Appendix F: Patent Valuation

• Author: Alexander I. Poltorak/Paul J. Lerner
• Profession: Is the founder, Chairman, and CEO of General Patent Corporation (GPC), an intellectual property (IP) firm focusing on intellectual property strategy and valuation, IP licensing, and enforcement/Is the Senior Vice President and General Counsel of General Patent Corporation (GPC)
• Pages: 249-269

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APPENDIX F

Patent Valuation

Portfolio Valuation

What is a patent worth? The answer depends on who is asking the ques-

tion. Two things, however, should be apparent: The true nature of intel-

lectual property is the additional or incremental value it brings to its

owner, and the incremental value is dependent upon the manner in

which the property is used. There are essentially four scenarios in which

a valuation of intellectual property is commonly sought:

1. The intellectual property may be owned by an individual or

an enterprise that utilizes the property to maintain a monopoly

with respect to a product it makes and/or sells, or a service it

provides.

2. The intellectual property may be owned by an individual or an

enterprise that does not utilize the property directly but is willing

to sell or license it to others.

3. An individual or enterpr ise may purchase intellectual property or

take an exclusive license thereunder to avail itself of a patent mo-

nopoly afforded thereby.

4. An individual or enterprise may take a nonexclusive license of the

intellectual property so as to be able to offer a new product or ser-

vice in a competitive environment.

Let us consider each category separately.

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Consider, for example, a pharmaceutical company selling a patented

blockbuster drug. While the patent is active, the company enjoys a large

market share and can charge for its drug whatever the market will bear.

Once the patent expires (or i s invalidated in court), a score of gener ic

drug manufacturers enter the scene and the maker of the blockbuster

drug inevitably suffers from price and market share erosion.

Thus, to such a company, a patent protecting a particular product or

process

1

would be worth exactly the net present value of the difference

between the revenues derived from the sales of this product or service

under the monopoly afforded by the patent and the corresponding

revenues in an unpatented, freely competitive environment. There is an

additional value in a patent, which is an option to license the patent to a

non-competitor who may use it in another market. Such a license can

be nonexclusive or exclusive in a specific field of use. This additional

revenue can be valued using real options theor y or, simply, a discount

cash flow analysis. For the purposes of this analysis, we will disregard

this additional value.

Calculating this difference on an annual basis, we have

VðPÞ¼<PR>PR ð1Þ

where V(P) is the annual value of the patent P;<PR>is the profit

generated by the patented product or process in a given year under the

assumption of a patent monopoly; and PR is the hypothe tical profit

generated by the same product or service without the benefit of patent

protection—that is, in a freely competitive environment.

To obtain the total value of the patent over its statutory life, we need

to sum the expression by years—from the year the patent was issued

(one can only enjoy patent protection from the date it is issued

2

) until it

1

Assuming that this product or process does not infringe the patents of others.

2

Pursuant to the American Inventors Protection Act of 1999, a patent application published 18 months

after the date of application filing will enjoy provisional rights as of the date of application publication.

250 Essentials of Intellectual Property