How does one value the product of one’s mind?
For companies, particularly those that produce tangible items, it is quite easy to put a monetary value on the goods that they produce. This is more of a feat, however, for entities that produce intangibles or, more specifically, intellectual property (IP).
Goods have quantifiable costs of production: manufacturing inputs, overhead, marketing costs, even inventory costs. But how does one value the product of one’s mind, the end-result of years of research and development?
Alan Lewis, president of Licensing Executives Society International, says there are no hard-and-fast, one-size-fits-all rules to IP valuation. It is, however, essential to taking advantage of the power of IP to boost a country’s economy.
In a recent presentation to members of the Licensing Executives Society Philippines, he notes that almost all countries in the world have a balance of payments on royalty accounts, which measure inflows and outflows of royalty payments for IP.
This, Lewis relates, is the only metric for cross-border IP trade.
Based on recent data, Lewis says the Philippines received nothing for its IP, meaning the country did not export any IP to any country. It paid $382 million (some P16 billion) in royalties, however.
In comparison, Australia received $700 million in royalties and paid $3 billion, while South Africa got $54 million and paid $1.7 billion. The United States had the biggest IP trade surplus, receiving $92 billion and paying only $26 billion.
“This is why IP is so important to Americans. It accounts for a large part of their economy,” Lewis says, adding that the United States experience showed how IP could help prop up a country’s economy.
Value of IP
Lewis acknowledges how the Philippines had already started to recognize how IP could contribute to the country’s economic growth. However, he says a uniform approach should be taken to IP valuation to enable the country to better take advantage of this resource.
“If you have something, but don’t know what it’s worth, do you really have anything? You may have a big chunk of diamond, but if you don’t know it’s value, it’s not worth anything at all to you,” Lewis says. “From a strategic point of view, you have to know the value of what you develop, for you to be able to better channel your resources. You have to have a realistic assessment (of your IP).”
There are several approaches to IP valuation, Lewis explains, the same way that there are different methods to valuing goods and properties. The basic approaches to IP valuation include the market approach, the cost approach, and the income approach.
With the market approach, value is based on the law of supply and demand, and is derived from the value of similar transactions. This may be difficult to use, as it requires knowledge of specific market pricing of deals involving similar technologies.
The cost approach is based on the principle of economic substitution, and can take into account historical cost, replacement cost, and replication cost. Using this approach, IP developers may be able to avoid the development mistakes of others. It is most suitable for when the R&D costs can be identified and no end-products or markets can be identified.
The income approach considers future cash flow converted to its net present value. It takes into account factors such as the technology’s competitive advantage, estimated investment over time, estimated income over time, and the discount rate.
‘Best’ approach
Lewis says it was important to use at least two methods in coming up with a valuation. No particular way, however, could be considered the “best.”
For countries such as the Philippines which has no uniform IP valuation standards, he says it will be prudent to look at best practices of other countries and use these as a basis for in-country valuation.
“There are no international valuation standards, but more of a uniform approach. There’s a necessity to have uniformity within the country, at least to give you a better comparison (with other countries),” Lewis says.
IP lawyer and LES Philippines immediate past president Ferdinand Negre says IP valuation is important for local businesses in that it is the last step before commercialization.
“It will determine how much the licensee should pay the licensor. You can’t go into commercialization without IP valuation. You need to have this in place to ensure that all parties to the transaction feel that the deal is fair. Having a proper valuation is win-win for both the licensor and the licensee,” he says in an interview.
The first step toward coming up with standards for IP valuation is already being taken by the Department of Science and Technology via the Technology Transfer Act of 2009.
Merle Opena, head of the research information, communication, and utilization division of the DoST’s Philippine Council for Health Research and Development, says consultations were ongoing for the draft guidelines for IP valuation for government-funded R & D projects.
For privately undertaken R & D projects, Negre says the country could take pointers from LES International’s Valuation Standards Committee.
“In that ad hoc committee, we’re looking into cross-border standards, which should trickle down to the local level. We’ll also closely coordinate with the (Intellectual Property Office of the Philippines), as they have a database that we can use,” he says. “We’re hoping to raise the country’s level of technology through government funding and awareness building.”
IPOPHL director general Ricardo Blancaflor urges both public and private entities to protect their IP by filing for patents, copyrights, and trademarks with the IPOPHL.
Knowing the value of one’s IP assets, he says, will be useless if such IP were not protected.
