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, LLC (1)
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 of information 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|
|6,500,987||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|
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.
TEN MOST VALUABLE PATENTS ISSUED IN 1983
|Patent||Issued||Relative Value When Issued||Assignee||Technology|
|4,399,282||8/16/1983||1,343||Kabushiki Kaisha Yakult Honsha||Pharma/Bio|
|4,372,948||2/8/1983||974||Kureha Kagaku Kogyo Kabushiki Kaisha||Pharma/Bio|
|4,374,829||2/22/1983||661||Merck & Co., Inc.||Pharma/Bio|
|4,396,617||8/2/1983||660||Duphar International B.V.||Pharma/Bio|
|4,399,276||8/16/1983||605||Kabushiki Kaisha Yakult Honsha||Pharma/Bio|
|4,369,189||1/18/1983||551||Union Carbide Corporation||Pharma/Bio|
|4,410,537||10/18/1983||507||Burroughts Wellcome Co.||Pharma/Bio|
|4,399,148||8/16/1983||499||Union Carbide Corporation||Pharma/Bio|
|4,372,953||2/8/1983||490||Otsuka Pharmaceutical Company, Limited||Pharma/Bio|
TEN MOST VALUABLE PATENTS ISSUED IN 1993
|Patent||Issued||Relative Value When Issued||Assignee||Technology|
|5,252,474||10/12/1993||1,696||Merck & Co., Inc.||Pharma/Bio|
|5,256,558||10/26/1993||969||The Trustees of Rockefeller University||Pharma/Bio|
|5,258,502||11/2/1993||868||Massachusetts Institute of Technology||Pharma/Bio|
|5,268,273||12/7/1993||824||Phillips Petroleum Company||Pharma/Bio|
|5,182,263||1/26/1993||823||Hoffmann-La Roche Inc.||Pharma/Bio|
|5,187,241||2/16/1993||763||International Business Machines Corporation||Pharma/Bio|
|5,262,568||11/16/1993||756||State of Oregon||Pharma/Bio|
|5,198,563||3/30/1993||695||Phillips Petroleum Company||Chem/Polymer|
|5,196,524||3/23/1993||679||Eli Lilly and Company||Pharma/Bio|
MOST VALUABLE PATENTS ISSUED IN 2003
|Patent||Issued||Relative Value When Issued||Assignee||Technology|
|6,566,344||5/20/2003||2,646||Idenix Pharmaceuticals, Inc.||Pharma/Bio|
|6,602,861||8/5/2003||1,252||Research Corporation Technologies, Inc.||Pharma/Bio|
|6,605,606||8/12/2003||1,109||Miravant Pharmaceuticals, Inc.||Pharma/Bio|
|6,596,332||7/22/2003||841||Nestec S.A.||Foods products|
|6,602,499||8/5/2003||824||The General Hospital Corporation||Pharma/Bio|
|RE038073||4/8/2003||804||Research Corporations Technologies, Inc.||Pharma/Bio|
Conventional valuation models are not generally applicable to patents. In addition, where they are applicable, they are labor intensive, and often require a series of assumptions. The PatentValuePredictor model is unconventional in the sense that it applies a modified version of income theory in which a nominal cash flow is determined based upon a macro economic model that applies heuristic rules. It has the benefits of being completely objective, applicable to all patents, inexpensive, and quick. Application of that model to the universe of U.S. patents indicates that the most valuable patents have generally been in the pharmaceutical and biotechnology technology area for the last three decades.
Rick Neifeld is a widely published practicing Patent Attorney and President of his IP boutique law firm, Neifeld IP Law, PC. Neifeld IP Law is located near the United States Patent and Trademark Office. Its web site is: www.Neifeld.com. Rick is also the co-founder of and President of StockPricePredictor.com, LLC which runs the PatentValuePredictor model, and provides U.S. and foreign file histories, related PTO services, certain database and software products. See www.PatentValuePredictor.com. Rick can be reached via email at and via telephone at 703-415-0012.
1. 1I can be reached at via email at and via telephone at my law firm Neifeld IP Law, PC at 703-415-0012.