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Valuation of patents: science or magic?
Dr Ralf D Kirsch, Dr Christof Keussen and Dr Thomas Westphal are patent
attorneys and partners in the IP law firm GLAWE DELFS MOLL in Germany (Hamburg,
Munich, www.glawe.de).
atents are rights, which allow the patentee to exclude
competitors from the commercial use of the patented technology or to allow this
use only in exchange for the payment of a license fee. No doubt patents have a
value. But what value is that?
The answer to this question is becoming increasingly
important in knowledge-based economies and sectors, such as the biotech sector
in India. The value of companies is more and more shifting from material towards
so-called immaterial assets to which also patents belong. However, there simply
is no commonly accepted method available yet to determine the value of a patent.
The absence of such common methods to determine the value of
a patent is making it more difficult for small and medium-sized innovative
biotech companies in the founding and growth phase to get the funding they need
in order to continue to grow. The value of such companies is often based to a
considerable extent on the Intellectual Property (IP), and therefore also on
patents and patent applications of the company or its founders. Negotiations
with potential investors or other capital providers would certainly be easier if
such company could assign a defined value to its patents that has been
determined by a commonly accepted method.
In addition, valuation of a portfolio of patents and patent
applications can also be important in the M&A business, e.g. if one biotech
company wants to acquire another company that has an existing portfolio, which
is also to be acquired.
No market price for patents
The value of an economic asset in a free economy is
determined by free price generation in the market. If there is a liquid market
for a given economical good the determination of its price is continuously
happening, which allows participants of the market to determine the value of
their own comparable assets. The direct comparability between the corresponding
assets is, however, of vital importance for the determination of the value
according to market prices that have actually been paid. Such comparability is
there for commodities or other mass goods of the daily need. Here, liquid
markets exist with a daily price determination, which allow for a rapid
determination of the value.
The lower the comparability of the goods and the lower the
liquidity of the market, the more difficult is the price determination. Even
when offering daily goods such as cars or property, one can have the painful
experience that the own view of the price cannot find much interest in the
market. It is obvious that patents are unique-even more so than e.g. property.
A comparability is hardly there. The market is less liquid and, at the foremost,
less transparent. Selling and licensing of patents is happening, but the
information on prices actually paid usually stays behind closed doors.
Therefore, a determination of the value of a patent by actually paid market
prices is usually not possible, or at least very difficult.
Plans for standards
At least in Germany, the valuation of patents is going to be
subjected to defined standards. In February 2007, the German Industry Norm DIN
PAS1070 "basics of proper patent valuation" has been published. In
November 2007, a DIN board was formed to work on the basics and standards for
patent valuation. In Germany, patent valuation has therefore made quite a bit of
the way from magic to science. A modernization of the German balance law, that
is about to take place, is surely going to speed up the further development
towards commonly accepted standards for valuating patents.
For Indian biotech companies it is important to remember that patents can be
looked at as an important commercial asset, the value of which can be
determined. In takeovers or mergers of biotech companies the value of a given
patent portfolio somehow needs to be valuated. At least in Germany, the
standards for determining the value of patents – be it a German national
patent or the German part of a European patent (Europe direct or PCT) – are
developing in a promising way.
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Different approaches
for valuation
Since reliable market prices as an
important indicator for the value of a patent are missing, the daily
practice has formed other approaches for the valuation of patents.
Cost approach: The cost approach is
based on the idea that the costs for the development, the filing and the
maintenance of a patent reflect its value. The cost approach comprises
direct costs for obtaining the patent as well as indirect costs, such as
the R&D costs, which can be quite substantial in the biotech and
pharmaceutical sectors. However, the costs for creating the patent are
usually not related to its potential future economic benefit that can be
gained with the patent. Unfortunately, huge efforts in R&D and
patenting do not necessarily guarantee obtaining patents of high
commercial value.
Market approach: The market approach
tries to make an analogy to known transactions of comparable patents
that have already been made in the past. The valuation is made according
to assumed adequate market prices that have been achieved in
transactions of comparable patents between third parties in the market.
The market approach is vitally dependent on the reliability of the data
on which the comparison is based on. Since there is no active and
transparent market for patents, such comparable data can hardly be
obtained. An additional problem is that there is simply no general
comparability of patents, patent transactions and companies involved in
that. In practice, there are attempts to create an almost complete
comparability by so-called "indicator models". Here, patent
transactions that have been published by the parties are analyzed and
various data on the patent that can be looked at statistically are
determined, such as the number of the claims and the number of
inventors. Subsequently, a correlation is made between these patent
indicators and the price that has been paid in the comparable
transaction. It is assumed that, in practice, a given patent with
similar indicators can achieve a similar price in the market. However,
there is no model yet that can be looked at and examined by everybody.
In as far as models exist they are simply not published by the
developers.
Profit approach: The profit approach
tries to forecast the future economic benefit of the patent over an
adequate period of time and to discount the interest of the thereby
generated future cash flows on the current value in cash (Discounted
Cash Flow Method). When determining the profit a patent can usually not
be looked at in an isolated way. In a first approach, a patent is only a
right to exclude third parties from using a protected technology. In
order to create from this right a commercial benefit, complementary
goods are needed, such as production means, access to a market etc. A
potentially valuable patent can have a low profit if it is in the hands
of a company that has no or insufficient means to actually use the
patent.
The so-called "Value in Use"
is determined based on the assumption that the patent to be evaluated is
kept and used and commercialized by its current proprietor. The existing
complementary goods of this proprietor are known. The "Value in
Use" determined in this way can be an important indicator for a
potential investor that wants to invest e.g. in a start-up company.
The so-called "Transfer Value" of a patent
assumes that the patent is sold and, as the case may be, used by a third
party. It can be substantially lower than the "Value in Use"
and can be important especially if a patent is to be used as a security
for a loan. One advantage of the profit approach is its transparency and
its traceability. Moreover, in practice, there is quite a body of
experience with the profit approach, such as the determination of
damages in a patent litigation trial or the determination of an adequate
compensation for an employed inventor. |
About the authors
Dr Ralf D Kirsch studied biology in Konstanz, Germany, and
went into research in molecular biology and cellular and molecular immunology at
the University of Cambridge, UK, where he did his PhD. After his science period
in Cambridge, he did a postdoc at the Max-Delbrueck-Centre for Molecular
Medicine in Berlin, Germany, also in the field of cellular and molecular
immunology (kirsch@glawe.de).
Dr Christof Keussen studied chemistry at the University of
Kiel and did his PhD there in the field of chemical physics. He is predominantly
active in the field of patent law, where the representation before the EPO as
well as in patent litigation and nullity suits are the major focus. He is a
member of the Board of the German Chamber of Patent Attorneys as well as in the
DIN board for patent valuation (keussen@glawe.de).
Dr Thomas Westphal studied biology in Moscow and spent years in research in
genetics, molecular biology and biochemistry at the Lomonossow University in
Moscow as well as at the Martin Luther University in Halle, Germany. He is
active in the field of patents and trademarks.
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