Intellectual Property Rights and Royalty

Intellectual Property Rights and Royalty
Team Members
Shashank Patodia (110) Ashutosh Shirwaikar (111) Ashwini Singh (112) Shraddha Sonawane (113) Chetan Tapase (115) Apurva Suvarna (114) Praful Thakur (116)
What is Intellectual Property?

Intellectual property (IP) refers to creations of the mind: inventions, literary and artistic works, and symbols, names, images, and designs used in commerce
Idea Expression Copyright ( Books)
Types of Intellectual Property
Idea Innovation Invention Patent (Pharmaceutical Products)
Idea Quality + Identity Trademark ( ISI mark)
Idea Appearance Design (Coke bottle)
Geographical indications ( Kolhapuri chappals )
Valuation Methods
Method
Value of the IP = (Present value of the cash flows)
Discount rate is the companies market based rate of return Cash flows considered over the life of the patent (17 years) Cash flow due to Brand value
Benefits of DCF 1. Compare values of two or more patents
Drawbacks of DCF 1. Does not take into account unique independent risks
Method
Involves working backwards from an assumed terminal value i.e. the sale of the investment at some future time
First described by Prof. Bill Sahlman of the Harvard Business School in 1987
Further developed by a Venture Capitalist firm called First Chicago Corporation The basic Formula is: ROI = Terminal Value Post-money Valuation
Method
Steps involved in the method:

Step 1: Estimate the Terminal Value Step 2: Discount the Terminal Value to Present Step 3: Calculate the required ownership Step 4: Calculate the current ownership expected dilution Value percentage percentage given
Relief from royalty is based on deprival value theory and looks at the amount of income that a company would be deprived of, if it did not own the intellectual property in question but was required to rent it from a third-party instead
Relief from Royalty Method
The royalty represents the rental charge, which would be paid to the licensor if this hypothetical arrangement were in place
The ability to determine an appropriate royalty rate depends upon the specific circumstances and requires the identification of suitable comparable transactions and prices involving third parties
Relief from Royalty Method

Advantages
Accessible Information available
Disadvantages
Rental charge can always be assumed
Intuitive
Real Options Method

Real option valuation methods treat the development and commercialization of IP as a series of options
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
Real Options Method

Advantages Disadvantages
Complex Formula Time Consuming Cost / Benefit Ratio
Flexibility
Timing Large Projects
Market comparables
Should offer a good indication of a patents value It reflects the exchange of value between two parties In valuing patents it is difficult to find a suitable comparable transaction
Other Valuation Approaches
Historic Cost
Measures the amount of money spent in the development of the IP at the time it was developed An historic cost measure tends to be unreliable Difficult to provide accurate information on the resources spent
Other Valuation Approaches

Replication Cost
Measures the amount of money that would need to be spent in current cost terms Develop the IP in exactly the same way and to achieve the same final state as it currently exists Includes costs incurred on any unsuccessful or inefficient prototypes.
Replacement Cost
Measures the amount of money that would need to be spent in current cost terms in order to develop the intellectual property as it currently exists, but excludes the costs relating to unsuccessful or inefficient prototypes.
The Nortel Case
Canadian telecommunications gear company - Once had a market value of $250 billion and employed 93,000 people
Filed for bankruptcy in January 2009

6000 patents initially valued at $900 million were auctioned off The winning bid stood at a whopping $4.5 billion by Nortel Six Microsoft, Apple, Ericsson, EMC, Sony, and Research in Motion
Income perspective Prevent Non-Practicing Entities from gorging the wireless industry Access to the patented technologies Removing infringement litigation exposure Patent Pooling Value in peace of mind
Justifications for Valuation
Googles Motorola Google acquired Motorola Mobility for $12.5 billion at a 63% Acquisition premium over its market value
Acquisition driven by Googles attempt to bolster its arsenal in IP war
Motorola held 24,500 patents at the time of acquisition
How did Google value Motorola?

Novels portfolio of 882 patents sold off at $450 million valuing each patent at $510,204.08
IPR and Royalty in News
FMCG giant Hindustan Unilever Ltd (HUL) today said it would pay a higher royalty to its Anglo-Dutch parent Unilever PLC in a phased manner. The move will increase the companys royalty to 3.15 per cent of its turnover by March 31, 2018 from 1.4 per cent in a staggered manner.
Roy Waldron, chief intellectual property counsel for Pfizer complained that last year India revoked Pfizer's patent for a cancer medicine, Sutent, "to allow Indian generic companies to manufacture and sell generic copies."
ASSOCHAM demands establishment of a National Intellectual Property Right (IPR) Strategy Authority to protect Indian Industry.
FMCG major Nestle on Friday approved a one percentage point increase in royalty to be paid to its parent company Nestle SA from 3.5% to 4.5% of sales. The increase, which will be paid over a five-year period at the rate of 0.20%, will be effective starting January 1, 2014. This will ensure ongoing access to the entire capabilities of Nestle.
Apple Inc. won more than $1 billion after a jury found Samsung Electronics Co. infringed six of seven patents for its mobile devices in a verdict that may lead to a ban on U.S. sales of handheld electronics a judge deems to violate Apples rights.
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Intellectual Property Rights and Royalty

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Intellectual Property Rights and Royalty

What is Intellectual Property?

Idea Expression Copyright ( Books)

Types of Intellectual Property

Idea Innovation Invention Patent (Pharmaceutical Products)

Idea Quality + Identity Trademark ( ISI mark)

Idea Appearance Design (Coke bottle)

Geographical indications ( Kolhapuri chappals )

Benefits of DCF 1. Compare values of two or more patents

Steps involved in the method:

Relief from Royalty Method

Relief from Royalty Method

Real Options Method

Options are priced using the Black-Scholes option-pricing model

Real Options Method

Timing Large Projects

Other Valuation Approaches

Other Valuation Approaches

The Nortel Case

Filed for bankruptcy in January 2009

Justifications for Valuation

How did Google value Motorola?

IPR and Royalty in News

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