Valuing patents – interesting discussion
How do you value a patent? Can you?
Is the value of a patent too specific to context to make any broad statements about this? Here’s the text of a conversation that has recently taken place in From LinkedIn’s ‘Patent and Intellectual Property Practitioners’ Group‘ – what would you add?
Head over to our equivalent blog post to add your thoughts, or log in to LinkedIn and do the same.
Is it possible to value patents accurately? There are so many companies out there professing to value patents-how far it is true?
The comments so far:
Valuing Patents, as with any form of Intellectual Property, is difficult at best. There are varying methods that are used depending on the type of IP and in what form it is used. In essence though, valuing IP is a current art that is quickly becoming much more effective.
There are three main models for valuing IP: Cost Method, Income Method, and Market Method. I’ve uploaded a PowerPoint Slide Show to my profile if you would like to review for information on this. However, depending on what you are seeking, it may not be necessary or worth-while to look forther. US GAAP doesn’t currently allow accounting value recognition for internally generated intangible assets in financial statements; instead, they only allow recognition of purchased intangibles, goodwill, etc.
There are a number of firms that specifically specialize in IP and, for what it is worth, are accurate because they have been doing it for so long. Patents specifically have inferences that other forms of IP do not have that may demonstrate added value (viz. number of previous patent citations & number of scientific theories) making it a tad more difficult.
A valuation is only as good as the assumptions which drive it.
Thanks for the comments. Five years back I wrote an article on valuation in IP Frontline( now available: http://www.intelproplaw.com/Articles/cgi/download.cgi?v=1092110332 ); but not exactly convinced that patents can be valued before hand.
Well, I agree with Alex with some more to add. The valuation depends on the purpose for which it is required to be valued. AS 26, just like US GAAP, does not provide anything for taking account of patent in number terms. If you need a patent to commercialize, it costs you higher but if you have to find a buyer for your patent, it would go cheaper to your estimate. But if you put the patent with a IP dealer, you may expect a better return. They have their own methods for estimating the value of a patent. But such a firm would be interested in patents applied for/granted in the developed countries only. The commercialization of IP part is still evolving. In my opinion patent valuation is very important in IP transactions and is an integral part of the IP due diligence.
Many companies now require their IP to be valued. That is sometimes a package of IP and not just patents. And yes, as Rahul indicates, the method does depend on the purpose for which it is required, which is not always associated with a direct sale or purchase. See http://www.colleripmanagement.com/opinion/opinion.html for more info and case studies.
Mr. Rajasekaran: I see by the comments you have received that the subject of valuing patents has been discussed from an academic perspective and that reference sites have been provided. I will provide a realistic business perspective. Patents can be valued with the same level of certainty as real property or any asset for that matter. This means it is not all about what it cost to develop plus a reasonable margin. It is more about what the market will be willing to pay. So, it is about comparables, where those are available, and where they are not available, it is about assumptions. When the practice of valuing IP assets started to split from valuing businesses as whole entities (for merger and acquisition activities), distinctive characteristics about IP assets drove the development of the various techniques. Nevertheless, valuing anything is some science and some art. I often say that valuing a patent has equal ability to be wrong as does valuing a manufacturing plant expansion. It also has equal ability to be right! Again, it is all about available comparable data and if that is not available, synthesizing dissimilar data into cogent and plausible assumptions. The rest is math. My company does IP valuations and no two projects are the same. We like to work with a valuation in context with monetizing assets, and finding the value of the asset in the market place (what a buyer is likely to pay) is really the best method to make a transaction happen. If you care to hear more about what we (UTEK Corporation) does to assist clients, please let me know. I am happy to provide more information about this subject in particular, or exploitation of IP assets in general. I hope this has helped. Best Regards, Paul F. Teta; Director IP Consulting and Exploitation
As Messrs. Seltzer and Dutta state, it really depends on why you are valuing the patents. Some patents have existing revenue streams and have been around and unchallenged for years. There, the exercise is more straightforward; but what about a newly issued patent or the one and only patent of a start-up?
When looking at one patent individually, most models ignore or gloss over two of the most important aspects, which are: How broad is the patent’s coverage and how strong is the validity of the patent. Unfortunately, these are very complicated questions and many economists are uncomfortable with the intricacies of patent law. So complicated that most models simply ignore them and look at the industry and the value of other patents in the same field, assuming all are equally broad, valid and enforceable.
If you wanted to value an athlete coming out of college, you could take averages for salaries related to his or her sport, from their school and from their conference, but all of that will pale in comparison to watching game films, reviewing statistics and conducting a medical examination.
No, it is not possible to value patents "accurately". Patents are each unique and therefore conventional valuation methodoligies, market, replacement cost, and income generally fail. However, income stream can be a basis for an objective valuation under certain assumptions. That is the basis for the model presented in my papers on patent valuation, and that is the basis of the model employed by "PatentValuePredictor" to value patents and patent portfolios. See http://www.PatentValuePredictor.com .
In my 20 years as a certified management consultant I have found intellectual property evaluation to be a tremendous source of entertainment. We have seen some highly complicated methodologies deployed to evaluate the value of intellectual property to the point where the central focus is taken away from the integrated deal structure. For an example we were recently involved in the negotiation with a group of highly trained technology transfer experts. Their central focus was on the percentage of royalties that they would win for their client and they demanded a 7% royalty of adjusted net sales based on a 40 page model that was anchored to a variety of standards. This is so common and yet so wrong it’s not about the value of the patent IT’S ABOUT THE VALUE OF THE DEAL! the principal focus should have been about the global deal structure, EX. is this the right strategic acquirer for the intellectual property? Does the deal structure mandate the development and deployment of an integrated commercialization plan? Is the deal structured as a foundational platform for a continuum of additional technologies with a licensee? A central focus on intellectual property value is amateur to say the least the focus has to be an integrated deal structure that provides the maximum monetization of the technology. One footnote we don’t like royalty agreements we took over this deal and set it up as a master distribution arrangement my client took on a small amount of additional risk but increased his percentage is to 35% when valuing and negotiating technology it’s important to look at 30 or 40 different deal structures rather than just simply pulling the license/royalty lever. www.lassenscientific.com
Malathi Lakshmikumaran Ph.D, FNASc of Lakshmikumaran & Sridharan
(B-6/10, Safdarjung Enclave New Delhi – 110029)
Has access to an interesting claims coverage tool that has valuation applications.
When I wrote my comment, I had no idea that this is going to invite such a vivid response and add value to the discussion. We really need a forum to freely discuss our views and share knowledge.
I agree with the esteemed comments that each patent is a unique case in itself and needs a fresh look for evaluating its value in financial terms due to various reasons and factors. I really appreciate the positive discussion on Patent Valuation triggered by Mr Rajasekaran’s question. Patent commercialization is still a puzzle for most of the IP professionals and its knowledge would make the patent life cycle complete. It would indeed increase the respect for patenting in industry at large.
What would you add?
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