Third WIPO-INSME International Training
Program: Financing your business with
Intellectual Property
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Major trends in IP monetization
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Geneva, December 1st, 2010
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Sylvain Roy, High Spin Licensing
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Contents:
5 themes highlighting world trends
in IP licensing and IP monetization
#1  Growing volume of activity
#2  Growing complexity and specialization
#3  Interdependence
#4  Increasing strategic value
#5  National specificities, reduced international
discrepancies
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Theme #1: Growing volume of activity
(and lots of place for further growth)
- IP is considered as property – as it should be –
rather than monopoly
- IP is becoming routinely traded, and IP trade is
increasing in volume, worldwide
- Transnational companies spread knowledge and
are responsible for the bulk of licensing activity
- Companies are no longer using IP solely as a
defensive tool, and see IP monetization as an
attractive value added activity that can increase
the ROI for R&D and market development which
have already been spent for existing products
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#1
Why business loves patents 1/2
- Provisional protection of an innovation (pending appl)
- Building monopoly position; blocking other from
entering a market
- Assembling portfolio of rights to create financial
strength (and improving balance sheet)
- Getting a seat at the table for standards setting
- Creating marketing messages and becoming more
visible in the market
Sources: EPO
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#1
Why business loves patents 2/2
- Generating license income
- Building a base for infringement claims (“troll” model)
- Preventing lawsuits
- Measuring the performance of the company or
individuals
- Communicating innovativeness to investors
- Avoiding the feared, but unknown, consequence of
not patenting
Sources: EPO
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#1
The IP licensing market
has exploded in the last 20 years worldwide
Licensing should further grow
from US$110 billion (2000)
to.... US$500 billion (2015)
(including copyright and trademark)
Intellectual property receipts, US$bn
Sources: Ernst & Young; Athreye and Cantwell, 2005; The Economist
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#1
The technology licensing market
is a fraction of the larger IP licensing market
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#1
Growing volume of patents, but
relatively few patents are being monetized
- 10,000 new patents are issued every week (world)
- Only a fraction of patents and disclosures end up
having any economic value; it is generally agreed
that only 5-10% of issued patents have a significant
commercial value
- Patent rights generally have value if :
Revenues + Volume + Infringement
(competition proving the
vitality of the market)
Sources: OECD; Milken Institute
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#1
Growing volume of patents, but
relatively few patents are being monetized
- Less than 3% of patents
generate royalty income
- Less than 50% of
licensed patents generate
income
- average revenue per
license of €45,000
(Switzerland, 2000)
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#1
Substantial growth can result from better
IP management and licensing practice
- Intellectual Property is still a significantly untapped
resource
- Innovating companies can increase their operating
income by 5-10% from the sale or license of patents
and proprietary technologies
 Few companies earn more than 0,5% of their
revenue from licensing
Sources: Harvard Business Review; McKinsey & Co., Nov. 2002 survey
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Theme #2: Growing complexity and
specialization
- Still, bottleneck issues limit monetization
efficiency
- Increased competitive research, development
costs and compliance costs encourage IP trade
- A growing secondary market for IP increases
overall market efficiency
- More players are becoming able to identify and
grab under-valued IP
- IP issues and strategies are becoming leading
indicators of company performance
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#2
Globalization and consolidation of R&D
- R&D has become increasingly concentrated to take
advantage of economies of scale and clusters of
knowledge
- Transnational firms are changing the way innovation
is transmitted and leveraged around the world; their
share of R&D spending is increasing dramatically
- Some industrial companies will transform partially or
completely into R&D companies, taking advantage
of relative growing value of IP
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#2
Bottleneck issues affecting IP monetization
- IP protection costs (not all inventions worth protecting)
- Un-harmonization of patent rules (US first to invent vs. EU first to
file patent systems) (biotech patents remain un-harmonized across EU on gene
sequences, stem cells) (claims of issued patents can vary from one country to
another) but
there is a drive toward Global consistency
- Patent complexity and patent claims incertitude (broad
upstream pioneer patents) (large number of claims are granted twice) (claims of
issued patents can vary from one country to another)
- Under-reported royalties (affecting up to 88% of deals; nearly 50% of
licenses have under-reported royalties in excess of 25%)
- Lack of valuation guidelines
Sources: Invotek
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#2
New players and innovative business models
- Secondary, speculative markets :
- IP banks buying patents and reselling at profit
- IP securitization (sale of IP for a pricing based on future
royalty income; e.g. David Bowie’s portfolio)
- Dedicated commercialization platforms:
- IP showcases, on-line listings
- IP auctions (Ocean Tomo, eBay)
- Enforcement speculative market:
- “IP trolls” (buys patents and seek royalties)
- Private-equity funding research dedicated to generate and
exploit IP (Intellectual Ventures)
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#2
IP value now provides a benchmark
to evaluate companies performance
• Equity indexes used to cover portfolios of large industrial
and technology companies:
– Jones Industrial Average (1896)
– Standard & Poor’s 500 (1957)
– NASDAQ Composite Index (1971)
Ocean Tomo 300
10 year performance tracking data
• New index:
– Ocean Tomo 300™ Patent Index (2006)
covers a portfolio of 300 companies that
own the most valuable patents relative to
their book value
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Theme #3: Interdependence
- Trends today is away from independence and
toward a vital need for the talent of others
- Considering increasing costs (for research and for
non-inventive activities), companies don’t rely on
their own capability to fill the product pipeline
- Competitors engage in overlapping research and
product development, and license each other’s
technology
- Revolutionary IP-driven deals are now done
across industries
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#3
Privileged relationship and legal vehicles
- Licensing (grants of rights)
- Options (access to future technology)
- Technology transfer (assignment of ownership)
- Donation and divestiture (with or without tax incentive)
- Hybrid agreements (often complex and sophisticated):
option/license, joint-venturing, cross-licensing,
corporate partnering, co-promotion or co-marketing
arrangements, strategic alliances and consortium
licensing
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#3
Strategic alliances among competitors
- Companies are learning and accelerating innovation
pace through acquisition and partnering
- Partnering topics includes:
- Joint R&D, product development
- Joint commercialization
- Patent Pools (Framework for agreement among patent holders to license their IP
to one another or to aggregate and cross-license IP rights)
- Joint litigation (avoiding “patent trolls”)
(Pharmaceutical and Biotech: Co-dev deals have increased 25-fold since the
early 1980’s; emphasis now on shared manufacturing rights, shared promotion
rights, shared profits from commercialization)
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Theme #4: Increasing strategic value
- IP has generally become a corporate priority and IP
strategies are more aligned to core businesses
- IP licensing justifies distinct, and often performing,
business units
- Rapid evolution of best practices, regarding notably
contractual clauses and “win/win” negotiations
- Increased selectivity, notably in the willingness to
trade non-core patents
- Increased willingness to enforce patents; litigation
determines ultimate disposition conditions
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#4
Higher value of IP contributes to selectivity
- Now emphasis on individual patent value instead of
“batch” or portfolio valuation
- Main factors influencing individual patent value:
- Legal factors: scope of the technical disclosure (description,
drawings); interpretation of claims (width, reach and clarity)
- Market factors: correlation between the patent and products
and market needs, existence of transaction on comparable
patents and technologies
- Financial factors: contributing value of the patents to profit
margin, market share or reduction of manufacturing costs
Again, no value without Revenues + Volume + Infringement
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#4
Several non-IP factors can influence
the value of a licensing deal
- There are 100+ factors influencing pricing of licensing
deals and royalty payments, among which:
- Stage of development of the technology
- Access to ongoing R&D via grantbacks and grantforwards
- Structure and spread of payments
- Warranties, indemnification
- Exclusivity, territories, etc
- There is no such thing as average industry royalty rates!
- Royalty is the last element to be covered during
negotiations
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#4
Examples of IP licensing successes
(Chemistry industry)
• Eastman Chemical Co.: in 1999-2002, closed 20 license
deals worth $50m plus $100m in NPV
• Bayer: 350 business units contributes to IP; offers
technology packages (each contains 3-5 patents plus
supporting information); each success is worth $1-10m,
at a profit margin averaging 78%
• DuPont IP monetization results (2001): $377m in royalty
income (2% of total revenues, but contributed to 23.3%
of total DuPont profits!)
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#4
Examples of Corporate IP strategies
(Chemistry industry)
• Proctor & Gamble: all technologies are more or less
available for Out-licensing; value contribution of
licensing would make it among its top-10 brands
• DuPont: strong success in licensing to China and India;
creates technology specifically for licensing
• Dow Chemicals Co.: emphasizes strategic patenting
and uses IP strategy to direct R&D priorities; Dow has
fewer technologies to offer on licensing (Dow downsized
its estate from 20,000 to 10,000 patents (1992), saving
$40m over 5 years in patent-maintenance fees alone)
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#4
Examples of Academic IP strategies
(U.S. Universities)
• MIT: has been spinning-off companies for 50 years;
strong in engineering and physical sciences, #1
university in number of start-ups
• UC San Francisco: focus on licensing technologies
that have a substantial impact
• U of Florida: high income relative to research
expenditure, focus on developing clinical or
commercial applications from basic science
discoveries
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Theme #5: National specificities,
reduced international discrepancies
- IP is still mostly traded among large corporations
- United States still ahead in almost all areas of IP
- Europe: top-down approach to research financing,
uneven access to capital
- Developing countries are fast growing patent filers,
their industrial champions grab assets through MnA;
China no1 filing country (2005 onward)
- Relative harmonization of IP rules, but important
discrepancies in enforcement
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Examples of regional discrepancies
#5
(Biotechnology industry, 2003)
• U.S. leads in invention disclosures, patents filed and
granted, licenses executed and licensing income
• European universities surpass their U.S.
counterparts in start-ups established
• United States and Europe have an equal total
number of companies, but...
–
–
–
–
Number of persons employed: US = 2 x EU
R&D spending: US = 3 x EU
Venture capital raised: US = 3-4 x EU
Access to debt finance: US = 4 x EU
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#5
National specificities: a snapshot
U.S. / Canada
• United States
– dominates research and high tech industries, due in part to direct and
indirect role of government in setting environment for innovation
– R&D funding driven by national security concerns
– unmatched academic entrepreneurship, leads the world in availability of
venture capital but shortage of funds for fundamental research
– revolutionizes the management of intellectual property
• Canada
– performing research networks, fastest growth for external patent
applications and industrial R&D investment among G7
– shortage of skilled managers able to grow high tech start-ups; gaps in the
risk capital system for financing early-stage ventures
– first in terms of cost competitiveness for biomedical R&D, second highest
number of biotech companies (world)
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#5
National specificities: a snapshot
• France
Europe
– innovation policy characterized by layers of complexity, but made great
progress in terms of government funding for research; scores 5th in R&D
spending (world)
– highly individualistic and entrepreneurial spirit, but the country is risk
averse (partly due to high tax rates)
– high number of scientists, goal to raise R&D investment to 3 percent of
GDP by 2010
– pool of large innovative transnational corporations
• United Kingdom
– abundant capital: strength in public spending (and charities funded
research), and by far the largest private equity and venture capital market
in Europe (2nd only to US)
– relatively fewer patents and fewer start-ups
– majority of university spin-offs are unsustainable (mostly in
pharmaceuticals, biotech and high technology)
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#5
National specificities: a snapshot
performing small countries
• Switzerland
– high innovation, highest biotech density worldwide, thanks to renowned
universities, tax environment and banking system
– ranks 2nd, worldwide in active patents per residents, strong in health,
pharmaceuticals, medical technology, IT, electronics and instruments
• Finland
– great emphasis on exploitation of research results
• Israel
– good start-ups incubation up to prototype phase; innovates but added-value
leaves (mostly to United States)
– specialized military units generated 3,000 start-ups, strong interdisciplinary
technologies (mathematics, physics, computer science)
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#5
National specificities: a snapshot
CHINA
• China should be at the center of any IP strategy
– first country in terms of patent application filing (ahead of JP, US, EU and PCT)
since 2005 (480’000+ filings!!)
– issued Chinese patents,
• 2007: 245'161 (original Chinese patents 153'060; foreign patents 92'101);
• 2006: 210'490
• 2005: 173'327
• Chinese Technology Trade Market (TTM)
– enormous growth in TTM, from US$ 3,75 b (1996) to 22,73 b (2006)
– patent based deals was US$ 1,69 b, 11% of IP based deals, 7% of total
– about 65% of deals involve Know How, related to outsourced technology
development and technical service contracts
– surprisingly, transactions are mainly between domestic organisations
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National specificities: a snapshot
CHINA
#5
• Challenges
– lack of framework to commercialise technologies for trading (overall level of
commercialisation is low, roughly 10%)
– inadequate IT infrastructure
– no established professional Chinese technology trade agents
– inadequate laws on technology transfer and poor enhancement leading to
loopholes and irregularities in the market and lack of confidence by IP owners.
.
• Critical Success Factors for business in China
–
–
–
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Knowledge about doing business in China.
The right technologies that are valuable to China.
A tailored business model that is based on long term partnership.
Flexible approaches to cater for the carried needs by Chinese
partners.
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National specificities: a snapshot
CHINA
#5
• Other risks and Problems
–
–
–
–
know-how (trade secret) is hard to protect in China.
many IP lawsuit cases involve know-how leak from former employees.
different interpretation of “contract”.
the government policy is “market in exchange for technology” so Chinese
regulations tend to protect licensees.
– post-contract risks: contract renegotiation, “clever” accounting and contract
interpretation, foreign exchanges control for payments under licensing
agreements.
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#5
CHINA : IPR situation
• Negative aspects
–
–
–
–
–
general lack of awareness of and respect of IPR
rapid improvements to laws but enforcement is weak
poor quality and potential corruption of local judiciary
high cost and lengthy legal process for IP cases
risk assessment is difficult.
• Positive aspects
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–
–
–
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increasing press and media coverage for IPR protection
gradual knowledge base improvement about IPR
no longer just a “foreigner’s problem”
business secrets are protected under Chinese regulations
establishment of IP special courts and training of judges.
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#5
CHINA : IPR situation
• Any patentability or novelty search should include a
search of Chinese patents
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–
–
–
SIPO
CNPAT
CNIPR
EPPIS
www.sipo.gov.cn/sipo_English/
http://search.cnpat.com.cn/Search/EN/
http://english.cnipr.com/enpat/
http://pub.cnipr.com/enpubpisfts
• Searching Chinese patent databases
– no complete update/coverage information available
– relevant information may be overlooked when searching with English
keywords/applicant names
– machine translation tools still in development stage
– certain functions are currently only possible via the Chinese interfaces:
– always combine different (free) sources
– use both English and Chinese interfaces whenever possible/necessary
– compare the results (e.g. different machine translation results).
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Final remarks for IP owners
(and for their IP counsels and consultants)
- Know what you have (assess your IP importance and value)
- Know where you stand (assess the IPR landscape relevant to your
key business)
- Aim for the best and prepare for the worse
- Define winning exploitation strategies to secure
market shares, involving your IP and third-parties IP
- Develop a wider network of expertise connected to
the market
- for assessment and implementation of IP monetization
strategies
- where internal resource collaborates with specialized
external firms
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Thank you!
Sylvain Roy
Managing Partner
HIGH SPIN LICENSING
sroy@hslicensing.com
+41(0) 78 741 4321
www.hslicensing.com
High Spin Licensing is a licensing agency focusing on
developing markets for patents and technologies worldwide
Please refer to us should you need to: find, sell or license
technologies and IP rights.
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