Patent valuation
Also called IP valuation, patent value, valuing a patent, patent appraisal
Patent valuation is the process of determining a monetary value for a patent. WIPO describes IP valuation as the activity that allows technology transfer and innovation professionals to determine a defensible monetary value for IP, and says it is typically carried out to support the commercialization of IP1.
Value is subjective and context-dependent. WIPO gives the example that the value of a particular patent to one company may be vastly different from that of a competitor, depending on their market position or product portfolio1.
When patents are valued
WIPO's guide says that once IP has been evaluated, valuation may follow for several reasons, including1:
- structuring a licensing strategy or deal1;
- assigning an IP asset, when it is sold or ownership is transferred1;
- raising funds, where IP assets are increasingly used as collateral to secure bank loans1;
- managing portfolios in a non-deal-oriented capacity, to focus commercialization effort on the most promising IP1;
- analyzing tax and transfer pricing, because tax authorities increasingly notice IP as a taxable asset1;
- and litigating a claim, where valuation may form the basis for legal resolution and for awarding damages1.
In the United States, when a court finds infringement it awards damages adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention (35 U.S.C. 284)3.
The main valuation approaches
WIPO's guide explores four approaches: the cost method, the market (comparables) approach, the income (discounted cash flow) approach, and the real options method and Monte Carlo simulations, which allow more complex calculations1. The publication's own summary names the market, cost and income approaches2.
| Approach | How it estimates value | Most useful when | Main limit |
|---|---|---|---|
| Cost | From the resources required to recreate or replace the IP1 | The asset is very early stage with limited commercial proof points. WIPO views it as a baseline approach when other data is not available1 | It lacks predictive power for future revenues1. There is often a large discrepancy between the cost of developing a technology and its perceived value to a buyer1 |
| Market (comparables) | By comparing precedent transactions of technologies similar to the one being valued1 | The market for similar technologies is active and transparent1 | Reliable comparables are scarce in early-stage technology transfer, and because IP is unique it is difficult to find sufficiently similar ones1 |
| Income (discounted cash flow) | From the expected future income or cash flow of the IP, discounted to present value1 | There is sufficient data to construct realistic financial forecasts1 | It depends heavily on assumptions about revenues, timelines and risk factors1 |
WIPO says the approach to choose depends on the maturity and application area of the IP1. It also recommends considering working closely with an IP valuation specialist when implementing the approaches, and aligning them with local laws, accounting standards and business culture1.
What affects a patent's value
WIPO says current and future value is determined by many factors, such as the risk of obsolescence, the maturity of the IP and expected development needs. Other determining factors include the IP's remaining economic lifetime and whether the buyer will gain access to other benefits such as know-how or technical assistance1.
For patents, WIPO lists indicators that can be scrutinized when judging strength. This is part of a qualitative evaluation whose output is non-monetary and which can be an input into a later valuation1.
- Claims: the number of independent and dependent claims indicates the breadth and depth of the protected invention, and wider and deeper claims may indicate a strong patent1;
- Age: indicates the remaining useful lifetime of the invention, and the younger the patent, the higher it may score1. See Patent expiration;
- Citations: the number of granted patents and applications that cite the patent as prior art, where more citations score higher1;
- References: a broad range of references indicates that the patent is based on strong science1;
- Litigation: strong patents are often fiercely defended by their owners1;
- Patent families: WIPO lists a high number of patent families as an indicator that may point to a strong patent with significant commercial potential1.
On lifetime, WIPO notes that the lifetime of an IP is typically based on when it expires. The IP can have utility beyond that point if the technology is buoyed by valuable know-how and trade secrets, and its lifetime can be extended, for example by building a strong brand or filing follow-on patents. In fast-moving industries the remaining useful life can be shorter than the formal protection period because of technology obsolescence1.
A patent is rarely valued alone. WIPO notes that IP is often made up of several tangible and intangible assets that together constitute a technology or product, so valuation requires a holistic approach1. It also lists, as a limit of the income approach, that it does not adequately account for the fact that products on the market may rely on several IP rights and may have freedom to operate dependencies1.
Questions people ask
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Run FTO SearchWhat are the main methods of patent valuation?
WIPO's guide explores four: the cost method, the market (comparables) approach, the income (discounted cash flow) approach, and the real options method and Monte Carlo simulations1. The cost method estimates value from the resources needed to recreate or replace the IP, the market approach compares similar transactions, and the income approach discounts expected future cash flows to present value1.
Which valuation method is best?
It depends. WIPO says the choice depends on the maturity and application area of the IP1. It describes the cost method as best viewed as a baseline when other data is not available, the market approach as most effective when the market for similar technologies is active and transparent, and the income approach as giving strong insights where there is sufficient data for realistic financial forecasts1.
Is a patent worth what it cost to obtain?
Not necessarily. WIPO notes there is often a large discrepancy between the cost of developing a technology to its creator and its perceived value to a buyer. The value to a buyer may be lower, for example if the buyer has limited capacity to meet market demand, or higher, for example if the buyer's own pipeline product has failed regulatory approval and the IP has the features needed to address that1.
Is there one correct value for a patent?
No. WIPO says value can be subjective and context-dependent, and that the value of a particular patent to one company may be vastly different from that of a competitor1. For early-stage IP it is difficult to predict with certainty what value it will bring to a specific buyer or licensee1.
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