IP value extraction and commercialisationDetermining the value of IP
Dr. Christian Hackl 25.10.2018
in cooperation with TUM-Tech GmbH
Managing Director of TUM-Tech GmbH
European Patent Office
§ Background- Ph.D. in Chemistry
§ More than 20 years experience in industry (management consulting), CEO of TUM-Tech for more than 15 years
§ TUM-Tech GmbH:- “Tech”: Technology Transfer (demand oriented) - Consulting on innovation management for companies and researcher
§ Assistant Professor at TUM (Technology and Innovation Management)
§ Cofounder of start-up (renewable energy)
Your speaker – Christian Hackl
www.tumtech.de
TUM: Technical University of Munich
DisclaimerOpinions expressed in this presentation are those of the speaker and not necessarily those of the European Patent Office.
European Patent Office
1. IP strategyFive virtual classroom sessions
2. IP evaluation and protection Five virtual classroom sessions
3. IP value extraction and commercialisationFour virtual classroom sessions
Overview of Webinars
European Patent Office
§ Module 1: “IP value extraction”
§ Module 2: “Licensing I”
§ Module 3: “Licensing II and enforcement”
§ Module 4: “Determining the value of IP”
Series Three - IP value extraction and commercialisation
European Patent Office
§ Different types of assets, value
§ Main valuation methods
§ Summary
Agenda
European Patent Office
What does the value of a company consist of?
?
European Patent Office
Tangible assets
BuildingsVehiclesEquipment…
Allocation of the enterprise value (%)
Tangible assets
Ernst & Young
Tangible and intangible assets
European Patent Office Ernst & Young 2009
Tangible assets
BuildingsVehiclesEquipment…
Intangible assets II
Goodwill
Allocation of the enterprise value (%)
Goodwill
Other intangible assets
Tangible assetsIntangible assets I
Patents / TrademarksKnow-how / Trade secretsCopyright / DesignHuman capital
Goodwill: excess amount paid for a company over the fair market value of the company’s identifiable assets” (tangible and IPR).
Ernst & Young
Tangible and intangible assets
European Patent Office
Components of S&P 500 market value
Importance of intangible assets?
Ocean Tomo intangible asset market value study 2017
European Patent Office
Goodwill Tangible assets
10
Industries Other intangible assets(e.g. IP)
Ernst & Young
Tangible and intangible assets
European Patent Office
Goodwill Tangible assets
11
Industries Other intangible assets(e.g. IP)
Ernst & Young
Tangible and intangible assets
European Patent Office
Goodwill Tangible assets
12
Industries Other intangible assets(e.g. IP)
Ernst & Young
Tangible and intangible assets
European Patent Office
What IP-asset is most important in M&A transactions?
Importance of patents
mergermarket: M&A Insights: Spotlight on Intellectual Property Rights
European Patent Office
The value of European patents
EPO, Ceccagnoli et al., 2005.
Patent value
Sh
are
of p
ate
nts
, %
European Patent Office
The value of European patents
EPO, Ceccagnoli et al., 2005.
Patent value
Sh
are
of p
ate
nts
, %
Average value(Mean)
European Patent Office
The value of European patents
EPO, Ceccagnoli et al., 2005.
Patent value
Sh
are
of p
ate
nts
, %
MedianAverage value
(Mean)
European Patent Office
The value of European patents
EPO, Ceccagnoli et al., 2005.
Patent value
Sh
are
of p
ate
nts
, %
MedianAverage value
(Mean)
3%
European Patent Office
The value of European patents
EPO, Ceccagnoli et al., 2005.
Patent value
Sh
are
of p
ate
nts
, %
MedianAverage value
(Mean)
3%10%
European Patent Office
Share of patent value classes in total portfolio value
EPO, Ceccagnoli et al., 2005.
Just 3% of all patents!
Just 10% of all patents!
European Patent Office
Value • Price
20
The notion of value
European Patent Office
Value • Price
• Price: result from the transaction seller / buyer
• Value: how much people are ready to pay
Willing Buyer(Licensee)
Willing Seller(Licensor)
21
The notion of value
European Patent Office
Value • Price
• Price: result from the transaction seller / buyer
• Value: how much people are ready to pay
Owner value: estimate of the value by the owner if he wasdeprived of the property of the item
Purchaser value: how much the buyer could pay for it
Market value: value • price of similar items already sold
Willing Buyer(Licensee)
Willing Seller(Licensor)
22
The notion of value
European Patent Office
Value PriceAmount of money exchangedValue to you / somebody else
What is the value?
European Patent Office
Value PriceAmount of money exchangedValue to you / somebody else
What is the value?
European Patent Office
DPA
What is the value?
6 year old Golf
European Patent Office
DPA
What is the value?
European Patent Office
DPA
What is the value?
European Patent Office
IP Value
28
???
a) Why valuing Intellectual Property?
European Patent Office
IP Value
29
External reporting and accounting
Taxation Planning
Litigation Resolution
Internal Management
Sales and licensing
Company Valuations
RaisingFinance
a) Why valuing Intellectual Property?
Different stakeholders involved
European Patent Office
§ Different types of assets, value
§ Main valuation methods
§ Summary
Agenda
European Patent Office 31
Cost-based
Overview of the different methods
European Patent Office 32
Cost-based
Market-based
Overview of the different methods
European Patent Office 33
Cost-based
Market-based
Income-based
Overview of the different methods
European Patent Office 34
Cost-based
Market-based
Income-based
Overview of the different methods
European Patent Office
Definition
§ The pricing of an asset is based on the cost of
developing the technology asset
Cost-based methods
35
European Patent Office
Definition
§ The pricing of an asset is based on the cost of
developing the technology asset
§ Cost considerations usually include:
Cost-based methods
36
???
European Patent Office
Definition
§ The pricing of an asset is based on the cost of
developing the technology asset
§ Cost considerations usually include:
• R&D: salaries, materials & equipment
• IP protection
• Trials, testing and prototyping
• Marketing & advertising
• Cost of capital
Cost-based methods
37
European Patent Office
Capitalization of historical costs
§ How much was spent to develop the technology
§ Problems:
Cost-based methods
38
???
European Patent Office
Capitalization of historical costs
§ How much was spent to develop technology
§ Problems:
• R&D costs are difficult to count (Which personal
costs? Over which period of time? Including
failures?)
• How to take into account inflation
• Cost • potential value
Cost-based methods
39
European Patent Office
Replication / replacement costs
§ Value of total costs to replace or re-create similar
technology that may already exist
§ Value paid • cost of re-developing it
§ Advantages for the buyer:
Cost-based methods
40
Replication cost: recreate similar IP, including cost of failureReplacement cost: create s.th. to replace IP, excluding cost of failure
European Patent Office
Replication / replacement costs
§ Value of total costs to replace or re-create similar
technology that may already exist
§ Value paid • cost of re-developing it
§ Advantages for the buyer:
• Avoids development effort
• Minimises risk
• Avoids costs related to a
delayed market entry (lost sales)
Cost-based methods
41
Replication cost: recreate similar IP, including cost of failureReplacement cost: create s.th. to replace IP, excluding cost of failure
European Patent Office
Replication / replacement costs
§ Practical considerations for the buyer
− Can you re-develop a unique, protected asset?
− Have development costs changed?
− Does a license secure freedom to operate?
− What is the cost of delayed time-to-market?
Cost-based methods
42
Replication cost: recreate similar IP, including cost of failureReplacement cost: create s.th. to replace IP, excluding cost of failure
European Patent Office
When to use the cost approach
§ When the asset is at very early stage of development
§ When IP is easy to “design-around”
§ Bookkeeping
Cost-based methods
43
European Patent Office 44
Cost-based
Market-based
Income-based
Overview of the different methods
European Patent Office
Definition
§ Value is based on the transactions of other
purchasers & sellers in the marketplace
§ Licensee/buyer is not willing to pay more than others
have paid for similar IPRs
§ Fair value of a patent = Price paid in comparable,
“arm’s length” transactions
Market-based methods
45
European Patent Office
When to use market approach
§ When you can find sufficient transaction information
§ Similar transactions: IPR type, industry, market size
Comparison considerations:
§ Technology: technical features, stage of development
§ Specific clauses, financial terms, legal parameter
§ Background: economic conditions, position of the
parties
Market-based methods
46
European Patent Office
Where to find transaction data
§ Company web sites, Industry presentations
§ Company annual reports
§ Online databases (e.g. www.Royaltysource.com,
www.Windhover.com)
§ Securities filings: SEC (US), FSA (UK)
§ Licensing specialists
§ Licensing Executives Society (LES) www.lesi.org
§ Royalty-rate journal: Licensing Economics Review
§ Court records
Market-based methods
47
European Patent Office 48
Cost-based
Market-based
Income-based
Overview of the different methods
European Patent Office
Income-based methods
Ability of Technology to Generate Future Income
=IPR Value
49
Definition
Fair Value of Patent = Present Value of the expected
future income (cash flow) stream
European Patent Office 50
Income-based methods
Discounted Cash Flow (DCF)
European Patent Office
PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3….+ In(1+r)-n
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
51
Income-based methods
Discounted Cash Flow (DCF)
European Patent Office
Now? OR in 1 Year??
Income-based methods
What do you prefer?
European Patent Office
Now? OR in 1 Year??
TIME
Income-based methods
What do you prefer?
European Patent Office
Cash? OR (1 EURO)
Lottery ticket (chance to win 1 EURO)??
Income-based methods
What do you prefer?
European Patent Office
Cash? OR (1 EURO)
Lottery ticket (chance to win 1 EURO)??
RISK
Income-based methods
What do you prefer?
European Patent Office
Two main principles:
1. Time
2. Risk
Three key parameters (for calculation):
1.
2.
3.
Income-based methods
56
DCF
???
European Patent Office
Two main principles:
1. Time
2. Risk
Three key parameters:
1. Amount of the income stream
2. Duration of the income stream
3. Risk associated with the realization of the income
Income-based methods
57
DCF
European Patent Office 58
Time
Discounting with an adjust Risk Rate
t0
Revenue
Income-based methods
Discount Cash Flow (DCF)
European Patent Office 59
t0 t1 t2 tn
Income-based methods
Discount Cash Flow
European Patent Office 60
Income-based methods
Discount Cash Flow
t0 t1 t2 tn
European Patent Office
t0 t1 t2 tn
61
100 EUR
Income-based methods
Discount Cash Flow
Income from
- Licensing fee
- Incremental profit: * price premium (apportioned cash flow)* extra sales* lower cost
- Relief from royalty
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
62
100 EUR
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
63
100 EUR
PV = I(1+r)
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
64
100 EUR
PV = I = 100 (1+r) (1 + 10%)
Assumption: r = 10%
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
65
100 EUR
PV = I = 100 = 100 (1+r) (1 + 10%) 1,1
Assumption: r = 10%
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
66
100 EUR
PV = I = 100 = 100 = 90,9 EUR(1+r) (1 + 10%) 1,1
Assumption: r = 10%
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
67
100 EUR
PV = I = 100 = 100 = 90,9 EUR(1+r) (1 + 10%) 1,1
Assumption: r = 10%
Income-based methods
Discount Cash Flow – year 1
European Patent Office
t0 t1 t2 tn
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate 68
Income-based methods
Discount Cash Flow – year 2
PV = I1(1+r)-2
100 EUR
PV = I = 100 = 100 = 82,6 EUR (1+r)2 (1 + 10%) 2 1,12
2. Year:
Assumption: r = 10%
European Patent Office
t0 t1 t2 tn
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate 69
Income-based methods
Discount Cash Flow – year 1 + 2
PV = I = 100 = 100 = 82,6 EUR (1+r)2 (1 + 10%) 2 1,12
2. Year:
Assumption: r = 10%
PV = I = 100 = 100 = 90,9 EUR(1+r) (1 + 10%) 1,1
1. Year:
Total: 173,5 EUR
PV = I1(1+r)-1
100 EUR
PV = I1(1+r)-2
100 EUR
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
70
Income-based methods
Discount Cash Flow
PV = I1(1+r)-1 + I2 (1+r)-2
PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3 …. + In(1+r)-n
European Patent Office
t0 t1 t2 tn
PV = I1(1+r)-1
PV = Present value of IP asset
I = Economic income projection
n = Year
r = Risk-adjusted discount rate
71
Income-based methods
Discount Cash Flow
PV = I1(1+r)-1 + I2 (1+r)-2
PV = I1(1+r)-1 + I2(1+r)-2 + I3(1+r)-3 …. + In(1+r)-n
European Patent Office 72
Valuation tools: patent rating
§ Automated tools, up to 50 econometric indices
aggregated:
• IPscore (EPO – www.epo.org)
• Global Patent Scorecard (Patent Board)
• Patent Factor index (Patent Café)
• Patent strength (Innography)
• IPQ (Ocean Tomo)
European Patent Office 73
Valuation tools: patent rating
§ Automated tools, up to 50 econometric indices
aggregated:
• IPscore (EPO – www.epo.org)
• Global Patent Scorecard (Patent Board)
• Patent Factor index (Patent Café)
• Patent strength (Innography)
• IPQ (Ocean Tomo)
§ Limitations:
• Often works as a black box
• Limited value for a single patent
• Strongly depends on the field of activity
European Patent Office
www.epo.org, IPscore
LegalIssues
Technology Market
Finance
Strategy
R&D
Finance orControlling
Marketing
PatentDepartment
General Manager
Source: IPscore
Structured approach / stimulating communication
European Patent Office
Source: IPscore
Output – risk and opportunity
www.epo.org, IPscore
European Patent Office
2018 2022
Source: IPscore
Output – financial forecast
www.epo.org, IPscore
European Patent Office
Various factors
See VC on “Evaluation dimensions” (series: “IP evaluation and protection”)§ Legal position
• Granted? Valid? Countries (number, importance)
• Remaining patent time
• Backward / forward citations
• Detectability of infringement, enforceability
• Passed opposition (period, proceedings)
§ Technical position
• Strength of claims
• Maturity, options of design around
§ Market attractiveness
• Industry, size, competitors
European Patent Office
§ The choice should be influenced by:
• The kind of industry
• The degree of maturity of the technology
• The degree of risk
• The IPR
• Available information / price of comparable assets
§ Combination of several methods to get an envelope of values
§ Valuation should be done on a regular basis
How to choose valuation methods
80