Patent Valuations - an Overview

Valuing a patent is a complex process that involves considering multiple factors, as patents are intangible assets with specific legal, commercial, and economic characteristics. There are three primary methods used when determining the value of IP.

Market-Based Methods

​

This approach is based on the principle of comparing the patent to similar patents in the marketplace. It uses sales, licensing agreements, or other market transactions to estimate the value.

Comparable Transaction : This involves finding sales or licensing deals for patents in the same or similar fields and using those deals to estimate the value of the patent in question.

Royalty Rate : This looks at the royalty rates from comparable patent licenses to estimate how much the patent could generate in royalties if licensed.

Income-Based Methods

​

This approach estimates the future income a patent could generate, typically through licensing, sales, or cost savings. It's based on the concept that the value of a patent is equal to the present value of the future cash flows it generates.

Discounted Cash Flow (DCF) : This is a common method where future revenue (or cost savings) that can be attributed to the patent is projected and then discounted to the present value using an appropriate discount rate.

Excess Earnings : This method is used when the patent generates income in combination with other assets (such as technology or machinery). The excess earnings attributable specifically to the patent are calculated.

Cost-Based Methods

​

This method determines the value of the patent based on the costs incurred to develop it, including research and development (R&D) costs, patent filing fees, and legal fees. This approach is most commonly used when the patent is in its early stages and has not yet generated any revenue.

Reproduction Cost : This method involves estimating the cost to recreate the patented technology or process, considering both direct and indirect costs.

Development Cost: This focuses on the costs already invested into the patent, including R&D and patent application costs.

In addition to the three primary methods, there are also two further approaches that can be used to determine the value of IP.

Option-Based Valuation (Real Options Method)

​

This method is useful when there are future uncertainties or opportunities associated with a patent. It applies option pricing models, like the Black-Scholes model, to estimate the value of a patent by considering the potential for future developments, such as extensions of the patent term, new market opportunities, or the option to abandon or sell the patent.

Real Options Analysis : This takes into account the flexibility that the owner has in decision-making regarding the patent (e.g., the option to commercialise, license, or abandon the patent). It is often applied to technologies with high uncertainty.

Risk Analysis

​

The risk profile of the patent is crucial in its valuation. Factors that affect risk include:

​

Patent Strength : Strong patents with broad claims, strong enforceability, and clear ownership are typically valued higher than weaker patents with narrow claims or potential legal challenges.

Remaining Life of the Patent : The time left before the patent expires impacts its value, as patents typically last 20 years from the filing date.

Market Potential : The size of the market the patent covers, along with the demand for the technology or innovation, affects the patent’s value. Larger, growing markets with limited competition often lead to higher values.

Legal and Jurisdictional Considerations

​

Patents are only enforceable within the jurisdiction they are granted, so their value can be influenced by the legal environment in different countries. A patent granted in a region with strong patent protection laws (e.g., the U.S., EU) is more valuable than one granted in a jurisdiction with weak enforcement.

Geographic Scope : The more countries where the patent is granted, the higher its potential value due to the broader protection.

Patent Infringement Risks : The risk of infringement litigation and its potential costs can reduce a patent's value.

Strategic Considerations

​

Some patents may have strategic value that goes beyond immediate commercial returns. This includes:

Blocking Competitors : The patent might be valuable because it prevents competitors from entering a market or launching a competing product.

Complementary Technologies : The patent may be critical for a company's broader technology portfolio or roadmap, adding value beyond just revenue generation.

Key Factors to Consider in Patent Valuation

• Patent Claims : The broader and more comprehensive the claims, the more valuable the patent is.

• Patent Status : Whether the patent is pending, granted, or expired influences its value.

• Commercialisation Potential : A patent’s marketability, including potential for licensing or use in products.

• Innovation Stage : Whether the technology is in an early R&D stage or fully commercialized.

• Patent Portfolio : If the patent is part of a larger portfolio, the collective value may differ from individual patents.

Summary...

​

Each method has its strengths and weaknesses, and the choice of approach often depends on the specific circumstances of the patent, such as its stage of development, market potential, and the purpose of the valuation (e.g., sale, licensing, litigation).