Patent Valuation from a Practical
View Point, and Some Interesting Patent Value Statistics from the
PatentValuePredictor Model - Rick Neifeld, Ph.D., Patent Attorney, and President of Neifeld
IP Law, PC and StockPricePredictor.com, LLC1
I.Introduction
My
colleague Grover Rutter (see his article in this edition) has presented an
excellent review of how to treat patents from a financial and tax reporting
standpoint.However, how do you
determine the real value of a patent?That begs the question: What factors are relevant to the real value of a
patent?You have to know what factors
into a valuation before you can address the valuation issue.Let's start with some definitions, and then
address this issue.After that, lets
look at the PatentValuePredictor model and some actual valuation data and
trends provided by the model.
II.General
Valuation Theories
Valuation
is an accounting term which means a lump sum of money payable to receive the
future benefits of an asset at a particular time.There are three generally accepted accounting theories for
valuing assets: market, cost, and income.Market theory values an asset as the present value ascribed to similar
assets in an active public market.Cost
theory values an asset by the cost of replacing the asset.Income theory values an asset by the present
worth of the net anticipated economic benefit of the asset.Can we apply any of these theories to value
patents?
III.Valuation
Theories as Applied to Patents
Market
theory valuation of patents has little or no utility because no two patents
are similar enough for the sales price of one to define the value of
another.Of course, you can say that
patent licensing and sale applies market theory to reach a market price.The problem is that most patents are not
bought or sold in an arms length negotiation, and therefore do not have an
objective sale price.Even when they
are licensed or sold, the transaction is usually clouded by other factors
including tech transfer or line of business transfer.
Cost
theory is generally inapplicable since a patent cannot be replaced.That is, once the invention is generally
known, it is no longer patentable.
Income
theory is applicable in certain circumstances.Patents have known finite terms.If you can determine the income resulting from ownership of a patent
over that term, you can assign a value to the patent just like you can assign a
value to a long term bond.
Conventional
methods using income theory to value a patent analyze micro economic
data to determine the anticipated economic benefit of owning the
patent.This micro economic data
includes market data indicating the gross sales and net income derived from the
sale of products attributable to the patent, and any revenue derived from
licensing the patent.Applying income
theory to micro economic data to value a patent is labor intensive, costly, and
complex.This method should include an
analysis to determine the meaning of the claims of the patent, a comparison of
products to the claims of the patent to determine what products are actually
covered by the patent, a determination of the size of the market covered by the
patent, and a determination of the cost advantage of the patented technology
compared to alternative technologies for that market.A micro economic analysis can be used to prove damages in patent
infringement litigation.However, a
micro economic analysis of a patent is often cost prohibitive for purposes of
business valuation, capital allocation, taxes, and licensing.Moreover, the data necessary for members of
the public to perform micro economic analysis of patents is simply not
available.This is because that data
includes relationships between patents, product lines, product line specific
costs and earnings information, and licensing royalty rates and terms.
Companies rarely release that type ofinformation to the public.Thus,
micro economic analysis of patents is often not feasible.
IV.Problems
With Generally Applying Income Theory
I
hasten to point out that even income theory valuation based upon micro economic
analysis has limited utility in most commercial settings, as opposed to its
application in patent infringement litigation.Why? Because patents and
products do not have a one to one relationship.They have a many-to-many relationship.As a result, you cannot simply evaluate the value of a patent
once you know the financials relating to certain products that the patent
covers.To illustrate this point,
consider the following two hypothetical situations.
FIRST HYPOTHETICAL SITUATION - UNUSED PATENTS:
A
company owns ten patents.The first
patent covers a first product, and the company manufactures that product for a
hefty profit.The second through tenth
patents do not cover the first product, but each one covers some alternative
potential product that, if produced, could effectively compete with the first
product.No one produces anything
covered by the second through tenth patent.Do you allocate all value to the first patent?Surely the other nine patents have actual value to the
company!How do you allocate income
attributable to sales of the first product to the ten patents in order to
assign value to each one of the ten patents?
SECOND HYPOTHETICAL SITUATION - THE MANY-TO-MANY
CONUNDRUM:
There
are three competing products in a particular niche market and five relevant
patents.Patents 1, 2 and 3 each cover
the first product.Patents 1, 2, and 4
cover a second product.Patents 2 and 5
cover the third product.You also know
of the existence of prior art that indicates a likelihood that some claims in
patents 1 and 5 are invalid.As an
additional complication, what if it was unclear whether certain of the products
were in fact covered by certain ones of the five patents.That is, what if the issue of infringement
was not cut and dried?Confusing?You bet! Even if you knew the sales and
profit margins for the various products in the hypothetical situations just noted,
there would be no simple or logical way to assign values to the various
patents.This is all too often the
reality when comparing patents and products: there exist many-to-many
patent-to-product relationships of uncertain bounds.
What
have I told you so far?I have told you
that classical approaches to valuation are inadequate.It is time for a new approach.
V.The
PatentValuePredictor Theory for Valuing Patents
Now
let me tell you about the PatentValuePredictor model for valuing patents.First, you should know that this model is
implemented as a web service, and it provides valuations for all U.S. patents
and (a provisional valuation of) published U.S. patent applications in real
time.
How
does the PatentValuePredictor model work?The PatentValuePredictor model simplifies the valuation determination
problem by reformulating the problem.It does not attempt to address the many-to-many relationship
noted above, and it does not attempt to find and use micro economic data
relevant to any particular technology niche.Instead, it substitutes for the foregoing many-to-many quandary and the
(generally unavailable) microeconomic data an estimate of an annual sales
covered by the patent.The model
generates a nominal annual sales covered by the patent based solely upon
measurable properties of the patent document and the value of the Gross
Domestic Product (GDP).I won't bore
you with the details of the model in this article.You can those details of the model in my earlier article entitled
"A Macro-Economic Model Providing Patent Based Company Financial
Indicators and Automated Patent Valuations " posted in the publications
sections of both www.PatentValuePredictor.com
and www.Neifeld.com.Suffice it to say here that there is a
heuristic relationship between measurable properties of patent documents and
patent value.For example, generally
speaking, the broader the claim protection, the more valuable the patent.
I
will tell you that there are good points and bad points about the
PatentValuePredictor patent valuations.First, the valuations are clearly statistical in nature and therefore
imperfect.However, there is no such
thing as perfection in valuation.Moreover, there is as far as I know, no other completely objective and
generally applicable method of valuing patents.Furthermore, the Web implementation of the PatentValuePredictor
model provides immediate results, and it is far less expensive (currently $100
per patent valuation) than any other method of which I am aware.Finally, as the size of an evaluated patent
portfolio grows, the PatentValuePredictor model's portfolio valuation becomes
statistically more accurate.See for
example the corporate patent portfolio value charts in my earlier article
"A Macro-Economic Model Providing Patent Valuation and Patent Based
Company Financial Indicators" posted in the publications sections of both www.PatentValuePredictor.com
and www.Neifeld.com.
Finally,
there are some other interesting statistics I would like to share with you that
relate to valuation of patents.These
statistics are derived from the PatentValuePredictor model.
First,
there are currently 1,726,307 enforceable patents.To determine actual dollar values, the PatentValuePredictor model
currently assumes that the entire GDP is covered by patents.The current GDP is $11.252 trillion.Therefore, the PatentValuePredictor model
indicates that each enforceable U.S. patent covers, on average, annual sales of
about $6.5 million (that is, the GDP divided by the number of currently enforceable
patents).However, profit is, generally
speaking, only a small fraction of gross sales, and old patents near the end of
their term have reduced value.That
explains why the PatentValuePredictor model determines an average value of
enforceable patents is only about $2.8 million.To get this result, we calculated the current valuation of each
one of the 1,726,307 enforceable patents, and then calculated the average
value.
The
PatentValuePredictor model indicates that the bulk of the most valuable patents
are and have for many years been in the Pharmaceutical or Biotechnology
(Pharma/Bio) technology areas.The
chart below shows the currently ten most valuable patents and their technology
area.
TEN CURRENTLY MOST
VALUABLE PATENTS (AS OF 3/11/2004)
Patent
Issued
Current
Value ($)
Assignee
Technology
6,517,866
2/11/2003
1,797,722,689
Pfizer
Inc.
Pharma/Bio
6,500,987
12/31/2002
1,570,968,527
Teva
Pharmaceutical Industries Ltd.
Pharma/Bio
6,566,344
5/20/2003
1,481,848,538
Idenix
Pharmaceuticals, Inc.
Pharma/Bio
6,465,496
10/15/2002
1,408,931,126
Teva
Pharmaceutical Industries, Ltd.
Pharma/Bio
6,452,054
9/17/2002
1,220,308,695
Teva
Pharmaceutical Industries, Ltd.
Pharma/Bio
6,221,640
4/24/2001
1,194,927,644
Cubist
Pharmaceuticals, Inc.
Pharma/Bio
6,071,970
6/6/2000
1,107,999,343
NPS
Pharmaceuticals, Inc.
Pharma/Bio
6,319,919
11/20/2001
1,081,784,355
Davis;
Bonnie (Syosset, NY)
Pharma/Bio
5,610,034
3/11/1997
1,071,288,767
Alko
Group Ltd.
Pharma/Bio
6,022,716
2/8/2000
1,069,310,287
Genset
SA
Pharma/Bio
While
the Pharma/Bio tech area has held the lead for most valuable patents, the relative
value of the most valuable patents has been increasing for decades.The charts below show the ten most valuable
patents issued respectively in 1983, 1993, and 2003, and a relative measure of
their value.Note in the sequence of
three charts below the trend of the relative value to increase over the
decades.
