Patents Certainly Have Value, But 50 percent of Gross Margin?
What is a patent worth? What are appropriate royalties for a patent license? These are typically very difficult questions to answer, but something business owners and inventors always want to know. A recent decision by the Court of Appeals for the Federal Circuit determined that a reasonable royalty for patents covering AstraZeneca’s well-known drug Prilosec, was 50 percent of the infringer’s gross margin (gross sales, less the cost of goods sold). Most will agree that “50 percent of gross margin” is much higher than typically awarded. However, multiple factors in this case were sufficient to support this royalty amount.
Most valuation models start with the infringement provisions set forth in U.S. patent laws, which provide that an award of damages for infringement must be “adequate to compensate for the infringement, but in no event less than a reasonable royalty for the use made of the invention by the infringer.” The reasonable royalty mentioned in this section is often considered a floor or minimum. Generally, a reasonable royalty is the amount an infringer would be willing to pay as the result of a hypothetical negotiation for a license to use the invention. An alternative approach to the calculation of damages in appropriate cases, is the patentee’s “lost profits” due to the infringement. The actual royalties or lost profits will depend upon the facts of every case, and will follow a fairly well established economic analysis.
In the AstraZeneca case, the infringing party was making a generic version of the patented drug, which was already commanding a significant profit margin. Even after the payment of a 50 percent royalty, the infringing party was left with a profit margin of 36 percent, which was “solidly within the range of 31-48 percent margins typically earned on products at that time”. This was one of the factors recognized by the Federal Circuit in affirming the lower court’s decision.
Patents can be a valuable asset for a patent holder and the infringement of patents can be expensive for the infringing party. While every calculation will be different and will depend upon several factors, this recent court decision shows that a royalty equal to 50 percent of a company’s gross profit margin is possible.
Should you have questions or concerns related to patent protection, the value of patents, or the process for enforcing patents, please contact one of Larkin’s patent attorneys who would be happy to discuss these issues.