developing the patent and V is the present value of the
expected cash flows from development, then:
FIGURE 12.1Payoff to Introducing Product Patent as Option
Thus,aproductpatentcanbeviewedasacalloption,where
the product is the underlying asset.
ILLUSTRATION 12.5: Valuing a Patent: Avonex in 1997
Biogenisabiotechnologyfirmwithapatentonadrugcalled
Avonex,whichhasreceivedFDAapprovalforuseintreating
multiplesclerosis.Assumewearetryingtovaluethepatent
andthatwehavethefollowingestimatesforuseintheoption
pricing model.
- Aninternalanalysisofthefinancialviabilityofthe
drug today,based on the potential market and the
pricethatthefirmcanexpecttochargeforthedrug,
yieldsapresentvalueofcashflowsof$3.422billion
prior to considering the initial development cost.