Intellectual Property Valuation

1. What is IP to a business/company?

Essentially, ‘IP’ refers to unique, value-adding creations of the human intellect that results from human creativity and inventiveness.
A company’s assets could be broadly categorized as tangible assets (e.g.: buildings, machineries) and intangible assets (e.g.: human capital, brands, designs and innovative capacity), thus the latter would include IP rights.
In a technology driven and enhanced world, companies are realising that intangible assets are becoming more significant and valuable in determining the competitiveness of a business in the market trade, instead of the traditional physical assets.
For instance, large factories are increasingly being overhauled by powerful and sophisticated software, traditional production techniques are being enhanced and modernised by endless innovation and creative ideas.
As such, companies should seek to make best use of their intangible assets, specifically IP assets, by legally protecting them.

2. What are the examples of such intangible assets?

Generally, IP rights is the subset of intangible assets of a business.
Some of such intangible IP rights/assets may be acquired in:

Innovative products and processes (through patentsand utility models);
Cultural, artistic and literary works, including computer software and compilation of data (through copyrightand related rights protection);
Creative designs, including textile designs (through industrial designrights);
Microchips (through protection of layout-designs or topographies of integrated circuits); and
Trade secrets(through protection of undisclosed information of commercial value).

3. How do these IP rights affect the market value of a company?

As mentioned, IP can become a valuable business asset.
Markets will value a company on the basis of its assets, its current business operations and expectations of future profits.
IP may generate an income for a business through the licensing, sale, or commercialization of the IP-protected products or services that may significantly improve the company’s market share or raise its profit margins.
IP rights can enhance the value or worth of a company in the eyes of investors and financing institutions.
In the event of a sale, merger or acquisition, IP assets may significantly raise the value of a company, and at times may be the primary or only true assets of value.
In a nutshell, the strategic utilization of IP assets can substantially enhance the competitiveness of a company.

Innovation is one method by which a company may increase market share. IP plays a major role in enhancing competitiveness of technology-based companies, whether such businesses are commercializing new or improved products or providing service on the basis of a new or improved technology.
The basis of inventions is innovation, and such inventions can be protected through patents.
For most technology-based companies, a successful invention results in a more efficient way of doing things or in a new commercially viable product. Such added value would underpin a bigger stream of revenue or higher productivity, resulting in improved profitability of the company, thus increasing its market share and value.
As a result, it would also attract increased public perception and belief that the company has earning potentials, hence increasing the company’s Price-to-Earnings Ratio (“P/E ratio”) and thus its valuation.
This would then indicate an increased demand of the company as investors would anticipate earnings growth in the future.
For instance, such companies would be perceived as an impressive corporation and would always be on the look-out by astute executives for a possible good acquisition deal when their businesses are in a growth mode.

Company	Explanation
Starbucks	Starbucks may have started out as a coffee company, but today, it’s a technology company. It has been investing heavily in a digital strategy to connect to customers through mobile. Starbucks has built a world-class customer loyalty program that gives them the tools to track customer purchasing behaviour and reward customers as they spend. Starbucks is now focusing on using its data to inform even better customer experiences, creating AI-driven personalized rewards for segmented groups of customers based on their past behaviour and other factors, such as weather, time of day, day of the week, and special events, like birthdays.
Procter & Gamble	Procter & Gamble is best known for its household cleaning products, such as the laundry detergent Tide. It had spent nearly $2 billion annually on R&D, and was one of the first adopters of Amazon’s Dash button system, which enables consumers to re-order products with the simple push of a button. When a consumer notices he’s low on Tide Pods, he can simply press the Dash button attached to his washing machine to get a new shipment within a couple of days from Amazon—no computers or credit cards needed. By taking an early lead with technologies like Dash, P&G is proving that, while it may be based around household staples, it understands how to innovate.
COSMED	COSMED is a family-owned company that designs and manufactures cardio pulmonary and metabolic diagnostic equipment, with its headquarters located in Rome. Traditionally, COSMED’s business model is based on device sales, but it has been keeping align with the technology roadmap, patents and other IP rights. COSMED relies heavily on its patent portfolio to build its reputation in the medical technology industry. In 2011, it has added to its portfolio by acquiring a manufacturing company with an attractive set of products and patents, Life Measurement, Inc. (“LMI”), a leading provider of body composition assessment equipment in infants, children and adults. As such, it is reputed that COSMED’s brand name, market visibility and recognition are bolstered by a comprehensive IP portfolio, including not only patents, but also trademarks and design rights that cover high-tech, user-friendly products.
Johnson & Johnson	Johnson & Johnson is an American multinational corporation that develops not only pharmaceutical and consumer packaged goods, but also medical devices. It has spent billions on R&D to address the unmet medical needs of patients globally and to develop innovative medicines and technologies. It advocates strongly for effective patent systems that support, protect and promote innovation, such as new life-enhancing and life-saving products. Such protection allows Johnson & Johnson the freedom to disclose information about its inventions openly, to the exclusion of other competing technology companies and organizations, and at the same time creating an ongoing cycle of innovation and product improvement, settling itself as a reputable and high market-share corporation in the pharmaceutical industry.

5. How do you manage your IP assets?

This could be done by conducting an IP valuation of a company.
IP valuation is a process to determine the monetary value of the subject IP right(s) of such company.
In other words, such valuation is an essential audit for a company.
There are various reasons for conducting an IP valuation, and some of the triggers would point to the purpose of increasing market shares/value of the company.

For instance:

Triggers	Explanation
Merger & Acquisition (M&A)	One of the main reasons for considering an M&A transaction is the value of the IP assets of the target company. This is so as companies’ value is increasingly based on intangible assets and investment knowledge, rendering the value of their IP significantly important. Valuation of the IP assets of the target company often identifies additional value that significantly enhances the final sale or purchase price. In other words, IP valuation not only ensures IP risks and value realization opportunities checked, but also enables the parties to make an informed decision. It also influences positively on the resulting company’s value and share price. For instance, SMEs’ market value would increase overnight as a result of their acquisition of important patents in key technologies.
Investor Relation	In the case of a listed company, an IP valuation helps to communicate the value of its IP assets to capital markets, supports its share prices, and helps to obtain funding from investors. Valuation of IP assets is also required for initial public offering (IPO) documents.
Strategic Financing and/or Raising Equity/Capital	In the past, monetising an IP asset meant taking steps to create a product or secure a royalty stream. Now, with an emerging secondary market for IP assets, new ways to monetise IP assets are being devised, i.e. by creating IP asset backed securities through the lending of IP assets (e.g.: a portfolio of copyright or patent assets), either partly or wholly. For such IP asset-backed securitisation, the valuation of an entity’s IP assets is crucial. Essentially, securitisation refers to the pooling of different financial assets and the issuance of new securities backed by those assets. In principle, these assets can be any claims that have reasonably predictable cash flows, or even future receivables that are exclusive. As a result, in recent years, IP financing deals have been completed through a number of financial vehicles – securitisation, bank debt, hedge funds and private equity. Venture capitalists would scrutinise the company’s IP management (e.g.: patent strategies and patent portfolios). Usually, venture capitalists would value the company as a whole and consider the role of IP in that process.

6. How is an IP valuation performed?

Generally, there are 2 broad approaches, namely, the quantitative and qualitative valuation.
Quantitative approach relies on numerical and measurable data with the purpose to calculate the IP’s economic value, whereas qualitative approach focused on the analysis of the characteristics and uses of the IP.

(a)Quantitative Approach

Approach	Explanation
Cost Approach	Determine value by calculating cost of developing a similar or exact IP asset. This approach is based on the principle that there is a direct relation between the costs expended in the development of the IP and its economic value.
Market Approach	Determine value by comparing with the actual price paid for similar IP asset under comparable circumstances. This approach is often applied when the asset under valuation is unique, wherein the comparison is performed in terms of utility, technological specificity and the perception of the asset by the market. The main factors to be considered would be, to have an active market, and an exchange of an identical IP asset or group of comparable or similar IP assets.
Income Approach	Determine value of economic income that the IP asset is expected to generate, and then adjusted/discounted to its present-day value. Hence, the value of an asset is intrinsic to the expected income flows it generates.

(b)Qualitative Approach

This approach is performed through the analysis of different indicators with the purpose of rating the IP right, i.e. to determine its importance.
Such indicators would cover all aspects affecting the value of the IP, for example:
Legal aspect
Technology level of the innovation
Market details
Company organization

7.How do we choose the right approach?

Primarily, there is no hard and fast rule to determine outrightly the right and wrong approaches. In fact, selecting the appropriate valuation method in a given circumstances is complex.
Several factors should be considered, for instance:
Type of IP at stake
Level of development of the technology
Purpose of the valuation
Weighted pros and cons of each method

8.Contact

For more information, feel free to contact us at info@teeip.com and/or 03-9134 3113.

Intellectual Property Valuation

Author: Siti Nasyrah

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