Valuing Patents: Technological Uncertainty and Appropriation

Abstract

Consistently measuring the value of patents across a wide range of technologies and contexts has long been a challenge for technology managers and researchers. In this context, stock market-based valuations have recently become popular. We propose that such valuations are best understood as the expected value of the intellectual property right at grant, factoring in technological uncertainty and the degree to which the patent will facilitate appropriation of eventual commercial value. We empirically demonstrate the role of uncertainty and appropriation in the context of pharmaceutical patenting and among AI patents. First, we find that stock market abnormal returns indicate that patents issued later in the drug-development process are more valuable, even though these ''secondary'' patents are generally seen as weaker than the more highly cited patents covering a new molecule. Consistent with this, we show that the valuation of AI patents increases strongly after the viability of a certain technology is demonstrated publicly. Second, in the context of pharmaceuticals, we show that a firm's ability to capture value from a given patent is associated with its stock market return. We find valuation premia for secondary patents that extend the monopoly-life of a drug, and for some new-use and continuation patents.