RoyaltyStat Blog

Royalty Rates for Utility Patents

Posted by Ednaldo Silva

The number of utility patents per license agreement primarily from two high-tech industries shows that most utility patent agreements include one patent number. The number of utility patents per agreement is a hyperbola. It's revealing that the interquartile range of royalty rates does not vary much considering the changing number of patents per agreement. In fact, the median royalty rate is stable at 5%, irrespective of the number of patents per agreement. This suggests that in addition to a stable median royalty rate, two important factors determine the profit potential of a patent portfolio (counting from 1 to 30 utility patents portfolio covered in a model license agreement): the license fees (upfront fees and milestone payments) and market size, measured by the cumulative net sales generated by the portfolio during its expected useful life. Please read: http://www.worldipreview.com/contributed-article/patent-royalty-rates-an-element-of-surprise

These results suggest also that comparability analysis is important to determine the event trigging the license fees, and the expected life-time revenue from the commercial use of the patents. As posited on a prior blog, the period-based royalty income can be determined by using the equation:

     Yt = φ St + At,

where φ is a comparable royalty rate obtained from RoyaltyStat, St denotes net sales attributed to the patent, At denotes the additional payments (license fees), and t = 1, 2, …, T is time (year).

For a given risk-adjusted discount rate, the forecasted royalties Yt from t = 1 to T can be discounted to a present value representing the worth of the patent portfolio. As described before, such a present value tends to be erratic, and we have suggested using PIM (perpetual inventory method) as a more reliable alternative.

The chart below shows that the number of utility patents per agreement is a reciprocal function.

License_Agreements_Per_Utility_Patent.png

 

Published on Apr 12, 2016 1:57:39 PM

Ednaldo Silva (Ph.D.) is founder and managing director at RoyaltyStat. He helped draft the US transfer pricing regulations and developed the comparable profits method called TNNM by the OECD. He can be contacted at: esilva@royaltystat.com

RoyaltyStat provides premier online databases of royalty rates extracted from unredacted agreements, normalized company financials (income statement, balance sheet, cash flow), and annual reports. We provide high-quality data, built-in analytical tools, customer training and attentive technical support.

Schedule an Online Demo 

Topics: Royalty Rates