Brand Valuation The Importance for Owners

Brand Valuation - The Importance for Owners

• Aims for this session:

Brand valuation

what?

how?

why? and

what’s in it for us?

• Agenda:

background

brand valuation in general

why is it important?

is it art or science?

comparisons & benchmarks

methodologies

implications for us

questions / discussion

History of Brand Valuation

Who are the players in this field?

Background

Brand Valuation – a potted history

• History of Brand Valuation

1988 – 1st Notable Valuation

2000 – $1bn Securitisation

2001 – “100 Best Global Brands”

2004 – IFRS3

2010 – ISO 10668

2014 – League Tables

• Some Players in Valuation:

The Big 4 Accounting Firms

Business Consulting Firms

InterBrand

Brand Finance

Valuation Consulting

• Generic, Unbranded ibuprofen

$0.03 per tablet

• Nurofen

$0.18 per tablet

Why is it important?

Ability to charge premium

How much is it worth?

Has the business leveraged that ability?

What is the value to the business?

Definition of brand (in this context):

A marketing related asset that may include names, terms and logos that are intended to identify goods and create distinctive images and associations in the minds of stakeholders, thereby creating economic benefits for the owner.

Purpose

Strategic planning

Financial Reporting

Dispute resolution

Due diligence

Premise

Market value

Investment value

Liquidation value

Methodology

Brand Valuation

Spot the Difference

Brand InterBrand Brand Finance

Value $m Position Value $m Position

$98,316 1st $104,686 1st

$93,291 2nd $68,620 3rd

$79,213 3rd $33,722 12th

How to value a brand?

• Art or Science?

e.g. InterBrand

e.g. Brand Finance

why are there differences?

• ISO 10668

since 2010

3 components:

• legal

• behavioural

• financial

About ISO 10668

• The differing approaches

market

cost

income

• Income approaches

various

• Royalty Relief

why that one?

principle behind it

• Brand Value is a function of

brand strength; and

financial performance

Royalty Relief Method

Brand valuation methodology – ‘Royalty Relief’ The strength of the brand determines the ‘royalty rate’ which is applied to forecast revenues to derive the brand value

Brand strength expressed as a BSI score out of 100

BSI score applied to an appropriate company-specific royalty rate, derived from a similar sector royalty rate range

Royalty rate applied to forecast revenues to derive brand revenues

Post-tax brand revenues are discounted to a net present value (NPV) which equals the brand value

Brand

Support

Brand

Equity

Business

Performance

Stakeholder

Opinion

X = $ Forecast revenues

Brand Strength

Index (BSI)

Brand

‘Royalty Rate’

Brand

revenues

Brand

value

%

Strong brand

Weak brand

X

Valuation – Why?

Disposal

Acquisition

Transfer pricing

Licensing

Securitisation

Choice of methodology influenced by purpose

May use several methods

• Intangible assets account for over half of the total global enterprise value as shown in a study* that analyses the enterprise value of 56,000 companies listed on more than 100 stock exchanges around the world.

• As with many industries, the functional differences between products and services have been narrowed to the point of near invisibility. It is intangible assets - such as brands - which provide the basis for establishing meaningful differences between apparently similar offers.

36% 44%

38% 37% 35% 35% 37%

60% 48%

42% 51% 50% 47%

4%

5%

4% 4% 4% 4% 5%

8%

7%

5%

9% 8% 7%

7%

9%

8% 8% 8% 8% 8%

11%

8%

9%

11% 10% 8%

53% 42%

50% 51% 54% 53% 51%

20%

37% 43%

29% 32% 38%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013

Undisclosed Value Disclosed Goodwilll

Disclosed Intangible Assets (ex g/w) Tangible Net Assets

Intangible assets

Tangible assets

*Source: 2014 BrandFinance® Global Intangible Finance Tracker (GIFT™)

Intangible assets in a business

97%

88%

78%

78%

38%

34%

30%

29%

11%

10%

2%

3%

12%

22%

22%

62%

66%

70%

71%

89%

90%

98%

Iron/Steel

Real Estate

Banks & DFS

Oil&Gas

Electronics

Telecommunications

Lodging

Retail

Cosmetics/Personal Care

Pharmaceuticals

Software

Source: 2014 BrandFinance® Global Intangible Finance Tracker (GIFT™)

Intangible Tangible

Value of Pharmaceuticals is largely in intangibles

Intangibles in Pharma Business

Tangible Net Assets 10%

Marketing intangibles

5%

Customer intangibles

5%

Contract intangibles

10%

Technology intangibles

55%

General goodwill

15%

Pharmaceutical Breakdown of Intangible Value by Category

(e.g. brands)

(e.g. customer

relationships)

(e.g. Manufacturing

and distribution

agreements)

(e.g. Patents, R&D)

Most valuable global brands - 2014

Rank Brand Brand Value

($bn) Brand Rating

1 104.7 AAA

2 78.8 AAA

3 68.6 AAA+

4 62.8 AAA

5 53.5 AAA-

6 52.5 AA+

7 45.4 AA

8 45.1 AAA-

9 44.8 AA+

10 41.5 AA+

Brand value by country

United States 1,909

Japan 377

Germany 324

France 266

UK 262

China 229

South Korea 152

Switzerland 121

Netherlands 112

Spain 76

TOTAL $4,371bn

Rest of the World 544

Rank

2014

Rank

2013 Brand

Brand

Value

2014

Brand

Value

2013

Enterprise

Value

2014

Enterprise

Value

2013

Brand

Rating

2014

Brand

Rating

2013

252 292 5,188 4,053 107,935 78,016 AAA AA+

334 304 4,151 3,869 191,319 191,939 AA+ AA+

431 451 3,452 2,776 239,611 184,173 AAA- AA+

441 442 3,393 2,825 212,263 175,977 AA+ AA+

492 425 3,044 2,893 152,115 127,308 AAA AAA-

Source: 2014 BrandFinance® Global 500

Most valuable pharmaceutical brands

Brand values are high as is Brand rating

Corporate Brands, Product Brands

Brand is the mental shortcut for consumers who cannot and will not study clinical data

Most consumers do not currently choose products based on their corporate brand

FMCG brands including big pharma are increasingly promoting themselves alongside their products

Corporate brand promotion tends to focus on emotional attributes and appeal – e.g. Pfizer’s “More than medication” campaign

Product brand promotion tends to focus on functional attributes

Protecting equity post patent…

Introduction

Growth

Maturity

Decline

End of patent

protection

New entrant

/ challenger

Development of brand equity

…and is critical in a crowded OTC market

How can brands

stand out from the crowd?

Drivers of brand equity Product brands compete on functional rather than emotional attributes

Non-drowsy

Fast Acting

Long Lasting

Soluble

Easy to swallow

Taste

Powerful

Effective

Non-greasy

Brand equity to business value

Inputs Brand Equity Outputs

Business

Performance

Brand

Preference

Customer

Behaviour

• Marketing communication

• Product

• Touchpoint experience

Brand

Drivers

Branded

Customer Experience

$

• Functional (quality, price)

• Emotional (image, innovative)

• Conduct (reputation, ethical)

• Revenue

• Margin

• Share price

• Purchase

• Repurchase

• Loyalty

• Advocacy

• Preference

• Consideration

• Recommendation

Brand Valuation – What do we do?

• League Table Reports:

Utilise Public Data

Use our search tools

Answer standard key questions

Use standard ‘scoring’ system

Produce Standard Report

Make overall recommendations

• Further Analysis:

Full Audit

Gap Analysis

Remedial Actions

An illustration

An illustration – MEGA PHARMA

Score

Ranking Trademark registration

strategy (the ‘what’)

Trademark scope (the

‘what for’)

Trademark coverage (the

‘where’)

Trademark consistency

(the ‘who’)

Mega Pharma 50 100 67 67

Weight

Trademark registration

strategy (the ‘what’)

Trademark scope (the

‘what for’)

Trademark coverage (the

‘where’)

Trademark consistency

(the ‘who’)

Percentage 35% 25% 30% 10%

Strategic position (weighed)

Overall score

Mega Pharma 69

Ranking (against peers and average)

Ranking Why (overall score) Trademark registration

strategy (the ‘what’)

Trademark scope (the

‘what for’)

Trademark coverage (the

‘where’)

Trademark consistency

(the ‘who’)

Mega Pharma 69 50 100 67 67

Multi Pharma 80 83 83 83 50

Elixir Pharma 92 100 67 100 100

Eco Pharma 88 67 100 100 100

Best Pharma 59 50 67 67 50

Mean 78 70 83 83 73

An illustration – MEGA PHARMA

An illustration – MEGA PHARMA

Implications for us…

• TM Registration

contribution to brand strength

cost or investment?

• Key things to get right:

ownership

current

‘futureproof’

Questions

Tom Farrand

Managing Director UK, Trademarks

T: +44 (0)20 74690950

E: t.farrand@novagraaf.com

W: www.novagraaf.com

• Registered TM Attorney

• Fellow of ITMA

• 30 years (gulp) in IP

• Specialist in IP protection strategy

Contact Details and Mini-Bio

Bibliography

ISO 10668 – link to obtain a copy:

http://www.iso.org/iso/catalogue_detail?csnumber=46032

ISO 10668 – link to overview from Brand Finance:

http://www.brandfinance.com/images/upload/iso_10668_overview.pdf

Brand Finance – website with league tables:

http://brandirectory.com/

Compliance with ISO 10668

• ISO 10668 was developed to provide a consistent framework for the valuation of local, national and international brands both large and small.

• The primary concern was to create an approach to brand valuation which was transparent, reconcilable and repeatable.

• Brand Finance CEO and founder, David Haigh was instrumental in the development of ISO 10668 alongside other industry experts.

• ISO 10668 is the international norm that sets out 3 key requirements to determine the monetary value of a brand:

Module 1: Legal analysis – Defining the brand and ensuring the brand is sufficiently protected

Module 2: Behavioural analysis – Determining strength of the brand amongst its stakeholders

Module 3: Financial analysis – Using robust financial data and appropriate valuation techniques

• Price premium

• Volume premium

• Income split

• Multi-period excess earnings

• Incremental cash flow

• Royalty Relief

Cost Approach Income Approach

• Comparable market transactions

Market Approach

• Cost to create

• Cost to recreate

• Within the Income approach, ‘relief from royalty’ is considered to be the most robust and effective method and is regularly used for accounting, tax and legal matters.

• The royalty relief approach hypothesises two separate businesses, one involved in manufacturing and/or marketing and one in intangible asset ownership.

• The asset owner licenses its IP to the manufacturer/ marketing company and receives a royalty in return based on the value/ volume of sales arising from the asset in question. Thus, if a company actually owns rather than licenses an asset it is relieved from paying such royalties.

• Part of the appeal of the Royalty Relief method is that real world publically available licensing agreements and financial data can be used to conduct the valuation.

ISO 10668 Market, Cost or Income Approaches

For the public league tables the Royalty Relief method is employed.

Is trust an issue?

Pharmaceutical brands considered competent and effective but not trusted

79%

70%

66%

65%

59%

59%

51%

51%

Technology

Automotive

Food and Beverage

Consumer Packaged Goods

Energy

Pharmaceuticals

Media

Banks

Trust in Industries 2014

Customer

Brand Perceptions affect

- Price

- Volume

- Repeat

- Share of wallet

- Cross sell

External Audiences

Brand Perceptions affect

- Distribution terms

- Channel access

- Strategic alliances

- Deal completion

- Licensing

- CSR

Staff

Brand Perceptions affect

- Recruitment

- Retention

- Recommendation

- Morale

- Staff costs

Financial Audiences

Brand Perceptions affect

- Interest spread

- Share price

- Debt/ Equity ratio

- Risk appetite

- Cost of borrowing

Potential

Customers

Existing

Customers

Influencers

e.g. Media

Trade

Channels

Strategic

Allies &

Suppliers Investors

Debt

providers

Sales

Production

All Other

Employees

Middle

Managers

Directors

brand

Brand affects a wide range of stakeholders