Quantitative approach



Several methodologies are used on the quantitative approach, but generally they can be grouped in four methods:



Cost-based method

This method is based on the principle that there is a direct relation between the costs expended in the development of the intellectual property and its economic value. Two different techniques are mainly used to measure costs: Reproduction cost method: Estimations are performed by gathering all costs associated with the purchase or development of a replica of the patent under valuation. Replacement cost method: Estimations are performed on the basis of the costs that would be spent to obtain an equivalent patent asset with similar use or function. In both methods, present prices are taken into account, i.e. the expenditures as of the valuation date and not the historical costs when these actually happened.For assessing costs, two cost sources of two sorts should be included: direct expenditures, such as costs with materials, labor and management; and opportunity costs, relating to the lost profits due to delays in market entrance or investment opportunities lost with the aim of developing the assets.

Market-based method

The market-based valuation method relies on the estimation of value based on similar market transactions (e.g. similar license agreements) of comparable patent rights. Given that often the asset under valuation is unique, the comparison is performed in terms of utility, technological specificity and property, having also in consideration the perception of the asset by the market. Data on comparable or similar transactions may be accessed in the following sources:

Company annual reports.
Specialized royalty rate databases and publications.
In court decisions concerning damages.

Income-based method

This method is based on the principle that the value of an asset is intrinsic to the expected income flows it generates. After the income is estimated, the result is discounted by an appropriate discount factor with the objective to adjust it to the present circumstances and therefore to determine the net present value of the intellectual property. There are different methods of calculation of the future cash flows, such as: Discounted cash flow method: This method aims to estimate future cash flows, which are projected and after discounted by applying an appropriate discount factor. The main source of information to estimate the cash flows is generally the business plan of the company that exploits or intends to exploit the asset. Relief-from-royalty method: In this method the value of the asset is considered as the value of the royalty payments from which the company is relieved due to its ownership of the asset. Hence, the appropriate royalty rate must be determined, allowing the estimation of the future royalty income stream. A discount rate is applied to determine the present value of the asset.

Option-based method

Differently from the other methods, the option methodology takes into consideration the options and opportunities related to the investment.[18] It relies on option pricing models (e.g. Black-Scholes) for stock options to achieve a valuation of a given intellectual property asset.


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