From Ideas to Assets Chapter 13: IP Leverage Strategies

Valued Added - Shifting perspective on IP The foundation of commercial power has shifted from capital resources to intellectual property. Patents, trademarks, and copyrights are now the central resource for creating value in almost all industries. There is no room for the old "not invented here" mindset - the pace of change does not afford any company the luxury of devloping expertise in all the divergent technologies tha it needs. Interdependence is at the root of the paradigm shift that is taking place - technology management in the future will center on leveraging technology that is owned to gain access to technology that is needed. Converting ideas into revenue, profits and value requires a framework of integrated complementary business assets. Complementary Assets - these are required to convert intellectual property into a product; to produce, package, sell, distribute, and collect payment on the product

Value of Intellectual Property Note that companies dominated by intangible assets and intellectual property (as measured by the percentage of total value the is ascribed to intellectual property and intangible assets) have a corresponding higher level of profits as measured by recent operating profit margins. Comparison between the prices for proprietary (patented) and generic drugs, shows that Gross margins for generics are % versus 90-95% for branded products. Thus the price advantages associated with patented and trademarked products is enormous and most, if not all, of the price advantage goes to bottom-line profits.

Business Enterprise Framework

From the previous image, we can see that the composition of a typical business is comprised of working capital, fixed assets, intangible assets and intellectual property. Working Capital - the net difference between the current assets and the current liabilities. 1.Current Assets - cash, accounts receivable, and inventory 2.Current Liabilities - accounts payable, accrued salary, and other obligations due for payment within 12 months. Fixed/Hard Assets - include manufacturing facilities, warehouse, and office equipment and furnishings, delivery vehicles, research equipment, and other tangible equipment.

Business Enterprise Framework Intangible Assets and Intellectual Property - Soft Assets Intellectual Properties are those the law creates - trademarks, patents, copyrights and trade secretes Intangible assets do no posses a physical embodiment but are still of value: customer lists, distribution networks, research and development capabilities, regulatory compliance know-how, clinical trial know-how, and manufacturing practices. As the framework for conducting business has not changed, what has changed is that the central focus is now placed on the soft assets. These are the assets that are used to continue the process of innovation, which in turn leads to new products that capture market share. The profits come from the growing revenue and value created.

"Innovate, Protect, Leverage" This the process used by companies who create value in the future - these are the companies in which you want to buy stock. INNOVATE As innovation now required a broad variety of scientific knowledge derived from previous innovation, innovation today now requires the integrated use of the intangible assets and IP from multiple companies. Thus full economic exploitation of new created innovations is necessary, and has lead to a new corporate strategy of "Innovate, Protect, Leverage." Companies in possession of large portfolios of IP incur a large cost in maintaining these portfolios and thus have an incentive to cooperate.

"Innovate, Protect, Leverage" PROTECT Patent rights arise because inventing is an expensive process and cost must be recouped to provide incentives to invest. If other could cheaply appropriate an inventor's innovation, calling ti their own without having invested time and energy, investments in innovation would not be made. We have regarded innovation so important that we willingly provide innovators with a limited-time monopoly as a reward for the time, effort, and expense associated with inventing. Now companies are proactively pursued protection as a primary strategic business tool.

Leveraging Strategies These are the different levels of leverage that companies are using to crate value. They are often referred to as "carrot and stick" licensing strategies Strategy One - Simply Defensive Patent everything in sight and threaten competitors with infringement litigation when the come too close to making products or doing business in a similar fashion. Protection of profit and markets are the first and most common objective of this strategy. A portfolio of IP holds competitors at bay. Maintenance of the portfolio is the primary activity coupled with monitoring the activities of competitors for encroachment in your market share. This strategy has evolved from the crumbling of traditional barriers to entry - IP now stands as the most powerful wall remaining between a strong market share and crumbling market share.

Leveraging Strategies Strategy Two - Defensive with Cost Control In addition to the previous strategy described, include the allocation of the costs from maintaining the IP among the different business units that benefit from the portfolio. Focus on the usefulness of some components of the portfolio and identify patents and trademarks that are not economically beneficial. Elimination can lead to significant savings in maintenance fees.

Leveraging Strategies Strategy Three - Income Generation from Licensing License technology to competitors. Earn income from internalization of innovation properties and also earn income from it being used by others. The previous two philosophies are focused on keeping technological advantages from exclusive internalization. The profit center model requires you to consider whether you wish to allow competitors to use the companies inventions against you. In large markets with several players, a different viewpoint can allow a company with IP to generate new sources of income This comes with acknowledging that your company will never dominate 100% of the market.

Leveraging Strategies Strategy Four - Pure Play Licensing Instead of participating in an industry and licensing to other participants, focus solely on the development of innovative technology and then license it to others. Licensing is the sole activity and backbone of the business. Focus on creation of new inventions and licensing the new properties to others to manufacture and distribute. Example: Rambus Inc. develops an open-standard chip-connections technology that is accessible to all semiconductor companies. They then license a full range of design, documentation, and system- engineering services in exchange for fees and royalties.

Leveraging Strategies Strategy Five - Charitable Domination Strategies Tax savings serve as incentive for implementation of cost saving strategy. Identify patents that are not providing an economic benefit and either donate the unused technology to non-profits and take a charitable deduction. Recognize that these patents are not valueless - embryonic technology still has value even if other corporations are not currently willing to pay for te needed developmental cost. Strategy Six - Securitization Use intellectual property as collateral for bonds and bank loans. Banks wishing to lend to IP-dominated companies are coming to grips of the new character of these companies and are willing to accept IP as loan collateral.

Leveraging Strategies Strategy Seven - Strategic Alliance Entry Fees Entry into an IP-oriented joint venture to gain access to the IP, patent rights and technical know-how of the other company, thereby allowing use of a broad-range of different technologies for innovation. The joint venture is a unique combination of trademarks, research capabilities and a powerful distribution network - Cash and manufacturing capacity have very little to do with the agreement. Potential partners will have to give up a significant financial interest to obtain access to another's IP.

Conclusion As stated from the author: