an Expert </li></ul><ul><li>Components of IP Valuations </li></ul><ul><ul><li>Fields of Use </li></ul></ul><ul><ul><li>Discount Factors </li></ul></ul><ul><ul><li>Profit Streams </li></ul></ul><ul><li>Profit Allocation: Licensor v. Licensee </li></ul><ul><li>Issues re Maximization of IP Value </li></ul>
  3. 3. When and Why You Need a Valuation Expert <ul><li>Cost of Expert Valuation: </li></ul><ul><li>$1,000s – $10,000s </li></ul><ul><li>Use an expert when accuracy and credibility are important </li></ul><ul><ul><li>Valuation subject to scrutiny </li></ul></ul><ul><ul><li>Large investments will be made </li></ul></ul>
  4. 4. Valuation Effort Required Large Very High Litigation Large High Intra-Company Transfers Large High Joint Ventures Large High Tax-Related Ventures Level of Effort Required Expected Degree of Scrutiny Circumstance
  5. 5. Valuation Effort Required (cont.) Medium Medium R&D Investment Medium Medium In-Kind Contribution Medium Medium Licensing (Sale & Purchase) Medium Medium Business Decision Making Level of Effort Required Expected Degree of Scrutiny Circumstance
  6. 6. Valuation Effort Required (cont.) Source: Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value from Innovation . John Wiley & Sons, Inc., 1998, p.183. Small Low Initial Estimate Medium Medium Exploitation Potential Medium Medium Portfolio Management Level of Effort Required Expected Degree of Scrutiny Circumstance
  7. 7. Components of IP Valuations <ul><li>IP Value </li></ul><ul><li>= Sum for all Fields of Use i of </li></ul><ul><li>( Present Discounted Value ) i </li></ul><ul><li> of ( Profit ) i </li></ul>
  8. 8. Fields of Use <ul><li>A field of use is a specific application, industry, product line, or geography for the invention </li></ul><ul><li>Each field of use may be developed, licensed, and/or marketed separately </li></ul><ul><li>Each field of use must be valued separately </li></ul>
  9. 9. Examples of Fields of Use <ul><li>Saran Wrap® </li></ul><ul><ul><li>Meat packaging in the United States </li></ul></ul><ul><ul><li>Book packaging in Europe </li></ul></ul><ul><ul><li>Packaging of entertainment products (CDs, DVDs, etc.) </li></ul></ul><ul><ul><li>Gift packaging (wrapping paper) </li></ul></ul>
  10. 10. Fields of Use Matrix $50M $100M $75M Latin America $0 $200M $100M Household Products $750M $50M $500M Entertainment $50M $100M $250M Food Asia Europe U.S.
  11. 11. Present Discounted Value <ul><li>Intuitively: A dollar today is worth more than a dollar tomorrow , and discounting makes you indifferent between revenue in future and PDV of revenue today </li></ul><ul><li>Discounting accounts for </li></ul><ul><ul><li>Time Value of Money : Interest rate and/or opportunity cost (return on other projects) </li></ul></ul><ul><ul><li>Technology Risks : Will the invention yield a viable product? </li></ul></ul><ul><ul><li>Marketing Risks : Will there be demand for the product at a profitable price? </li></ul></ul>
  12. 12. Present Discounted Value (cont.) <ul><li>PDV is calculated by applying discount factors to future revenue streams </li></ul><ul><li>Discount factors are “weights” for future $ relative to initial period $ </li></ul><ul><ul><li>Weights decrease with time </li></ul></ul><ul><ul><li>Weights decrease with risk (discount rate) </li></ul></ul>
  13. 13. Discount Factors: A Graphical Illustration
  14. 14. Discounted Factor
  15. 15. Present Discounted Value: A Tabular Example $2.61 ( ↓ 48%) 0.20 0.30 0.44 0.67 1.00 Discount Factor r = 50% $3.36 ( ↓ 33%) 0.41 0.51 0.64 0.80 1.00 Discount Factor r = 25% $4.17 ( ↓ 17%) 0.68 0.75 0.83 0.91 1.00 Discount Factor r = 10% $5.00 $1 $1 $1 $1 $1 Nominal $ PV Period 5 Period 4 Period 3 Period 2 Period 1
  16. 16. Present Discounted Value: A Tabular Example (cont.)
  17. 17. Present Discounted Value: Another Tabular Example $2.48 ( ↓ 26%) $2 $2 $1 $0 $0 Nominal $ $4.24 ( ↑ 26%) $0 $0 $1 $2 $2 Nominal $ $3.36 $1 $1 $1 $1 $1 Nominal $ 0.41 0.51 0.64 0.80 1.00 Discount Factor: r = 25% PV Period 5 Period 4 Period 3 Period 2 Period 1
  18. 18. Present Discounted Value: Another Tabular Example (cont.)
  19. 19. Discount Rates <ul><li>Discount Rates (Levels of Risk) </li></ul><ul><ul><li>Vary across Industries </li></ul></ul><ul><ul><li>Increase with Time to Market </li></ul></ul><ul><ul><li>Decrease with Stage of Development </li></ul></ul><ul><ul><ul><li>Basic Research Result : Development of idea </li></ul></ul></ul><ul><ul><ul><li>Prototype Development Stage : Functionality of technology </li></ul></ul></ul><ul><ul><ul><li>Pilot Production Stage : Manufacturing ability </li></ul></ul></ul><ul><ul><ul><li>Advanced Stage : Product marketing and production </li></ul></ul></ul>
  20. 20. Sample Discount Rates Patrick H. Sullivan, Profiting from Intellectual Capital: Extracting Value from Innovation . John Wiley & Sons, Inc., 1998, p.339. Gordon V. Smith and Russell L. Parr, Valuation of Intellectual Property and Intangible Assets, 3 rd Edition. John Wiley & Sons, Inc., 2000, p.506. Source 0-30% 25% Advanced 30-50% 30-40% Intermediate 50-75% 50% Basic Discount Rate 2 Discount Rate 1 Stage of Development
  21. 21. Profit If Successful <ul><li>Valuation Methods </li></ul><ul><li>Cost-Based Approach : Cost of reproducing/replacing technology </li></ul><ul><li>Market-Based Approach : Price of similar technologies </li></ul><ul><li>Economic Analysis : PDV of future profit streams </li></ul>
  22. 22. Cost-Based Approach <ul><li>(Cost of reproducing technology) </li></ul><ul><li>Useful for determining whether to develop in-house or license </li></ul><ul><li>Helps to put bounds on amount willing to pay or receive for license </li></ul><ul><li>Does not account for market demand </li></ul>
  23. 23. Market-Based Approach <ul><li>(Price of similar technologies) </li></ul><ul><li>Requires </li></ul><ul><ul><li>existence of a market for comparables </li></ul></ul><ul><ul><li>with open knowledge of terms of sale </li></ul></ul><ul><ul><li>and willing parties to the negotiations </li></ul></ul><ul><li>Adjustments for comparability often subject to dispute </li></ul><ul><ul><li>See Economic Factors for determination of adjustments for comparability </li></ul></ul>
  24. 24. Economic Analysis <ul><li>(PDV of future profit streams) </li></ul><ul><li>Intrinsic Value Factors </li></ul><ul><ul><li>Benefits of IP relative to Alternatives </li></ul></ul><ul><ul><li>Size of Product Market </li></ul></ul><ul><ul><ul><li>Marginal Change: </li></ul></ul></ul><ul><ul><ul><li>Market ~ Existing Users </li></ul></ul></ul><ul><ul><ul><li>Revolutionary Change: </li></ul></ul></ul><ul><ul><ul><li>Market ~ Existing Users + New Users </li></ul></ul></ul>
  25. 25. Size of Product Market Total Population Old Market = New Market Marginal Change Total Population Old Market Revolutionary Change New Market
  26. 26. Economic Analysis (cont.) <ul><li>Intrinsic Value Factors (cont.) </li></ul><ul><ul><li>Portion of Realizable Profit from Invention v. </li></ul></ul><ul><ul><ul><li>Other Patented Components </li></ul></ul></ul><ul><ul><ul><li>Non-Patented Components </li></ul></ul></ul><ul><ul><ul><li>Manufacturing Risk </li></ul></ul></ul><ul><ul><ul><li>Other Business Risk </li></ul></ul></ul>
  27. 27. Contribution of IP to Profits
  28. 28. Economic Analysis (cont.) <ul><li>Manufacturing/Supply Factors </li></ul><ul><ul><li>Capacity Constraints </li></ul></ul><ul><ul><li>Access to Raw Materials </li></ul></ul><ul><ul><li>Access to Consumers </li></ul></ul><ul><ul><li>Regulatory Environment </li></ul></ul><ul><ul><ul><li>Tariffs </li></ul></ul></ul><ul><ul><ul><li>Quotas </li></ul></ul></ul><ul><ul><ul><li>Price Caps </li></ul></ul></ul>
  29. 29. Economic Analysis (cont.) <ul><li>Demand Factors </li></ul><ul><ul><li>Consumer Appeal v. Alternatives </li></ul></ul><ul><ul><li>Marginal v. Revolutionary Change </li></ul></ul><ul><ul><li>Consumer Switching Costs </li></ul></ul><ul><ul><li>Consumer Acceptance of Product </li></ul></ul>
  30. 30. Economic Analysis (cont.) <ul><li>Demand Factors (cont.) </li></ul><ul><ul><li>Potential for Sales of Complementary Products </li></ul></ul><ul><ul><li>Product Lifecycle </li></ul></ul><ul><ul><ul><li>Adoption/Diffusion Curve </li></ul></ul></ul><ul><ul><ul><li>Repeat Sales </li></ul></ul></ul><ul><ul><ul><li>Market Saturation </li></ul></ul></ul><ul><ul><ul><li>Current/Future Substitutes </li></ul></ul></ul>
  31. 31. Product Lifecycle
  32. 32. Profit Allocation: Licensor v. Licensee Profit from Invention Licensor’s Share Licensee’s Share
  33. 33. Profit Allocation: Licensor v. Licensee <ul><li>Form of Allocation </li></ul><ul><ul><li>Types </li></ul></ul><ul><ul><ul><li>Up-Front Payment </li></ul></ul></ul><ul><ul><ul><li>Milestone Payments </li></ul></ul></ul><ul><ul><ul><li>Royalty Payments </li></ul></ul></ul>
  34. 34. Profit Allocation: Licensor v. Licensee (cont.) <ul><li>Form of Allocation (cont.) </li></ul><ul><ul><li>How Determined </li></ul></ul><ul><ul><ul><li>Deliverables? </li></ul></ul></ul><ul><ul><ul><li>Transfer of knowledge? </li></ul></ul></ul><ul><ul><ul><li>Risk Sharing </li></ul></ul></ul>
  35. 35. Profit Allocation: Licensor v. Licensee (cont.) <ul><li>Size of Allocation Depends on </li></ul><ul><ul><li>Fees for similar licenses </li></ul></ul><ul><ul><li>Stage of development </li></ul></ul><ul><ul><li>Bargaining power of parties (alternatives available to each) </li></ul></ul><ul><li>Rules of Thumb : </li></ul>
  36. 36. Maximization of IP Value <ul><li>Capture all fields of use </li></ul><ul><li>Rank applications by profitability </li></ul><ul><li>Rank applications by probability of success </li></ul><ul><li>Consider who is most suited to exploit each application </li></ul>
  37. 37. Contact Information
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