About Chemical Innovation - Subscription Information
June 2001
Vol. 31, No. 6, pp 17–23.
Starting the Process

Table of Contents

Matthew Glasser
Nir Kossovsky

Monetizing intellectual property

opening artChemical companies are learning how to profit from new tools to evaluate and market underutilized technologies.

In the movie Field of Dreams, Kevin Costner hears a voice telling him that “if you build it, they will come”. Whereas Costner’s character relied on divine intervention for transforming his cornfield into a ball field, executives in the chemical industry spend their valuable resources turning their intellectual property (IP) into products, valuing the results, and then marketing them to customers. Indeed, the industry’s mantra for most of the past century, “invent it, develop it, manufacture it, market it, and sell it”, created a group of extremely valuable and successful companies.

Today, in the face of growing economic pressure, souring financial markets, and declining profit margins, many companies are seeking alternatives to the invent it–sell it model. One alternative, in a growing number of cases, is for the company to use a financial strategy to monetize its most valuable asset of the knowledge economy: its IP. As executives scramble to reduce the expense and risk of their R&D and try to fill their product pipelines rapidly with in-licensed technologies, they are finding a variety of financial institutions offering financial services for valuing, marketing, and monetizing their IP assets.

The changing structure of industry
“It used to be that you would enjoy a certain period of time of high margins when you launched a new product. Now, you are seeing shorter and shorter time periods of high margin since many chemical products have become commodities,” says William Heise, director of licensing at Eastman Chemical Company (Kingsport, TN).

According to Heise, today’s chemical customers often buy products solely on the basis of price and not on any kind of performance or added value. As a result of smaller profit margins, Eastman is looking for other ways to create value—by harnessing the intrinsic value of its IP. “The world is changing, and it is moving from the old economy, in which companies were more defensive in their IP strategies and used patents to protect what they own, to a new economy in which companies must create value from their IP,” says Heise.

Eastman is among a growing group of companies that believe they can no longer count on the manufacturing of products as the sole mechanism for creating a return on their R&D investments. To facilitate growth during challenging economic conditions, companies such as Eastman and Dow Chemical are seeking to leverage their competitive advantage in IP. By developing aggressive IP management, licensing, and donation programs, Eastman and Dow are creating revenue sources from untapped technologies.

“I think the chemical industry is going through a transition in the way we operate from an old-economy focus to a knowledge economy focus,” says David Near, director of intellectual capital for the polyurethane division of Dow Chemical. “Dow truly sees itself as a knowledge company. And with that change of perspective, our strategy for managing our IP has changed.”

The knowledge economy
To compete in today’s knowledge economy, other chemical companies would be wise to heed Dow’s example. Executives assigned to create revenue for their companies need to recognize that they can no longer afford to treat their IP simply as a legal protection against possible infringement; rather they need to consider IP a financial asset. Although patents can and do provide security against legal infringement, most businesses will be unable to generate revenue from untapped IP by keeping the technology locked away in their lawyers’ vaults.

For centuries, patents have been viewed as a legal tool for protecting technology rights. If you look closely at the structure of a patent, however, you will discover that it behaves more like a financial instrument than a legal protection. In fact, a patent is really just a financial call option on a technology. Just as a call option provides the holder the right (but not the obligation) to purchase a share of stock that may or may not have value in the future, patents provide the right (but not the obligation) to invest in the development and use a technology that may or may not have value sometime down the line.

Because of these similarities, companies can manage, value, and monetize their IP just as they would other financial assets. Although many companies have created revenue from licensing technology, how many have tried to license, assign, collateralize, securitize, swap, or donate untapped IP? All of these are possible when managing IP as a financial asset.

“There are a lot of good ideas out there for generating revenue in nontraditional ways,” says Harry Gwinnell, assistant general counsel for IP at Eastman. “A lot of companies don’t know if the fruits of their research will pan out. Very often, they have a lot of good technology sitting there that could be very strategic to someone else.”

But despite the desires of many chemical companies to develop aggressive IP monetization programs, the prospects of reengineering the way they manage their intellectual property seems daunting. And for some companies, adopting a financial strategy for monetizing IP has yet to become a priority.

“Chemical companies are under considerable cost pressures right now due to unfavorable exchange rates and high costs of raw materials. These costs exert a tremendous pressure on earnings,” says Gwinnell. “As a result, a financial IP strategy sounds like a nice thing to do as opposed to a ‘need to do’.” But as the economy changes and more CEOs, CFOs, and investors demand better bottom-line performance, companies are looking to leverage their untapped technology. What was once considered a nice thing to do is quickly becoming a necessity.

The importance of IP assets
This sense of urgency is not surprising given the changing nature of today’s companies. Whereas a company’s physical assets once determined the financial health of its business, IP is now the driving force for many companies and the economy as a whole.

Until the mid-1980s, the value of intangible assets of Standard & Poor’s 500 companies tended to equal the value of their tangible assets. On average, their market capitalization was twice their book value. Today, these values are weighted heavily toward the intangibles. By March 2000, intangible assets accounted for $5 of every $6 of market capitalization (1). And according to InteCap Inc. (Chicago), the world’s largest specialty IP consultancy, the combined value of IP rights for the average company is about two-thirds the value of all of the intangibles (2).

Despite a balance sheet heavily skewed toward the intangibles, many companies are still having trouble making money from their IP. According to data from The Patent & License Exchange Inc.’s Intangible Asset Market Index (IAMI), the value of intangibles in the chemical and applied materials sector underperformed even the struggling stock markets (3). (See box, “How does the IAMI work?”)

Between December 2000 and February 2001, the NASDAQ Composite Index was down >15% and the S&P 500 >6%. As unimpressive as those returns were, they were stronger than the 22% decline in the value of chemical and applied material intangible assets. “The chemical industry does not get the kind of IP asset valuations that other industries get,” says David Braunstein, vice president at Fairfield Resources International Inc. (Berwyn, PA), an IP consultancy.

Braunstein adds, “Although some companies are getting more aggressive in their IP management, in many cases companies don’t know how to manage the process.” The result, remarkably, has been historically to take a Field of Dreams approach—invent and hold your IP, and they will come and license it.

Faced with a broken IP marketplace filled with risk and uncertainty, it is no surprise that many companies feel overwhelmed when trying to monetize their technology and have taken a relatively passive approach. Until now, the IP system has been riddled with obstacles that make technology transfer a risky proposition.

Corporate executives who have mastered the skills of obtaining value from the company’s physical assets are stymied when trying to do the same with the intangible assets. When trying to extract value from a company’s patents, executives are consistently hindered by a lack of information, the inability to work outside their network, and the risks associated with transferring technology from one party to another.

As a result, it has become a global tragedy that state-of-the-art technologies are forced to remain on the corporate shelf because of a broken marketplace. Even companies genuinely interested in maximizing the value of these patents face so many unknowns that they do nothing.

Questions abound that prevent technology transfer deals from being realized:

  • How can management determine the value of a particular innovation?
  • How will they find a buyer for their IP?
  • Can they trust the company that is interested in licensing their technology?
  • How do they protect their business interests and ensure the greatest return from their IP?

Unable to answer these IP questions, businesses have taken defensive positions, assumed the Field of Dreams strategy, and locked away valuable technologies. But thanks to the Internet, online financial marketplaces for IP can now resolve each of those concerns. Reasonable strategies, tools, and resources are available to help anyone interested in creating value from IP. Using these tools and services, intellectual capitalists (as those who are creating capital from IP like to be called) can value, market, and monetize their assets.

New marketplaces and marketers
Not surprisingly, many of the resources are Internet-based IP marketplaces. They help companies create liquid assets from their patents and know-how—call options on technology—by providing them with tools typical of other financial markets. Some of these tools include online IP catalogs that allow you to search for technology and market your innovations, patent valuation systems based on real-options theory, escrow services, and even insurance to protect against patent invalidity.

One of the most powerful features of Internet-based marketing is the ability to describe technologies in a new way. For many years, those who tried to market their IP to other companies struggled with the limitations of natural language–based marketing. The seller and buyer of IP were forced to communicate their respective interests in unscientific prose through personal networks, cold calls, cold letters, trade show visits, and various print media.

Internet-based bulletin boards have increased the efficiency of prose-based disclosures and searches, but many sites are still hampered by the limitations of keyword searches. Today, however, IP buyers and sellers can benefit from new Web-based products that allow users to search with standardized units of measure and locate technology on the basis of disclosures and ranges of values—the quantitative features of innovations that are natural to technologies yet so hard to describe with words.

But to take advantage of these online tools, Near believes that chemical companies must begin to think like IP companies. Before committing to a financial IP strategy, he believes that executives must answer these important questions:

  • Do you see yourself as a knowledge company?
  • Does your upper management support and commit to your IP efforts?
  • Do they believe that there is money to be made in managing your intangibles?
  • Do you have the structure necessary to make it happen?

If you can answer “yes” to these questions, Near believes you are ready to take the next step and set up an IP licensing group.

How Eastman does it
Who do you need on your IP team? Eastman believes the value it can generate by leveraging its IP is great enough to warrant seven people in a group, all of whom are actively trying to license company technology.

The Eastman team consists of technology experts, an accounting and finance professional who helps with valuations, a marketing professional, and an expert in negotiations. “We work together closely. It has to be a group that is fairly entrepreneurially focused. It has to consist of complementary skills and talents,” says Heise. “We initially reported directly to the CFO, and we got buy-in from the top as a corporate initiative.”

Eastman believes that it is essential to have a group of diverse professionals with business, science, and legal backgrounds working toward the goal of monetizing its IP. “If you leave the responsibility to one area or the other, you are going to be deficient in one side or the other,” says Gwinnell. “But if you can get the legal, business, and scientific groups working together, that is a powerful machine that increases not just the likelihood of success but also the value of the deals.”

Heise adds that the IP group must have “folks who are not afraid to challenge the corporate culture. It is so easy to say, ‘no, I don’t want to license that technology.’ And we have made it harder and harder to say ‘no’ to prospective deals.”

To demonstrate its commitment to IP management and to enlist the aid of the company’s researchers, Eastman’s IP group even relocated its offices to the middle of the R&D building. This move has allowed Eastman to make IP monetization a top priority by putting the group members in the middle of the action.

“We are right in the corporate research center. We want to be where the inventors are and establish a presence,” says Heise. “And the attitude of the researchers has been very positive. They want to see their technology practiced. They don’t care whether Eastman uses it, or if it is deployed through a license. They want to see the technology that they have worked on for years and sweated over be put into practice.”

Backed by the company’s top management, the Eastman IP group is aggressively pursuing IP monetization. In addition to using its own networks, Eastman is taking advantage of the online financial IP marketplaces and other technology tools designed to leverage intangibles.

“Online financial marketplaces offer us the ability to find new potential licenses and technologies and the tools we need to facilitate the transaction,” says Heise. “They also provide an avenue to reach other industries and even other countries.”

A case study
In November 2000, Eastman used the financial tools of The Patent & License Exchange (pl-x) to close a stalled technology transfer transaction with a German polymer company, which declined to be identified for this article. “We would not have done this deal without access to the tools available through companies such as The Patent & License Exchange,” says Jon Wood, Eastman’s IP attorney who handled the deal.

The international transaction assigned IP rights for a polymer pellet conversion technology from Eastman to the German company. By using Eastman’s technology, the German company was able to improve the efficiency of turning a tacky polymer into pellets suitable for further handling and offer its customers security against possible patent infringement using underwater pelletizing technology for tacky polymers.

Despite Eastman’s desire to create value for its technology by assigning it to the German company and that company’s interest in obtaining the rights to the IP, both parties could not agree on how to mitigate the financial risks of completing the transaction. “We turned to pl-x because we needed its financial services to help us close the deal,” says Heise. “Using pl-x’s patent valuation system, we verified that our negotiations were on the right track. Because of these tools, we were able to complete the transaction.”

After weeks of negotiating over the price of the assigned technology, Eastman turned to pl-x’s TRRU Metrics patent valuation system (see box, “How does the IAMI work?”) to confirm that both parties were receiving the fair market value for the asset. TRRU Metrics, which uses market financial data and the Black–Scholes Options Pricing Formula (4) for calculating the value of patents, helped Eastman verify that it had accurately negotiated a price that was consistent with the market value for its technology.

With the price issue resolved, Eastman again looked to pl-x for help in mitigating risk for itself and the buyer. Concerned about the possibility of having the patent deemed invalid or unenforceable by a court of law and the resulting losses in revenues, both parties took advantage of pl-x’s automatic patent validity insurance, provided by Swiss Re New Markets (Zurich). With the automatic patent validity insurance of up to $10 million, Eastman was covered for any potential losses to its expected royalty stream, and the buyer could recoup the cost of purchasing the rights to the technology.

“The deal would not have gotten done without the validity insurance,” says Wood. “The company wanted us to provide validity, and we wouldn’t give it to them. That was the biggest stumbling block to closing the deal. We were at a stalemate.”

To ensure that the transfer of funds was completed safely, Eastman used another pl-x risk reduction tool: its transaction assurance services, provided by pl-x’s strategic partner, Chicago Title, a Fidelity National Financial company. A world leader in escrow services, Chicago Title served as an intermediary in guaranteeing that the funds were transferred securely from the German chemical company to Eastman. With pl-x’s funds management, Eastman could rest assured that it would be paid for the rights to its technology.

“A thousand things can go right, but it only takes one thing to go wrong to squelch a deal. So any tools that help bring us closer and faster to a deal we view as value-creating,” says Heise.

With the rise in the value of IP and the need to develop new intangible asset monetization strategies, other companies are looking to take advantage of these online financial IP marketplaces.

Revenues rising
Kevin Rivette, author of Rembrandts in the Attic (5), reports that revenues from IP licensing rose more than 700% between 1990 and 1999. Over the same period, the U.S. Patent and Trademark Office reported that the number of U.S. patent applications by U.S. entities rose 49% and by non-U.S. entities, 45%—a total increase of 243,000 applications per year (6). With these increases in IP activity, the Eastman transaction is likely to be just beginning in the rise of online IP transactions.

The rise of advanced technology tools for trading IP could not have come at a better time. Because the significant jump in the volume of transactions and assets is overwhelming, the ad hoc transaction systems used by the international network of IP licensing professionals have proved to be inadequate, and licensing executives are turning to technology to aid them in their efforts.

These executives find themselves in a situation not unlike that faced by securities market makers whose ad hoc transaction systems were overwhelmed in 1970 by the growing number of issuers and secondary market transactions. IP professionals, noting how the securities market makers solved their problem with a technology-based transaction system (the NASDAQ), are now looking for a comparable Web-based solution.

The online financial markets for IP will allow intellectual capitalists, who combine the best of IP expertise with the savvy of the world’s finest financial market makers, to extract value from patents and other IP. These intellectual capitalists will pursue the full range of strategies to create capital from IP, including licensing, assignment, collateralization, and securitization. They will value IP, which affords rights but not obligations, as real options. They will then bring to bear the tools used in other disciplined financial markets to provide information symmetry and transparency, enable efficient price discovery, and minimize risk.

“Your ability to manage and enhance your knowledge assets is your most important business,” says Near. “We have to redefine what competitive advantage means. There is a tremendous amount to gain by putting everything out there for licensing. From our perspective, nothing is off limits.”

References

  1. Lev, B. Intangibles—Management, Measurement and Reporting; Brookings Institution: Washington, DC, 2001.
  2. McGavock, D., InteCap Inc., personal communication, 2001.
  3. Intangible Asset Market Index Data. The Patent & License Exchange: Pasadena, CA, Feb 14, 2001.
  4. The Trillion Dollar Bet. Public Broadcasting System (Nova), Feb 8, 2000; www.pbs.org/wgbh/nova/stockmarket/ (accessed May 2001).
  5. Rivette, K. G.; Kline, D. Rembrandts in the Attic: Unlocking the Hidden Values of Patents; Harvard Business School Press: Boston, 2000; p 122.
  6. Statistical Reports. U.S. Patent and Trademark Office, Technology Assessment and Forecast Branch, Jan 1, 2000.


Nir Kossovsky is the founder, chair, and CEO of The Patent & License Exchange Inc. (245 S. Los Robles Ave., 5th Floor, Pasadena, CA 91101; 626-405-0690; kossovsky@pl-x.com). Previously, he founded Heisenberg Principles Inc., a technology and strategy management consultancy, and was a regular contributor to CHEMTECH. Prior to that, he was an associate professor of medicine at the University of California, Los Angeles, where he became an international authority on biomaterials. He has a B.A. in philosophy from the University of Pittsburgh, an M.D. from the University of Chicago, a Post-M.D. in pathology and laboratory medicine from Cornell University, an M.B.A. in finance and management from the University of Southern California, and a Joint Professional Military Education, Policy and Strategy Certification from the U.S. Naval War College, Newport, RI.

Matthew Glasser is the communications manager at The Patent & License Exchange Inc. and a freelance journalist and writer (626-584-3320; mglasser@pl-x.com). His work has appeared in national and regional publications and on local and network television. A former television news producer and assignment editor, he is an authority on the media and marketing communications. He has also worked as a political consultant and lobbyist, theatrical publicist, and technology strategist. He holds a B.A. in public policy from Occidental College, Los Angeles, and an M.A. in journalism from the University of Southern California.

"My dad has more intellectual property than your dad!"
"My dad has more intellectual property than your dad!"

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