Monetizing Innovation: Analyzing and Leveraging Intellectual Property Portfolios

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By Robert (Russ) O’Haver, Ph.D.

Dr. Russ O'Haver is a NERA vice president.

Many companies have developed large portfolios of patents and other forms of intellectual property (IP) but use only a small portion of these intangible assets in core products and services. The remaining assets effectively sit on the shelf. Although many idle IP assets have little value, others can provide economic benefits — for example, through third-party licensing deals in industries in which the patent owner does not compete. This article discusses ways corporations can create value from under-performing intellectual property and leverage further their core IP assets.

Businesses, particularly larger ones, often lack a systematic understanding of all of their patents (and unpatented technology), copyrights, and trademarks. This, in turn, means missed opportunities to generate greater economic returns from IP portfolios. For a relatively small incremental investment, companies can not only develop strategies for creating new revenue streams, but also use a deeper understanding of their IP portfolio to inform their:

• business strategy — e.g., how certain patent portfolios might constrain strategic moves into new business areas or facilitate opportunities for partnering;
• research and development — e.g., identifying technology areas for investment or in-licensing from other industries;
• legal protection of intangible assets — e.g., assessing the relative market benefits of patenting or trade secret protection; and
• tax planning — e.g., donating patents that no longer fit with core strategies to universities or other nonprofit organizations.

Screening the Portfolio

For a company with thousands of patents, various analytical filters can be passed through the IP portfolio to help screen systematically patents that may have untapped commercial potential. Over the past five years, software tools for ¡°patent mapping¡± have been developed that enable companies to identify the patents in a particular technology space, the characteristics of those patents, and their relation to one another. These tools can serve as some of the early-stage, less labor-intensive filters for a portfolio.

One patent-mapping technique is analyzing the groups of patents that form technology clusters. Quite often a company has a few core patents, with a number of patents around that core to protect the perimeter from competitors. Clustering patents into technology groups is a useful first step to reducing the size of the analysis to a manageable level, to understanding a company’s core technology strengths and its related protection strategies, and to identifying the breadth of coverage across a technology space.

Another software-driven patent-mapping technique is citation analysis. The process of securing a patent from the U.S. Patent and Trademark Office requires references to the so-called ”prior art” — i.e., other patents and published research related to the proposed innovation. After receiving a patent, subsequent applications will, in turn, reference the earlier one.

Thus, for any individual patent, there are sets of backward and forward references (or citations) that resemble a family tree, with direct descendants, cousins, and other relations.

These relationships can provide important insights. For example, a company in a completely different industry may be citing your patent, which could suggest an opportunity for licensing or another form of partnering. Companies typically focus on their own industries and often lack a broad view of technology transfer opportunities from other industries. Yet innovations developed in one industry may have a crossover application in another. A good example is KEVLAR®, a strong, lightweight material originally developed for tire treads that has found significant commercial application in such areas as body armor and high-performance sails. As more industries converge – for example, pharma and chemicals, and bio-tech and computing – opportunities for such technology transfer will increase.

The patent-mapping tools described above and similar techniques have applications beyond identifying opportunities to monetize an IP portfolio. For example, patent mapping is a valuable tool for research and development. What technologies have been developed? Who has developed them? What are the open spaces? Should we spend our own R&D dollars to develop a new technology, or would we be better off in-licensing it?

A longitudinal analysis of a technology space can provide insights into the length of technology cycles and topics related to patent value. A great deal of patenting may be followed by a lull, then a large increase in activity. Understanding the timing of innovation is important to R&D, valuation, and strategic planning. Citation analysis is also beginning to be used for patent valuation purposes, and economic research papers suggest that higher degrees of citation and other patent metrics correlate to greater patent value.

Patent mapping is only one screening tool. Other techniques to understand what is in the IP portfolio and what more could be done with it include financial and market analysis, bargaining scenarios for potential licensing opportunities, and legal and technology assessments from qualified experts, particularly around patent claim sets.

Monetization Options

A rigorous analysis of a patent portfolio typically reveals a subset of patents that may be good candidates for licensing. There are two basic types of licensing. The first, “stick” licensing, is an opportunity that arises when another company may be infringing on your patents. One option is to negotiate a royalty payment for the continued use of your innovation in their product. This is a particularly complex type of licensing, which generally requires a good understanding of the litigation environment and the costs and benefits of proceeding down that path.

“Carrot” licensing is when a company has developed an IP asset that may have value in another industry. For example, communications companies have developed powerful patternrecognition software to detect anomalous transactions. They can license this software to other industries where transactional fraud rates are high or under increasing scrutiny – for example, depository institutions where new national security regulations have increased monitoring requirements. As with the KEVLAR® example, a ceramic developed for the aerospace industry could have attributes that would also be desirable in a variety of basic industrial processes. Similar licensing strategies can be used with brands. MasterCard®, for example, extended its brand to bank-issued debit cards and stored-value transactional cards.

One option for monetizing technology-related IP is a spin-out, or business sale, in which a cluster of intangible assets and associated key people become the basis for creating a new and separate company. This may be an attractive option when a business has technologies and associated brands that do not fit with the core strategic direction of the company. One of the many important factors in a successful spin-out is the linkage between the patents and brand. Companies should be able to carve out pieces of the portfolio without disrupting other patents and brands. A related monetization option is a joint venture or other partnering opportunity that is based on the leverage potential of the technology or brand portfolios.

Companies can also donate their patents to universities and research institutions. This provides a tax deduction equivalent to the fair market value of the patent and can enhance the business’s reputation for corporate citizenship. DuPont, Proctor & Gamble, and other large companies have publicly acknowledged programs for donating patents that no longer fit their strategic plans but may have commercial potential with further development. The philanthropic goal of such programs is providing new revenue streams to universities and nonprofit organizations.

The business goal of patent donation is helping a company manage its federal tax liability. The location of intangible assets and so-called IP holding companies also has implications for state and local taxes, and is therefore relevant to understanding the relative values of IP. Moreover, in international tax planning, the location of intangibles for a large company with overseas subsidiaries is an important consideration. The transfer price – the price related companies will pay to use intangibles – must be justified at “arm’s length.”

Cost reduction is another form of monetizing a company’s intellectual property. A thorough analysis of an IP portfolio will often reveal patents that are basically worthless because of advances in technology. Because formal patent protection is costly – typical lifetime costs for patents filed globally are $200,000 – abandoning a useless patent can generate signifi- cant cost savings. IBM, which is well known for its success in generating revenue from its IP portfolio, also does an excellent job of trimming the deadwood from its portfolio, even as it continues to be a leader in generating new patents.

Companies can take a similar approach to managing their trademarks, which are also expensive to maintain. A corporation that suspects it has too many brands may do a cost-benefit analysis of delisting some of their registered trademarks. New approaches to brand valuation facilitate such analyses. (See “The Ultimate Intangible,” p. 19)

In some cases, when an IP asset appears interesting but has no immediate commercial use, a company may simply hold on to it. Similar to a call option in financial markets, this approach acknowledges that some markets can change quickly, and an opportunity to commercialize the asset could appear in the near future.

Related IP Financial Products

Some companies are taking a hard look at securitizing their IP in the capital markets. If licensing activity accelerates, as many practitioners predict, companies may increasingly benefit from opportunities to securitize royalty streams as an alternative source of capital. Perhaps the best known examples of IP securitization have occurred in the music industry, where the royalty streams from copyrights owned by well-established artists have been fairly stable. Such securities have attractive risk-return characteristics for investors.

The securitization of the royalty stream from an individual patent is a different matter altogether. There is more idiosyncratic risk with a patent’s royalty stream, and technological obsolescence could abruptly reduce its economic life. One of first patent-securitization deals involved Yale University, which licensed a molecule it had developed to Bristol-Myers. The securitized royalty stream was “sold” in the capital markets for $115 million, and Yale used a portion of the proceeds to build a new research lab. U.S. universities reportedly generate more than $700 million in royalties annually and execute 3,300 licenses per year.

Licensing streams from a portfolio of patents present an opportunity for packaging the risks in a fashion similar to mortgage-backed securities. In such a package, pooling of diverse income streams reduces risk and creates a more marketable security.

Other forms of innovative IP financial instruments are also becoming available. These include using IP insurance products and related risk analysis (see “Gray Matters,” p. 1), IP to collateralize third-party lending, and acquisition of IP rights from distressed companies.

Further Implications of Monetization

Monetizing IP helps create flexibility for a company’s R&D function as a complement to cross-licensing and similar transactions that facilitate freedom to operate in a patented space. Instead of the traditional choice of developing a technology for products or abandoning it, a monetization strategy creates other opportunities for value creation.

This may be particularly important for industries such as pharmaceuticals, where it may not be possible to continue the R&D process for every promising compound in earlystage development.

Monetization of IP can also have implications for mergers and acquisitions. For example, if a company buys 100 patents or acquires a company with 100 patents, there may be ten that are considered particularly synergistic and may have motivated the transactions. But what about the other 90? Monetization analysis can help executives decide whether product development, licensing, or donation is the best option.

As more companies begin to analyze their intellectual property and options for monetizing it, there is growing recognition that IP management must be approached proactively and holistically – i.e., spanning functions within corporations. With increasing international protection of IP rights through the TRIP accord and other multilateral agreements, there will likely be more incentives for licensing and monetization in general. As the reporting of IP assets becomes a more salient feature of discussions to enhance disclosure and the quality of financial statements, there will be greater emphasis on identifying and valuing intellectual property. Addressing this need will require more sophisticated tools and methodologies.

Dr. O'Haver, who is based in White Plains, advises clients on intellectual property matters, including monetization of patent and software portfolios, development of licensing positions, valuation of patents, brands, and copyrights, and royalty determination. NERA is a leading global economic consulting firm that applies economics and finance to solving complex business, risk management, and valuation issues. Dr. O’Haver can be reached at russ.ohaver@nera.com or at 212 345 6390.