Patent Valuation Methods and Approaches for Buyers and Owners

While patents are usually considered as intangible assets of a company, the fact remains that their commercialization is an important contributor towards corporate success. The management of these immaterial assets is an important element of strategic management that is constantly increasing in significance. It is critical to manage and value patents in order to evaluate their contribution towards corporate success. This is where Patent Valuation comes in.

It is a part of the management system and aims at assigning a monetary value to a patent/patent portfolio for its licensing (exclusive or non-exclusive deals). Since, patents are techno-legal documents comprising the details of a technology and not an actual product, assigning a value to it can become quite complicated and tricky. While it is relatively simple to determine the costs for the issuance of a patent, true patent valuation needs applicable set of tools.

Patent Valuation Methods and Approaches

Monetary valuation for a patent portfolio can be carried out with the help of capital value (income based), market price (market comparison) and cost oriented patent valuation methods. The approach that is usually employed by corporates or law firms is a cost-oriented valuation process.

Figure: Patent Valuation Methods

Cost oriented valuation process: This approach consists of the Reproduction Cost Method and the Replacement Cost Method. There are two ways to apply the cost approach:

  1. Reproduction Cost Method wherein the costs are required to create an exact duplicate of the asset in question, or
  2. Replacement Cost Method wherein the costs for the manufacture or acquisition of a use-equivalent asset can be used.

It is to be noted that such an approach is conceptually weak as it is not usage driven. This is because the data applied is applicable to the past. Therefore, the cost approach for valuation of intangible assets can only be used in a general sense in order to verify plausibility. It can also be used when minimum price thresholds (purchase price negotiations) need to be determined.

Market Approach: This approach draws a comparison of market prices, i.e. attributing a value to a patent portfolio based on the value assigned by the market forces in comparable situations or similar portfolio deals in the same technical domain. However, this is only possible if the market prices concern sufficiently comparable assets and these prices are publicly known and accessible.

Income Approach: The basis of this approach relies on the assumption that the value of an intangible asset is resultant of the future success that will be generated by cash flows from the asset.

Who Needs Patent Valuation and why?

Patent Valuation as a part of a monetization study or a stand-alone study can be used both by owners a technology or by a prospective buyer of the technology.

For Owners of the technology: For an owner to be able to gain revenue from their patent portfolio, the first step is to ascertain the potential monetary value of the patent using a synergistic approach based on multiple parameters. Cost of reproduction, future income and existing market prices or similar deals in the past can all be important factors.

Since innovations are of immense significance in the attainment of a competitive edge today, their protection and successful commercialization can create durable corporate success for companies of all sizes and industries. In view of companies’ increasing capital requirements, and growing exploitation opportunities on inter-national financial markets, patent commercialization is also of considerable interest for stakeholders and investors.

For Buyers of the technology: A smart investment in a new technology or licensing of a patent portfolio is crucial for a corporate/investor to stay relevant in the market. However, before going into any investment deal, it is advisable to conduct a thorough investigation of the patented technology and also ascertain the potential value of the portfolio. Thus, valuation studies help in giving an initial idea of the monetary value.

As a part of Monetization Study

Patent Monetization study is the process of evaluating a technology’s monetary potential, validating the technology and identifying the appropriate strategies for commercialization. The Patent Monetization study is conducted in four major stages:

  • Portfolio Analysis & Infringement Study
  • Validity Searches
  • Technology Evaluation
  • Patent Valuation

Patent Valuation is the conclusion of a Patent Monetization Study, where a final monetary value for licensing of the patent portfolio is assigned based on the information from all other aspects.

The Sagacious IP Approach

At Sagacious IP, we employ a hybrid approach that takes into consideration the marketability, cost for reproduction and its value proposition with respect to the IP. The first part of this hybrid approach involves market analysis of the technology under study, understanding how much revenue would be generated by the implementation of subject technology, whether the technology is fresh or obsolete in market, discount rate, etc. Along with these, many other factors influencing the market are considered to arrive at an expected licensing fees value.

The second and most important part of this hybrid approach involves rigorous analysis of the Intellectual Property under study. There are different factors which affect the applicability of a patent. These factors need to be taken together to understand what is the actual worth of the Intellectual Property which is under study.

Once an exhaustive market and IP study has been conducted, the patented technology is scored against various market and IP parameters. The market parameters include cost, taxes, market size and share, product stage of the technology, etc. Based on the scores, a NPV (Net Profit value) is calculated using a mathematical model. IP parameters include technology uniqueness and impact, legal aspects, competitive technologies, infringement potential etc. The scores from the IP parameters are used to calculate a Weighting Factor. The NPV and the weighting factor finally provide an overall value of the patent under study. Read about our Monetization case study here.

Harsha Agarwal (Life Sciences) and the Editorial Team

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