Perspectives from Law, Economics and Political Economy
- New Horizons in Intellectual Property series
Edited by Meir Perez Pugatch
5. I. What is an idea worth? Richard P. Rozek and George G. Korenko INTRODUCTION People assign values to ideas every day in the marketplace for intellectual property (IP). This marketplace is thriving. There were more than 625 transactions involving some form of IP rights in the pharmaceutical industry alone between July 2003 and June 2004.1 IP does not have value unless it contributes to products or services that ﬁll previously unmet needs, represent an improvement over existing products or services, or allow cost savings. For example, while a patent provides exclusive rights to an innovation, it does not ensure that consumers will purchase the product or service embodying the innovation. Emmett J. Murtha, former Director of Licensing at IBM, estimated that only about 5 per cent of the patents in a large portfolio have substantial value.2 Many patents cover technologies that are not commercially viable or cannot be practiced without access to other technologies. Determining the value of IP requires an understanding of the characteristics of the research and development (R&D) process and the downstream markets for the associated products or services. IP may be valued for internal business decisions, venture capital ﬁnancing, ﬁnancial reporting such as for Statement of Accounting Standards (SFAS) 141 and SFAS 142, licensing transactions, taxes, litigation or bankruptcy. Some of these forums have codiﬁed standards that an analyst must follow when valuing IP. There are three approaches frequently applied: the cost approach, the market approach, and the income approach. Not surprisingly, there...
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