How to valuate patents | RW | Mathew

How to valuate patents | RW | Mathew

To thrive in the market, you need to aggressively innovate. Otherwise, you will not even be able to survive, forget about thriving. Innovation is what made Honeywell go from a retailer of heat regulatory systems to developing smart technology for climate regulation and home security systems. Lack of innovation is what forced the likes of Compaq, one of the largest PC sellers in the world during the 90s and 80s to shut shop in 2013.

Google bought Motorola Mobility and its 17,000 patents for $12.5 billion to protect its Android mobile OS from competitors. Thanks to its 1,100 digital photography-related patents, Kodak was able to sell those patents for a dozen licensees for $525 million, although it was expected to fetch much more than that.

The gene-splicing patent of two Stanford professors that was world-altering enough to launch the biotech industry, generated $255 millions. Within 24 years of the patent, more than 2,000 biotechnology companies had been launched.

Did you notice the difference in the monetary value of the patents? Everyone knows that all patents are not equal, some are more valuable than others. There are different factors which contribute to the monetary value of patents.

Your intelligence assets are usually in the form of patents. In this dog-eat-dog world of litigation and patent trolls, you need to secure your intellectual assets. Patents provide protection for businesses from their ideas being stolen by their competitors. Since it is an intangible asset, assigning a dollar value to it can be difficult. We can use a variety of methodologies to see if a patent would be a cash cow or not.

What are the instances when you need to assess the value of a patent?

Only when you know the value of your patents would you be able to make use of it appropriately. Knowing the valuation of patents becomes important when there are business transactions/situations such as the ones below:

When there are negotiations while selling or licensing intellectual property rights as it is essential to reach an agreement in good faith.
Patents can also be used as security for bank loans, it is imperative that you show them that the IP asset is of a particular value.
Organizations are legally bound to report their assets, even of those that are intangible.
For your internal team when they want to define strategies for patent protection.
When there is a patent conflict or dispute, in situations like this, knowing the correct value of the IP will enable you to claim fair damages.
While trying to evaluate the value of the company for an M&A, JV or when filing bankruptcy.

How to find the value of patents:

Businesses use different methods to find the value of patents, but most of them can be classified into two types: 1. Quantitative approach and 2. Qualitative approach.

The quantitative approach uses measurable data to calculate the value of patents while the qualitative approach relies on the prospective uses for a company which owns the patent.

Quantitative valuation includes metrics like the cost in obtaining the IP, cost of similar market transactions in the industry, cost of creating a similar technology, and so on. Qualitative valuation includes assessing the IP through a non-monetary lens, such as its technological impact, strategic impact, brand loyalty, and other intangible metrics that will help you come up with a credible value for the patent.

Quantitative approach to valuate patents:

There are four methods which are widely used to find patent values in the quantitative approach. We will talk about each one of them in detail, below:

Cost-based method:

The cost-based method works on the assumption that the costs incurred while developing the IP is directly related to how much it is worth.

Here, the replacement cost of the patent or the amount equivalent to replace the protection right on the invention is considered to be the cost of the patent.

In other words, how much would be paid to replace the patent is considered to be the replacement cost. Or how much would be spent in developing a similar patent is assumed to be the right value.

When we calculate the expenditure, we base it on the current prices. Some of the other cost sources that are included in the cost-based method are: material costs, labour costs, overheads, opportunity costs, profits that are lost when you bring it to the market at a later date, etc.

Income-based method:

In this method, the value of the patent is calculated based on the income that it generates for the patent owner. Even the cost savings that owning the patent will provide is considered when using this approach. When a business or an inventor is developing a product, it is with the hope that it will help increase their profits or at least save them a tonne of money.

Market-based method:

In this method, you need to keep an eye on the market transactions and see if there are any assets which are similar to yours. The comparison between your asset and a similar asset is made with regards to its utility, perception, technical superiority, and so on.

How can you find such data?

It will be available in the annual reports of companies.
Databases where royalty rates are available
Industry-specific publications
Court decisions where damages were discussed

The above sources can give you a fair idea of the rates. Based on the numbers that you get from these sources as well as based on the present market situation, you can arrive at a value that is reasonable to all the parties involved.

Option-based method:

It uses the options-pricing theory to determine the value of the IP. This method considers the options and opportunities related to the investment. When using the options pricing model, patents are valued using financial options. The key point in using a financial model to find the value of a patent is that even stock options provide exclusive rights to the owner while excluding others from using it (that’s how patents work too).

Qualitative approach:

In the qualitative approach that is used to find out the value of patents, there is no reliance on pure financial data. There are a multitude of factors that are used to determine the value of the patents in a qualitative approach. It could be assessing the various aspects that affect the value of the patent. Here are three methods that are widely used:

Value indicator-approach:

It uses rating methods like IP Quotient where the strength of the portfolio and the surrounding variables are assessed. Using this analysis, a qualitative rating is attributed to the patent. This data can be used to draw internal comparisons in assessing the value of the patent, but it cannot give you a decisive number.

Competitive advantage:

In this method, the competitive advantage that the business will get by owing the IP asset is taken into consideration. If it is just bragging rights, then it wouldn’t make any difference to your bottomline. Below are a few questions that you can ask:

Does it cause a significant shift in how your customers perceive you?

Will it increase sales?

Does the IP asset better the quality or performance of your product?

Rating approach:

Businesses can use a variety of parameters to assign a dollar value to patents. You should also determine the type of function that the IP is going to play for your business. Does it align with your objectives for the near future?

Qualitative methods are usually used for internal purposes as the number is arrived without taking financials into consideration. It is a great method if you want a sense of how it will fit into your portfolio by giving you an idea of the opportunities and risks involved. There are more common-sense inputs than hard data which will make a much better case to come up with a number.

Conclusion:

Now that you know that there are different methods which can be used to find the valuation of a patent, the method that you eventually choose should be binding on your business objectives. As seasoned professionals in this area, we would advise you to employ more than one method so that it is easy to corroborate them. Finding the value of IP can help you make significant business decisions which can alter your entire business trajectory.

If you need help with finding the value of a patent, get in touch with the Research Wire team and we will be able to assist you. We have processes and workflows in place to arrive at the value for a patent based on our extensive experience over the years.

Read more