VALUATION OF INTELLECTUAL PROPERTY RIGHTS MEDISCRIBE© COPYRIGHT
The Value of Intellectual Property
Intellectual capital is recognized as the most important asset of many of the world’s largest and most powerful companies including the copyright and Patent on the MEDISCRIBE© System.
Intellectual capital is the foundation for the market dominance and continuing profitability of leading corporations throughout the world is a major consideration in valuing an investment. It is a key objective in mergers, acquisitions, and investments and knowledgeable companies are increasingly using licensing routes to transfer these assets to low tax jurisdictions.
Nevertheless, the role of intellectual property rights ( IPRs) and intangible assets in business is insufficiently understood. Accounting standards are generally not helpful in representing the worth of IPRs in company accounts and IPRs are often under-valued, under-managed, or under-exploited. Despite the importance and complexity of IPRs, there is generally little co-ordination between the different professionals dealing with an organization’s IPR. For a better understanding of the IPRs of a company, some of the questions to be answered should often be:
1) What are the IPRs used in the business?
2) What is their value (and hence level of risk)?
3) Who owns it (could I sue or could someone sue me)?
4) How may it be better exploited (e.g. licensing in or out of technology)?
5) At what level do I need to insure the IPR risk?
One of the key factors affecting a company’s success or failure is the degree to which it effectively exploits intellectual capital and values risk. Management obviously need to know the value of the IPR and those risks for the same reason that they need to know the underlying value of their tangible assets; because business managers should know the value of all assets and liabilities under their stewardship and control, to make sure that values are maintained. Exploitation of IPRs can take many forms, ranging from outright sale of an asset, a joint venture or a licensing agreement. Inevitably, exploitation increases the risk assessment.
Valuation is, essentially, a bringing together of the economic concept of value and the legal concept of property. The presence of an asset is a function of its ability to generate a return and the discount rate applied to that return. The cardinal rule of commercial valuation is: the value of something cannot be stated in the abstract; all that can be stated is the value of a thing in a particular place, at a particular time, in particular circumstances. I adhere to this and the questions ‘to whom?’ and ‘for what purpose?’ must always be asked before a valuation can be carried out.
This rule is particularly significant as far as the valuation of intellectual property rights is concerned. More often than not, there will only be one or two interested parties, and the value to each of them will depend upon their circumstances. Failure to take these circumstances, and those of the owner, into account will result in a meaningless valuation.
For the value of intangible assets, calculating the value of intangible assets is not usually a major problem when they have been formally protected through trademarks, patents or copyright.
There are four main value concepts, namely, owner value, market value, fair value, and tax value. Owner value often determines the price in negotiated deals and is often led by a proprietor’s view of value if he were deprived of the property. The basis of market value is the assumption that if comparable property has fetched a certain price, then the subject property will realize a price something near to it. The fair value concept, in its essence, is the desire to be equitable to both parties. It recognizes that the transaction is not in the open market and that vendor and purchaser have been brought together in a legally binding manner. Tax value has been the subject of case law worldwide since the turn of the century and is an esoteric practice. There are quasi-concepts of value which impinge upon each of these main areas, namely, investment value, liquidation value, and going concern value.
In an ideal situation, an independent expert will always prefer to determine a market value by reference to comparable market transactions. This is difficult enough when valuing assets such as bricks and mortar because it is never possible to find a transaction that is exactly comparable. In valuing an item of intellectual property, the search for a comparable market transaction becomes almost futile. This is not only due to lack of compatibility, but also because intellectual property is generally not developed to be sold and many sales are usually only a small part of a larger transaction and details are kept extremely confidential. There are other impediments that limit the usefulness of this method, namely, special purchasers, different negotiating skills, and the distorting effects of the peaks and troughs of economic cycles. In a nutshell, this summarizes my objection to such statements as ‘this is rule of thumb in the sector’.
It must also be acknowledged that in many situations after examining these lives carefully, to produce cash flow forecasts, it is often not credible to forecast beyond say 4 to 5 years. The mathematical modeling allows for this in that at the end of the period when forecasting becomes futile, but clearly the cash flows will not fall ‘off of a cliff’, by a terminal value that is calculated using a modest growth rate, (say inflation) at the steady state year but also discounting this forecast to the valuation date.
It is important to note that valuation is an art more than a science and is an interdisciplinary study drawing upon law, economics, finance, accounting, and investment. It is rash to attempt any valuation adopting so-called industry/sector norms in ignorance of the fundamental theoretical framework of valuation. When undertaking an IPR valuation, the context is all-important, and MEDISCRIBE has taken this into consideration in the assignment of a realistic value to the asset based on a greatly reduced market share and projected income.
The Value of MEDISCRIBE©’S copyright and patent
In determining the value of the copyright MEDISCRIBE© has taken the projected sales of the commercial embodiment in valuation determination by:
1) Using the consideration of the licensing revenues from the commercial application of the MEDISCRIBE© Project;
2) Using the consideration of the potential market;
3) Using the projected sales over the life of the copyright;
4) Using the market share the MEDISCRIBE© can command;
5) Using the number of available substitutes for MEDISCRIBE©; and
6) Considering the number of complementary embodiments that MEDISCRIBE can develop from the Intellectual Property rights.