Knowledge To Money – IP Valuation

HGF has been asked to include intellectual property (IP) valuation as a topic at its IP in Healthcare Conference on a few occasions now. So this article sets out to give you a high level introduction to IP valuation and what you can do to help yourself.

Why value IP?

Most commonly we tend to think about IP valuation in the contextof transactions. These may be licences, assignments, business sales – whether a sale of the whole business or the issue of shares to a new investor. The transaction might be some type of securitisation to raise finance. You may also find yourself having to value IP in the context of transfer pricing, for instance, where you license IP to an overseas affiliate. In that case you should discuss the valuation with your accountants to make sure you satisfy the transfer pricing requirements of the relevant tax authorities. IP also has to be valued where there has been litigation in relation to it. There are many cases setting out the details of how that valuation will be done. This article will focus on IP valuation for transactions.

Art or Science?

IP valuation is certainly a science to the extent that it involves financial analysis. It does not just involve numbers though. That financial analysis will be based on assumptions and use of historic data. It is true that there is a lot of uncertainty at the early stage of IP development. If you are at the latter stage of development, it can be difficult to separate IP and non-IP contributions. How precise can you be? The argument is that it is just opinion and not scientific calculation.

Is it worth doing a valuation? It is. Your aim is to bring as much science as you can to the valuation and the assumptions which go into it. You want a valuation that is as informed as you can make it. If you go into any negotiation without having made any effort to think about the valuation, then you are just waiting for the other side to tell you what number they think is appropriate. You wouldn't do that with other provisions of the deal.

How to value IP

The type of approach you take will vary depending upon the nature of the IP involved in your transaction. Your method of valuation will be based upon the information which is available (or potentially available) to you. You will have more information about the value of your IP if, for instance, you are in Phase III clinical trials than if you are still pre-clinical. Trying to estimate the amount that might be paid for the ultimate therapy when it goes to market is much more difficult the earlier you are. The biggest constraint, however, is often your budget. If you have the money available, you can hire a professional valuer, who may be an accountant, to produce a valuation of your IP. The cost of this, however, can be prohibitive for many early stage businesses. So, you have to think about what you can do for yourself.

Methods

There are three main methods used to value IP from a quantative perspective.

Cost method

This method looks at...