Valuation of Real options: Patents, Intellectual Property assets

Introduction

For those managing both patent applications and granted patents it is essential to know the value of each sufficiently accurately if one is to make well-founded decisions about their management. Since only a small proportion of patents turn out to be of extraordinary value in the long run and given that IP department budgets are limited any methods which lead to a better understanding of the value of given patent applications or patents should be welcomed..
Aim

our review intends to examine the theoretical foundations of real options within the patent literature and critically discuss its applications to patent valuation, patent use, licensing and other relevant patent decisions, such as opposition. Objective We identify four main framework within real options scholars have built option pricing models to the valuation and optimal management of patent assets. These are summarized in the following way: (1) Models that study patents as sequential investment and value them by means of compound options model. (2) Models that study patents as multiple real options and value them as portfolios of tangible and intangible assets. (3) Models that use complex stochastic processes to deal with different sources of uncertainty. (4) Models that combine option pricing and game theory to analyse the effect of competition and litigation on patent value and patent relevant decisions. Methodology Our contribution in this report is threefold. First, we provide a brief introduction to more traditional valuation models and present their major limitations. We explain how the application of real option analysis may overcome to some degrees the limits that arise from standard methods. Second, we examine the different fields of literature that have built models based on real options theory to the analysis of different issues concerning patents. We identify four main framework within real options scholars have built option pricing models to the valuation and optimal management of patent assets.