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.

THANK YOU