The European Innovator’s Handbook to Pharma Royalty Rates

3. How to Analyze the Royalty Value of an IP

3.1 Clarify What You’re Valuing

• Is the IP active, pending, or expired?

• Is it core to a product, or supportive (e.g. UI design, manufacturing method)?

• Does the IP stand alone or rely on a bundle (e.g., software + trademark + trade secret)?

3.2 Understand the Licensing Context

Different licensing situations yield different royalty expectations.

Use case examples:

• Exclusive manufacturing license → Higher royalty (limited access)

• Non-exclusive SaaS feature license → Lower rate, but scalable

• Cross-license in standard-essential patents (SEPs) → Complex valuation

3.3 Research Comparable Royalty Benchmarks

Use available databases and public filings to find similar IP deals.

3.4 Choose the Right Valuation Approach

There are three main methods:

3.4.1 Market-Based

• Compares royalty rates from similar past deals

• Works best when benchmark data is available

• Requires strong comparability in technology & deal structure

3.4.2 Income-Based

• Projects future revenue from IP and applies a royalty rate

• Considers adoption rate, pricing, and licensing potential

• Can be modeled using DCF (discounted cash flow)

3.4.3 Cost-Based

• Estimates cost to develop the IP from scratch

• Useful for early-stage tech or internal R&D negotiations

3.5 Adjust for Licensing Terms

Royalty is just one part of the deal. Adjust value up or down based on:

• Upfront payments (high upfront = lower running royalty)

• Territorial scope (global licenses command more)

• Sublicensing rights (allowing further licensing = higher value)

• Duration (longer-term = more stable income)

3.6 Factor in Patent Strength & Market Fit

Evaluate the IP’s actual defensibility and commercial utility:

• Are claims broad, enforceable, and granted in key markets (e.g., USA, Germany, EPO)?

• How closely is the IP tied to a revenue-generating product?

• Has the IP ever been licensed, cited, or litigated?