THE NEXT BUBBLE: STOCKS? REAL ESTATE? . . . PATENTS? In this interesting article from Dominique Patton, a question has been raised whether the current slew of high profile patent ligitation is causing excessive valuations to permeate the IP portfolios of technology companies. It has been recently reported that intangible assets now make up two thirds to three quarters of corporate market value in the US for both old and ‘new-economy' businesses, and in many cases, intellectual property lies at the core of these assets - biotech firms around the world are claiming that intellectual property typically accounts for some 60 per cent of their market value.
One of the biggest problems with intangible assets (and especially patents), is that there are few fundamental accounting norms for actually calculating a patent's "value." While accountants, actuaries and the like can be called in as experts during trial to calculate damages (i.e., lost profits/Panduit test, reasonable royalty, price erosion, non-infringing alternatives, etc.), these types of exercises do little to inform the market on the real value of any specific (non-litigated) patent during a given time period.
Experts have long warned about the inadequacy of existing accounting norms in capturing the monetary worth of patents. Those that are generating licensing revenue and royalties can be valued on a discounted cash-flow basis. A further slice is deemed valuable because of the competitive threat it prevents.
In the food, pharmaceutical and biotech industries, for instance, where it is now commonplace to seek to block out an entire market space with a patent barricade, some 11 per cent of the patents filed are subsequently contested. A patent battle, alone, is the first mark of real value, according to some commentators.
Elsewhere, within some companies, the monetary value of patents are deduced by looking at what it would cost to license in the same notional technology. This provides a theoretical basis, but little real data to work with.
Yet the most striking fundamental of patent valuation, overall, is how few fundamentals there are. Companies themselves struggle to evaluate their own intellectual property.
And this problem at the level of book valuations is multiplied manyfold in market values. Specialists at the Inno-Tech institute in Munich's Ludwig Maximillian university have shown that the ratio of book value to market value for companies' intangible assets has declined dramatically from 1:1 in 1978 to 1:7 in 2000.
This means that any misplaced value on the books is now getting amplified by a factor of 7 in market valuation, and rising.