IP Standards, Hard-to-Value Intangibles, and PWERM
Intellectual property is valued for many reasons — an acquisition, a license, a tax-driven contribution of IP to a company, or a transfer-pricing analysis between related parties. The difficulty is that the most valuable IP often has the least history to price it against. A patent still in examination has no granted right, frequently no revenue, and no true comparable. Valuing it requires a recognized standards framework and a method built for uncertainty.
The standards framework: IVS
The International Valuation Standards (IVS), effective 31 January 2025, are the global benchmark, comprising the General Standards and the Asset Standard IVS 210 Intangible Assets. Two choices are made in every engagement. The first is the basis of value — for tax and many transactions this is Fair Market Value, the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion and both reasonably informed. The second is the approach and method: IVS 210 recognizes the income, market and cost approaches, with income-approach methods such as relief-from-royalty and excess-earnings, while emphasizing that observable market evidence for intangibles is limited and that their valuation requires significant professional judgment, supported only by disclosed and reasonable inputs.
Hard-to-value intangibles
Some IPs, by their nature, are hard to value. In OECD terms these are “hard-to-value intangibles” (HTVIs): assets for which, at transfer between related parties, no reliable comparables exist and projections depend on highly uncertain assumptions. The OECD’s guidance carries a distinctive consequence: tax authorities may use what actually happens (ex post) as presumptive evidence of whether the original pricing (ex ante) was at arm’s length. That places a premium on the assumptions, and on the DEMPE analysis — who develops, enhances, maintains, protects and exploits the asset — because economic utility, not legal title alone, drives the returns.
Pending patent applications as HTVIs
A pending patent application is a textbook HTVI. Its value turns on a binary, low-probability event — grant with commercially useful claims — that no comparable can price, and the scope of protection stays open until examination concludes. Timing exacerbates the problem: an application publishes eighteen months after filing, so any trade-secret protection in the disclosed subject matter is lost whether or not a patent ultimately issues. Economically, such an asset resembles an option on an uncertain legal right rather than a stream of current earnings.
Pharmaceutical HTVIs
Drug applications are the hardest case of all. Beyond patent risk, value depends on a chain of clinical and regulatory hurdles, each low and each compounding. For example, industry data put the likelihood of approval from Phase 1 at roughly 8% across all indications, and lower for central-nervous-system programmes. In the most difficult indications the odds are starker still — barely 2% of Alzheimer’s compounds that reached Phase II/III have succeeded. The cost and length of development explain why the realistic path for an early asset is out-licensing rather than self-funded trials. Second-medical-use claims also add legal fragility, because the novelty of such claims is examined stringently and their allowable scope is often constrained. The relevant deal terms — upfront and milestone payments — are best benchmarked to academic-license norms.
PWERM as an IVS-compliant methodology
For assets like these, the Probability-Weighted Expected Return Method (PWERM) is the appropriate income-approach tool, recognized in professional valuation guidance. Implemented for drugs as a risk-adjusted NPV, it multiplies each future cash flow by the cumulative probability of reaching it and discounts only for the time value of money — so clinical and commercial risk is captured in the probabilities, not double-counted in an unforgiving discount rate. Probability-weighted methods of this kind are standard for early-stage biopharma assets. Because every probability, term and source is explicit and testable, PWERM satisfies IVS’s requirements for reasoned method selection and transparent reporting, and it produces a defensible range rather than false precision.
PWERM in practice
Consider a generalised case: a pre-IND, second-medical-use application for a combination of two off-patent drugs supported by anecdotal data. Assign, illustratively, around 30% chance of a useful grant, roughly 20% chance of a license conditional on grant, deal terms anchored to academic-license medians, and a <2% cumulative clinical success. PWERM weights these into a value best expressed as a range.
The sensitivity analysis is the most revealing part of the calculation: the grant probability, the deal-execution probability and the headline terms move the value calculation, while the clinical odds barely shift it.
Practitioner takeaways
A good practitioner must triangulate the income result against market comparables and a cost-based floor, consistent with IVS’s multi-approach discipline. Disclose the range and the few inputs that drive it, rather than a single figure. And where one input dominates — for a pending patent, the probability of grant — commission the independent opinion that resolves it.
For hard-to-value IP, credibility comes not from pretending to certainty, but from a standards-based method that shows its work.
[1] International Valuation Standards Council, International Valuation Standards (effective 31 January 2025), https://ivsc.org/standards/; IVSC, IVS 210: Intangible Assets (Asset Standard, 2025), https://www.ivsc.org/wp-content/uploads/2021/10/IVS210IntangibleAssets.pdf.
[2] U.S. Internal Revenue Service, Revenue Ruling 59-60, 1959-1 C.B. 237, https://sub.bvresources.com/FreeDownloads/IRS59-60.pdf.
[3] IVSC, IVS 210: Intangible Assets (2025), https://www.ivsc.org/wp-content/uploads/2021/10/IVS210IntangibleAssets.pdf.
[4] OECD, Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations 2022, Chapter VI (Intangibles), https://doi.org/10.1787/0e655865-en.
[5] OECD, Transfer Pricing Guidelines 2022, Chapter VI, https://doi.org/10.1787/0e655865-en; OECD/G20, Aligning Transfer Pricing Outcomes with Value Creation, Actions 8–10: 2015 Final Reports, https://doi.org/10.1787/9789264241244-en.
[6] U.S. Patent and Trademark Office, MPEP § 1120: Eighteen-Month Publication of Patent Applications (35 U.S.C. § 122(b)), https://www.uspto.gov/web/offices/pac/mpep/s1120.html; WIPO, PCT System: Summary for Users, https://www.wipo.int/en/web/pct-system/users/summary.
[7] BIO, Informa Pharma Intelligence & QLS Advisors, Clinical Development Success Rates and Contributing Factors 2011–2020 (2021), https://go.bio.org/rs/490-EHZ-999/images/ClinicalDevelopmentSuccessRates2011_2020.pdf; C. H. Wong, K. W. Siah & A. W. Lo, “Estimation of clinical trial success rates and related parameters”, Biostatistics 20(2) (2019) 273–286, https://doi.org/10.1093/biostatistics/kxx069.
[8] C. K. Kim, Y. R. Lee, L. Ong, M. Gold, A. Kalali & J. Sarkar, “Alzheimer’s Disease: Key Insights from Two Decades of Clinical Trial Failures”, Journal of Alzheimer’s Disease 87(1) (2022) 83–100, https://doi.org/10.3233/JAD-215699.
[9] J. A. DiMasi, H. G. Grabowski & R. W. Hansen, “Innovation in the pharmaceutical industry: New estimates of R&D costs”, Journal of Health Economics 47 (2016) 20–33, https://doi.org/10.1016/j.jhealeco.2016.01.012.
[10] European Patent Office, Guidelines for Examination, Part G-VI (Novelty) (2025), https://www.epo.org/en/legal/guidelines-epc/2025/g_vi.html.
[11] P. Shah, G. Vaughan & F. D. Ledley, “Comparing the economic terms of biotechnology licenses from academic institutions with those between commercial firms”, PLOS ONE 18(3) (2023) e0283887, https://doi.org/10.1371/journal.pone.0283887.
[12] American Institute of Certified Public Accountants, Valuation of Privately-Held-Company Equity Securities Issued as Compensation (Accounting and Valuation Guide, 2013), https://www.aicpa-cima.com/cpe-learning/publication/valuation-of-privately-held-company-equity-securities-issued-as-compensation-accounting-and-valuation-guide-OPL.
[13] J. J. Stewart, P. N. Allison & R. S. Johnson, “Putting a price on biotechnology”, Nature Biotechnology 19(9) (2001) 813–817, https://doi.org/10.1038/nbt0901-813.
[14] Analysis Group, Biotech Asset Valuation Methods: A Practitioner’s Guide (2024), https://www.analysisgroup.com/globalassets/insights/publishing/2024-biotech-asset-valuation-methods.pdf.
[15] International Valuation Standards Council, International Valuation Standards (2025) — General Standards on valuation approaches/methods and reporting; and IVS 210: Intangible Assets, https://ivsc.org/standards/.
[16] On academic-license deal terms: Shah, Vaughan & Ledley (2023), PLOS ONE 18(3) e0283887, https://doi.org/10.1371/journal.pone.0283887. On clinical success rates: BIO/Informa/QLS (2021), Clinical Development Success Rates 2011–2020, https://go.bio.org/rs/490-EHZ-999/images/ClinicalDevelopmentSuccessRates2011_2020.pdf; Kim et al. (2022), Journal of Alzheimer’s Disease 87(1) 83–100, https://doi.org/10.3233/JAD-215699.
[17] IVSC, IVS 210: Intangible Assets (2025) — income, market and cost approaches, https://www.ivsc.org/wp-content/uploads/2021/10/IVS210IntangibleAssets.pdf.
