Assessing the Value of a Patent: Things to Bear in Mind
By Ian Cockburn1
One truism that is often quoted is that, “if it is worth copying, it is worth protecting”. This simple piece of homespun philosophy is one of the first questions that any inventor or innovator should ask. If the answer that returns is a bleak NO, then the matter can be laid to rest and greener pastures explored. More often than not though, the answer is an emphatic YES!
Further questions then arise such as how much will it cost? And what sort of return can I expect on my efforts, that is, how much is my patent worth?
This article attempts to provide an answer to the latter question and is written to encourage start-up companies to look seriously at the value of their innovations and to consider ways that will make the most of their intellectual and capital investment. The article focuses mainly on patents. For answers relating to the costs involved in gaining patent protection, consult an intellectual property (IP) professional in the relevant jurisdiction.
Patents are only one of many kinds of Intellectual Property Rights (IPRs) and are granted for new products or for new processes for making known products better. They give the owner an exclusive right to exploit those new products or processes for a maximum of 20 years. They are, therefore, acknowledged as a powerful commercial tool and an important link between Research & development and the marketplace.
But patents are much more than just that, and can be used to identify and develop new brands, to maintain present markets or create new ones. They can be used to raise development finance and can also be used to generate new income streams through licensing, or to create a business presence in countries without incurring a large expenditure on bricks and mortar entities of your own. When used wisely, patents may even be the difference between a company’s success and its failure.
Intellectual property rights (IPRs) assets are often described as intangible assets. They include a company's brands, patent portfolio, R & D strategies and licensing agreements.
Other significant intangible assets are invested in a company’s human capital, its know-how, and include such things as its databases, manuals, product specifications and manufacturing guidelines. All of these intangibles have a value and some effort should be made to quantify them so that when technologies are transferred or a business is bought or sold, or a merger takes place, then a fair market price can be realised.
Almost every small business undervalues its intangible assets.
As an asset, IPRs play a substantial part in a company’s commercial outlook and may impinge on just about every aspect of its business - from it sales, marketing and product development to the overall financial health of the company. Consequently, everyone in a company should be involved in one way or another with its IPRs assets management and, therefore, should be aware of and be required to take an active interest in these so-called intangible assets. But how much are these intangible assets worth? And how can they be better exploited?
A feature common to all successful companies is their focus on innovations and an acute awareness of the value of their intangible assets. These companies understand the role all intangibles assets play in their financial health. In particular, they understand the role patents and trade marks play in maintaining their competitive edge and in enhancing their market position. Successful companies invariably have well managed intellectual property portfolios designed to control access to their inventive advantage and to maximize revenues through licenses, royalties and robust business alliances.
The importance of these intangible assets in business may be gleaned from any of the market leaders. A quick review of major companies, such as Philips, Sony, Samsung, Pfizer, Proctor & Gamble, Xerox, IBM, Ford, The Home Depot, reveals that much of the wealth of these companies is encapsulated in their intangible assets, and in particular, in their brands, patents and in-house know-how. In fact, a 2002 survey of the Fortune 500 companies estimated that anywhere from 45% to 75% of the wealth of individual companies comes from their Intellectual Property Rights.
There often comes a stage in a patent’s life when a proprietor asks the question how much is my patent worth? The reasons for asking this question may vary dramatically. From an inventor looking to raise capital so that his invention can move from the back room to the High Street, to a technology leader attempting to put a price on its invention, to those that wish to license it, or vice-versa to those lagging in the market who realize that to stay competitive the best option available to them is to seek a license to the use of that new or improved technology.
Regardless of the above, each invention will find it’s own price and will generally depend on five common factors:
- Importance of the Patent. Breakthrough patents, which explore whole new areas of technology, or are the first to find answers to long-standing problems, are the most valuable. Examples of such patents are Edison’s light bulb, Benz’s automobile engine, Cohen’s polymerase chain reaction (PCR) patent, the first photocopier, or possibly an invention yet to come, such as a definitive cure for AIDS. In these cases, the patents would be so innovative that they give the owner a complete monopoly over an entire industry and are extremely valuable, often worth billions of dollars. Although most patents never reach these heady heights they are nevertheless valuable in that they can force a competitor to start innovating to keep pace with new and improved technologies and products in the market, or conversely to a license from a patent owner who has will to do so. Incremental patents, which make only small advances over existing products, are usually the least valuable though this may not be always so. A question that is often asked in relation to an incremental or breakthrough patent when endeavoring to put a price on it is 'How much would my competitors pay to use my protected product or process?'
- The Market. Market size, the number of articles that are likely to be made and the cost of each article also have a significant bearing on the value of a patent. What sort of sales can the patent be expected to support, and for how long? A good example of an article which has significant market presence is the ubiquitous Intel® chip that is reported to have a value estimated in the Billions of dollars.
- ThePatent Term. Patents have a maximum life of 20 years and, therefore, a
20-year potential monopoly. Patents that are just beginning their life and which have longer to run on the their potential monopoly position understandably will have more value. It is rare that a patent nearing the end of its term will cause a great threat to its competitors. It is almost certain that they will have devised technologies or products of their own by then that will not interfere with the patent owners monopoly position. In addition, one has to take into consideration the potential business life of a patent, i.e., the duration which a patent is likely to be economically useful, if other subsequent patents are providing better alternatives to it.
- Amount of Prior Art. The number of cited documents or patented products populating an area of innovation also have an effect on the value of a patent. Generally, if the particular article is one of just many articles of a similar ilk then the consumers are spoilt for choice and the value of each patent in that field will have a relatively smaller premium than, for example, a stand alone patent with a captured customer base.
- Patent Significance. Every patent has its own significance in a particular area and will usually form part of an overall IP strategy either to maximize its earning potential or to allow other patents to maximize theirs. Examples of such patents are those that are used to block other key players from gaining a foothold in a market. Yet other examples are those patents that are additional to an original patent and rely on the protected matter in the original patent to successfully operate. It not uncommon for drug companies or telecom companies to take out further patents protecting a strong first generation of patents, thus securing a big chunk of a market and the ability to negotiate licenses and royalties from the protected, but much desired technology.
Disclaimer: PIPERS endeavors to be as accurate as possible when preparing its articles and has taken all reasonable steps to ensure that the information contained herein is accurate. The contents of this article are for purposes of information only. If you require any clarificaiton please seek the advice of an IP professional or contact http://www.piperpat.com/
1 The author is Web Editor, Manager Advertising & Marketing at PIPERS - Global, A Patent attorney Firm with Offices in the United Kingdom, New Zealand, Australia, Singapore and Malaysia. The views expressed in this article are those of the author and do not necessarily represent those of WIPO.