Patent Valuation

Still A Long Way To Value-Based Patent Valuation

The Patent Valuation Practices Of Europe’s Top 500
By Martin A. Bader and Frauke Rüether

I
nnovations and patents make important contri- sized the importance of innovations and patents for
butions towards corporate success. A survey on corporate success. Innovative products account for
the top 500 patent applicants of the European 66 percent of the interviewees’ turnover and for
Patent Office on behalf of PricewaterhouseCoopers 60 percent of their profits. Patents, which are one
conducted by the Institute of Technology Manage- segment of the overall field of innovation, are also
ment at the University of St.Gallen, Switzerland and held in high esteem as drivers of success. Fifty-eight
its innovation and intellectual property management percent of the interviewees confirmed the impor-
advisory spin off BGW reveals the status quo of valua- tance of patents. Correspondingly, 57 percent of the
tion procedures and methods. companies interviewed indicated that value-oriented
Success Factors for Companies innovation management is firmly entrenched in their
Since innovations are of immense significance in organization; only 12 percent answered this ques-
the attainment of a competitive edge today, their tion in the negative.
protection may create durable corporate success. To determine the contributions of patents to
Innovations and patents are therefore considered to corporate success patents should be managed and
be success factors for companies of all sizes and in- valued. This could happen through monetary and
dustries. In view of companies’ increasing capital re- non-monetary valuation methods. While the costs
quirements, and growing exploitation opportunities for the issuance of a patent can be determined with
on inter-national financial markets, patents are also of relative ease, the actual valuation of a patent requires
considerable interest for stakeholders and investors. an appropriate set of tools. Monetary valuation can
Accordingly, the management of immaterial assets is be carried out with the help of capital value, market
an important element of strategic management that price and cost oriented methods (a more detailed
is constantly increasing in significance. description is given in the last sections of this article).
As a consequence of the introduction of the In- This high number of methods, combined with the
ternational Financial Reporting Standards (IFRS) and non-standardized specific procedures they involve,
the palpably increasing interest of the capital market result in a great deal of uncertainty in the valuation
in immaterial assets, a Europe-wide study was con- of patents.
ducted seeking to investigate
the status quo of patent valu- Figure 1. Monetary Valuation Methods By Needs
ation in corporate practice.
The questionnaire was sent
to the top 500 Europe-based Disputes
36.4%
43.2%
patent applicants before the 20.5%
European Patent Office. In 34.0%
particular, the investigation Transfers 31.9%
34.0%
focused on the current gen-
eral importance of technolo- 35.7%
Taxation 28.6%
gies and patents, valuation 35.7%
motives and valuation meth- 42.9%
ods in companies, and the Accounting 21.4%
position of the value-oriented 35.7%

management of technologies 24.4%

Management 31.1%
and patents. 44.4%
Status Quo of Valuation 0% 10% 20% 30% 40% 50%
in Europe Number of mentions (%)
More than 90 percent of
Income-based approach Market approach Cost-based approach
the inter viewees empha-

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 Patent Valuation
The results with regard to monetary valuation potential values in patents.
methods came as a surprise. For one thing, the in- The path from a currently dominating risk and
terviewees indicated that monetary valuations are cost approach in patent portfolio management and
conducted relatively rarely. For another, 44 percent patent valuation to an at least application dependent
of the companies stated that they use a cost oriented opportunity and market or income based approach
valuation process, sometimes even for management still seems to be steep and breathtaking for Europe’s
events (see Figure 1). top enterprises. Cresting this task aids to manage
This result is surprising since particularly the man- patents and patent portfolios suitable and also fosters
agement who frequently asks to be informed about the utilization of patents.
the potential value contribution of their patents will Appendix: Valuation
find it difficult to infer it from this method. It is also Approaches ■ Martin A. Bader, BGW AG
surprising in the light of the importance of value- As a final comple- Management Advisory Group,
oriented innovation management. tion to the interested St. Gallen-Vienna,
Even if all the monetary valuation processes are ap- reader, some general
plied more frequently or more rarely depending on Managing Partner,
information is given in
the various occasions, there appears to be a wide the following about the Rorschach am Bodensee,
dispersion of their application (see Figure 2). On the state-of-art in valuation Switzerland
strength of this wide spread it can be deduced, how- approaches. E-mail: martin.bader@
ever, that cost and market-price-oriented processes In order to valuate in- bgw-sg.com
tend to be used as specialized instruments, whereas tangible assets, in prin-
capital-value-oriented procedures tend to fulfill more ■ Frauke Rüether, Institute of
ciple, three valuation
of a broadband function. approaches can be used Technology Management,
Still a Long Way To Go (source: IDW ES 5): University of St. Gallen
The results of the study thus confirm that patents a) market approach, Research Associate
no longer are solely used for protection but started to b) income approach, St. Gallen, Switzerland
be seen as a corporate success factor and as an asset. E-mail: [email protected]
c) cost approach.
Even though companies are more aware of patents
and their value proposition, the study’s results identi- Within these ap-
fied still many problems and uncertainties regarding proaches, several valuation methods can be applied
the valuation of patents. The uncertainty in valua- (see Figure 3).
tion methods leads not only to a loose management a) Market Approach
of patents but also to insufficient utilization of In case a reason for valuation calls for a valuation
which draws on market prices,
this is generally only possible
Figure 2. Occasions for Valuation of Patents and Technologies if and to the extent the market
prices concern sufficiently
comparable assets. In addition,
1 (never) 2 3 4 5 (often) the market concerned must
Maintenance of patent PF be active.
Compensation of employee
Control of R&D
A market is active if all
Distribution of budgets the following conditions are
Cross-licensing fulfilled:
Strategic alliances a) the goods in the market are
Purchase/sales of company homogenous;
External reporting
Compensation for damages b) purchasers and sellers will-
Loan collateral ing to enter into agreement
Voluntary information can generally be found at any
Debt/Equity financing time; and
Liquidation, insolvency
c) prices are publicly known.
Transfer pricing
Transfer of functions Since intangible assets are
40.0% 20.0% 0.0% generally not traded in active
% of mentions unknown markets, it must be deter-
mined whether comparable
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 Patent Valuation
Figure 3. Valuation Approaches and Valuation Methods such an asset. In exceptional
According to the IDW ES 5 Standard cases, revenues in perpetuity
may be considered in case the
useful life of the asset is suffi-
Approaches Market Approach Income Approach Cost Approach ciently long so that it becomes
irrelevant whether the present
Market Prices in Direct Cash Reproduction value of a limited series of cash
Active Market Flow Prognosis Cost Method flows is considered or whether
the present value of cash flows
Methods Analagous Relief-from-Royalty Replacement in perpetuity is considered.
method Method Cost Method
The income approach al-
Multi-Period
lows valuations from different
Excess Earning perspectives. Aside from stan-
Method
dardized concepts of value,
Incremental e.g. the fair value, which are
Cash Flow relevant for company external
Method
objectives, it is possible to in-
clude individual and subjective
transactions can be drawn upon for the valuation of components and thereby reach strategically relevant
an intangible asset. By means of analogies a compari- decision values. This is relevant in cases in which
son between the observable price for a comparable the valuation is carried out not only for tax or ac-
object and the value sought for the (to be valuated) counting purposes, but for example shall be used
intangible asset can be made. Since adequate data for a purchase price finding or shall facilitate other
from comparable transactions are very rarely acces- decision making processes.
sible, it is necessary to provide a detailed background There are basically four different methods to evalu-
and reasoning for the choice of comparable transac- ate intangible assets based on an income approach
tions and the key indicators deducted therefrom. each of which allows for a different way of isolating
b) Income Approach the specific cash flow for the relevant intangible asset.
The income approach is based on the assumption These methods are generally equivalent. In individual
cases, one method or the other may be better suited
that the value of an intangible asset results from the
than another due to the importance of the specific
future success which will be generated by the asset
intangible asset for a company or the fact that the
in the form of cash flows.
information required for the application of one spe-
The value of an asset is considered to be the sum of cific method may be difficult to come by.
the present value of the future cash flows that can be Within the income approach, the following methods
generated as of the day of valuation (Discounted Cash are applicable:
Flow) from the use of the intangible asset within the
expected economic useful life and possibly its divest- • Direct Cash Flow Prognosis Method,
ure/disposal. The central tasks within a valuation are • Relief-from-Royalty Method,
therefore the prognosis of the cash flows relevant for • Incremental Cash Flow Method and
the valuation and the determination of the capitaliza- • Multi-Period Excess Earnings Method.
tion interest rate/capitalization cost rate depicting c) Cost Approach
the risk of the concerned intangible asset. The third approach for the evaluation of intangible
A major task in connection with the valuation of assets consists of the Reproduction Cost Method
single assets is isolating the specific cash flows that and the Replacement Cost Method. However, this
can be credited to the asset to be evaluated. These approach has a major conceptual weakness since it is
cash flows are a type of added value to the cash flows not use driven and since the data used always refers
that could be generated without the specific asset. to the past. For these reasons, the cost approach
The planning period for the cash flows is to be for the valuation of intangible assets can generally
based on the economical useful life of the intangible only be used to verify plausibility or to determine
asset or its remaining useful life. The useful life of minimum price thresholds, e.g. in purchase price
intangible assets is usually limited wherefore a valu- negotiations.
ation may not consider revenues in perpetuity from In applying the cost approach, either the costs

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required to create an exact duplicate of the asset T; Lohwasser, E.; Menninger, J. (2008): One Valuation
in question (Reproduction Cost Method) or the Fits All?—How Europe’s Most Innovative Companies
costs for the manufacture or acquisition of a use- Valuate Technologies and Patents. Munich.
equivalent asset (Replacement Cost Method) can BGW (2007): Glossary Practice of Valuation of
be used. It has to be verified whether discounts Technologies and Patents. St. Gallen, Vienna.
are to be applied to properly consider economical, Gassmann, O.; Bader M.A. (2007): Patentmanage-
technical or functional obsolescence. ment. Innovationen erfolgreich nutzen und schützen.
The depreciation must be oriented towards the ex- 2nd edition, Springer: Berlin.
pected useful life defined by economical criteria. ■ IDW ES 5 (2006): Entwurf IDW Standard: Grund-
References sätze zur Bewertung immaterieller Vermögenswerte
Bader, M.A.; Beckenbauer, A; Gassmann, O.; König, (IDW ES 5). http://www.idw.de/

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