GEST112_2006_S06_2

7/28/2019 GEST112_2006_S06_2

1/41

1

The Theory of Innovation &Entrepreneurship

Prof. Bruno van Pottelsberghe

Ass. Nicolas van Zeebroeck

GEST 112 (Technological Innovation)

S6: The Value of Patents

Van Pottelsberghe SBS S6|2

Todays Menu .

S6.1. The Cost of patenting

Van Pottelsberghe B. and D. Franois, 2006, The cost factor in patentsystems, working paper.

S6.2. The Value of Patents Harhoff D., Scherer F. M. and Vopel K. (1999),"Citations, Family Size,

Opposition and the Value of Patent Rights", 31p. Reitzig M. (2004), Improving patent valuations for managementpurposes - validating new indicators by analyzing application rationales,Research Policy, n 33 (2004), pp. 939957.

S6.3. The Determinants of Patent Value Guellec D. and Van Pottelsberghe B. (2000), Applications, Grants andthe value of patents, Economic Letters, 69(1).

S6.4. Financial Valorization and Securitization Edwards D. (2002), Patent Backed Securitization: Blueprint for a newasset class, Gerling NCM, 2001. Washington|CORE.

7/28/2019 GEST112_2006_S06_2

2/41

2

6.1. The cost of patenting


Objectives :

Whether and to what extent the cost of patentingaffect the demand for patent?

Put forward a methodology for comparative analysis of

patent systems : the 3-C index The role of cost

Non-cost factors

7/28/2019 GEST112_2006_S06_2

3/41

3


Table 1. EPO, USPTO and JPO:

Basic figures, 2003

Why? to expensive? Not all domestic patents? different patents?

4137Others

31550EPC States

881816Japan

55527USA

Geographical origins of patent filings (%)

122,511169,02859,992Total Patent Granted

413,092342,441116,613Total Patent Filings

8399501,022Annual revenue, M

1,12623,6373.400Patent examiners

2,4796,7235,821Total staff

JPOUSPTOEPO

x 3


Caveats: EU does not include thedomestic priority filings... but

Similar percentage of filings from abroad at theUSPTO and at the EPO, about 50% (2nd filings)

Similar percentage of filings from Japan at theUSPTO and at the EPO, about 18% : (2nd filings)

They confirm that the US market is three timesmore attractive that the European market.

7/28/2019 GEST112_2006_S06_2

4/41

4


Table 1. EPO, USPTO and JPO: Basicfigures, 2003

4137Others

31550EPC States

881816Japan

55527USA

Geographical origins of patent filings (%)

122,511169,02859,992Total Patent Granted

413,092342,441116,613Total Patent Filings

8399501,022Annual revenue, M

1,12623,6373.400Patent examiners

2,4796,7235,821Total staff

JPOUSPTOEPO


Market size and patent filings, 2003

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

0 50 100 150 200 250 300 350 400 450 50

Population (M)

Patentfiled

USA

EU 13 EU 25EU 3

Japan

7/28/2019 GEST112_2006_S06_2

5/41

5


Market size and geographically

designated patent filings, 2003

0

50000

100000

150000

200000

250000

300000

350000

400000

450000

0 50 100 150 200 250 300 350 400

Population (M)

Noffilin

Japan

EPO 3

USA

EPO 13


Not all patents are the same

Number of claims of applications at the USPTO: 23-24

At the JPO: 7

At the EPO: 18.

Many other differences

7/28/2019 GEST112_2006_S06_2

6/41

6


Market size and geographically

designated filings of claims, 2003

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

0 50 100 150 200 250 300 350 400

Population (M)

Mofclaimsfi

Japan

EPO 3

EPO 13

USA


Why no size effect?Why _ so few patents at EPO?

EPO = second filings (however Japan)

Not a European market for technology: once grantedthe patent must be validated, translated. In eachindividual member country

A matter of cost?

7/28/2019 GEST112_2006_S06_2

7/41

7


Cost effect in the literature?

Surveys always underline the high cost ofpatenting perceived by firms

Surveys always underline a lack of confidence inthe IP system

BUT:

No correlation with patenting behavior


The cost of patenting

Official fees

Patent attorney for document

Patent attorney for interaction

Patent attorney for translations

Validation fees

Renewal fees

In house or outsourced + transaction cost

7/28/2019 GEST112_2006_S06_2

8/41

8


Cost is unique for each patent:

Quality of services

Number of claims/page

Desired geographical scope

Desired speed of services

Desired route (PCT, Direct)

Hypotheses: 3 or 13 EU member countries

Average number of claims

To grant, to 10 years, to 20 years


Roland Berger, 2005 Survey

17,78022,10019,500**12,500**Attorneys and prof. rep.

31,58046,55056,27223,545TOTAL, including:

5,3006,800Attorneys

5,6009,20016,5972,975Fees

10,90016,000Renewal fees, including:

3,4007,40013,600*3,400*Translation costs

4,4006,3006,5754,670EPO fees

6151818Number of claims

68133Designated states

Euro-DirectEuro-PCTAllAll

RB (2005)1This paper, Table 3

7/28/2019 GEST112_2006_S06_2

9/41

9


Comparative cost structure of patentapplications and maintenance

0

10.000

20.000

30.000

40.000

50.000

60.000

70.000

80.000

90.000

100.000

110.000

120.000

130.000

EPO3 EPO13 USPTO J PO

Process costs

Process and translation

Process and external serv.

TOTAL 10 years

TOTAL 20 years

3,0654,670 6,575 1,541

8,070 20,175


Proposals for comparativecost analysis:

Process and translation costs more reliable (butno professional representation costs)

Analyse the cost per claim

Analyse the cost per claim per market unit(capita) : 3C-index

7/28/2019 GEST112_2006_S06_2

10/41

10


Patent costs per claim in the

three offices

0

1000

2000

3000

4000

5000

6000

7000

Process costs Process and

translation

Process and

external serv.

TOTAL 10 years TOTAL 20 years

Cumulative costs

EUR

EPO13

USPTO

EPO3

JPO


European and Japanese costs relativeto the US

3.51.91.7JPO

10.05.38.4EPO13

3.42.23.4EPO3

CLAIMS

1.10.60.5JPO

7.84.26.6EPO13

2.61.72.6EPO3

TOTAL 20years

TOTAL 10years

Process andtranslationPATENTS

7/28/2019 GEST112_2006_S06_2

11/41

11


Millions of claims filed vs. process

cost per claim

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

0 200 400 600 800 1000 1200

EUR

M

ofClai

USA

EU 3

Japan

EU 13


Millions of claims filed vs. processcost per claim per capita : 3C-index

0,0

1,0

2,0

3,0

4,0

5,0

6,0

7,0

8,0

9,0

0,0 0,5 1,0 1,5 2,0 2,5 3,0 3,

EUR

Mofclai

USA

Japan

EU 3

EU 13

7/28/2019 GEST112_2006_S06_2

12/41

12


Qualitative indicators in the three

regional offices

50% (QW: 64%)64% (QW: 87 to 97%)59% (QW: 67%)Grant rate2

371*1,103326.9Claims granted perexaminer

1,1952,235624.1Claims filed perexaminer

50.5*47.817.8Grants per examiner

170.3*96.934.6Filings per examiner

2.9 Million7.9 Million2.1 MillionTotal number of claimsfiled

31exam

27Search: 12Exam : 38

Procedure pendency(in months)

53.8%100%87%Examination rate

JPOUSPTOEPO

3 to 4


Other factors than costs...

No perceived Europen market : complexity

Longer process, more time per patent

More rigor, and hence quality

Less domains of patentability

7/28/2019 GEST112_2006_S06_2

13/41

13


Concluding Remarks on costs

Methodological implications: 3C-index

Europe attracts much less patents than the USA, there is noEurope-wide market for technology

The higher cost of patents induce a smaller demand

The higher rigor of the EPO process would justify higherexamination fees and explain a smaller demand for patent...

but not the 'virtually' higher costs related to validation,translation, transactions, renewals in each individual memberstate


European Community patent a dream

European Patent Litigation Agreement

London Protocol (much lower translation costs)

Concluding Remarks on costs

7/28/2019 GEST112_2006_S06_2

14/41

14


EPO Filing

Belgian Patent

Patenting Processes

Toward a European Community Patent?

Application ProcedureatEPO (Munich)

Enforcementin National CourtsGrant Death

European Patent (Under current EPC)

French Patent

German Patent

UK Patent

Filing

Application Procedure atEPO Enforcement in CentralEuropean Patent CourtGrant Death

European Community Patent (in the future?)

EPO Filing European Patent

Filing

6.2. The Value of Patents

1. The Value of Patents2. A Skewed Value Distribution3. Valorization Models

7/28/2019 GEST112_2006_S06_2

15/41

15


1. The Value of Patents


Patent Value

For a corporation involved in

technological competition, the value of

a patent is best defined as its asset

value

(Harhoff et al., 2003)

7/28/2019 GEST112_2006_S06_2

16/41

16


Patent Value

If the value of a patent is best defined as its asset

value, then the value of the patent is actually the

present value of its future cash flows

1- If the patent is exploited by its holder, then it is the

value of the margins on the sold products issuing from

the patent

Share of revenues really due to patent???2- If the patent is licensed out by its holder to external

companies, than it is the value of the royalty feesgenerated by the patent

Very difficult to observeProxies or Indicators only


Patent Value

Two different types of value proxies:

1- Indicators of patents value show a direct

correlation with observable prices, costs, or sold

quantities of the patent-protected product,

2- Indicators operationalize latent determinants of

patent value such as novelty, inventive step,

breadth, difficulty of inventing around,

disclosure, and dependence on complementary

assets.

7/28/2019 GEST112_2006_S06_2

17/41

17


2. A Skewed Value Distribution


Patent ValueGuellec & van Pottelsberghe

Inventions

1

Applic.

2

Grants

3

High

value4

5

Increasing value

7/28/2019 GEST112_2006_S06_2

18/41

18


3. Valorization Models


Patent Value

Little theoretical understanding and even less empiricalevidence on the complex interaction between indicators,determinants and prices, costs, and quantities of protectedproducts sold.

Until today, a variety of variables have been tested as

indicators of patent value. Amongst them, Reitzig (2002)analyzes the appropriateness of 13 indicators. The 3

evaluation criteria are:

-The validity of the indicator variable

-The point in time at which the information to compute the

indicator becomes accessible

-If the information is available electronically or has to be

collected manually.

7/28/2019 GEST112_2006_S06_2

19/41

19


Patent Value


Patent Value

Three generations of indicators of patent value:

1. The authors of the 1st generation validate indicators which are

linked to patent value by rationales that speak to rather general

economic considerations (i.e., family size, market value, forward &

backward citations) it does not involve in-depth knowledge of

institutional details of the patent system.

2. The 2nd generation indicators use patent-specific procedural

information and link it to patent value (i.e., referring to the filing

strategy or the legal contents of backward citations).

3. The 3rd, new generation: using the patent-full text documents

(i.e., correlation between nber of claims & macro indices of a

nations technological performance)

State of the Art

7/28/2019 GEST112_2006_S06_2

20/41

20


Patent ValueState of the Art

New field ofresearch

Patent full-textdocuments (vs makinguse only of 1st pageinfo)

3rd

Less empiricalevidence

Pattern-specificeconomic

considerations

2nd

Empirical evidenceGeneral economicconsiderations

1st

ResearchWhat the indicatorsof a generationhave in common:

Generation

6.3. Determinants of PatentValue

7/28/2019 GEST112_2006_S06_2

21/41

21


Patent Value

Assessing the value of patent rights is difficult (distributionis skewed)

Skewness property (Griliches) : These findings, especiallythe large amount of skewness in this distribution, leadto rather pessimistic implications for the use of patentcounts as indicators of short-run changes in the output ofR&D.

Need additional information which is correlated with thetrue value of the patent right

Allow much greater accuracy than unweighted countstatistics

Attempt to solve the problem : use of the informationcontained in renewal decisions of patent holders(Schankermanand Pakes)

Survey of Harhoff, Scherer & Vopel (1999)


Patent Value

Others correlates of patent value that have been studied are :

Market value of biotechnology firms (Lerner1994)

Social returns to innovation in the computer-tomography scanner industry (Trajtenberg1990)

Number ofjuridictions in which patent protection issought (Putnam1996)

The value of patent rights can be approximated by combiningthese indicators

This survey uses a broad set of indicators which are :

Survey of Harhoff, Scherer & Vopel (1999)

7/28/2019 GEST112_2006_S06_2

22/41

22


Patent ValueSurvey of Harhoff, Scherer & Vopel (1999)

Forward citations (citations received from subsequent

patents)

Backward citations (references to other patents)

The number of references made to the non-patent

literature, i.e. mostly to scientific journals.

The outcome ofopposition proceedings

Patent "family size (the number of countries in which

patents were granted for the same invention)

The scope of the patent (that has as proxy the number of

different four-digit IPC classifications)


Patent Value

They focus on the private value of patent rights and consider twoconcepts :

the value of renewed patent protection the asset value of the patent right

Three scenarios: I. In the first scenario, the patent protects a quality improvement

of a product, but there is no interaction between this particular andother patent rights.

II. They allow for such interactions as they occur in cumulativeresearch processes. In such cases, control over one patent mayaffect the value of other patent rights as well if the owner of onepatent can block the use of the other.

III. They consider the case of multiple patents coveringtechnologies that are perfect substitutes for each other.

Theoretical Issues in Measuring the Value ofPatent Rights

7/28/2019 GEST112_2006_S06_2

23/41

23


Patent ValueEstimates of patent value the left hand side,

explained variable

Purpose: In what extent patent value is explained byobservables (citations, scope,)?

First step: a survey to obtain value estimates that weremeant to capture asset values of patent rights.

The survey was directed at German patent-holders andconducted in 1996.

It considered all patent grants with a 1977 German prioritydate which were renewed to full term, i.e., expired during1995.

Data on 4349 patents that were applied for in 1977 andrenewed to full term.


Patent ValueEstimates of patent value the left hand side,explained variable

Sample was asked a single question :

If in 1980 you had known how its contribution to the

future profitability of your enterprise would unfold,

what is the minimum price for which you would have

sold the patent, assuming that you had a good-faith offerto purchase?

Respondents were asked to place their patent within one of

5 broad minimum selling price ranges: less than DM

100,000, DM 100-399,999, DM 400-999,999, DM 1-5

million, and more than DM 5 million.

7/28/2019 GEST112_2006_S06_2

24/41

24


Patent ValueResults of the survey - The distribution of the

value of patent rights

Positive responses were obtained on 772 patents

(57.1% of the total on which contacts were

made) held by 394 organizational entities and

individual inventors (+ or 10).

The distribution of the value of patent rights is

summarized in the following Table.


Patent ValueResults of the survey - The distribution of thevalue of patent rights

Respondents Valuation of Patents with Full Term - Results after Interviews

Valuation of Patent Cases Percent

Less than

DM 100,000 203 27.0 %

DM 100,000 399,999 200 26.6 %

DM 400,000 999,999 154 20.5 %DM 1 - 5 mill ion 129 17.2 %

DM 5 - 10 mill ion 28 3.7 %

DM 10 - 20 mill ion 16 2.1 %

DM 20 - 40 mill ion 15 2.0 %

DM 40 - 80 mill ion 5 0.7 %

More than DM 80 million 2 0.3 %

Total 752 100.0 %

Note: the survey also produced data for 20 other patents which were assessed by

respondents of our written survey to be worth more than DM 5 million. In these cases, no

additional information was available.

7/28/2019 GEST112_2006_S06_2

25/41

25


Patent ValueCorrelates of patent value - the right hand side,

explaining variables

1. Patent Scope :

The scope of a patent is difficult to assess and measure- use of Lerners approach (number of four digit IPC)

2. Citations Received from Subsequent Patents :

Looking at the frequency of citations that a particularcontribution receives from subsequent patents.

3.References to other Patents (BackwardCitations):

A relatively small scope and low monetary value shouldcharacterize a patent whose examination report containsa large number of backward citations.


Patent ValueCorrelates of patent value - the right hand side,explaining variables

4. References to the Non-Patent Literature:Patents may be based in part or fully on new scientific knowledge.

A relatively high number of references to the scientific literature maytherefore indicate patents of relatively high value (PATDPAdatabase)

5. Family Size :

The size of a patent family (measured as the number of jurisdictionsin which a patent grant has been sought) and the survival span ofpatents are highly correlated (Putnam and Lanjouw)

6. Outcome of Opposition Cases :On average, 8% of all EPO patents are opposed, and 14 % of thepatents thus attacked are revoked. However, opposition rates andoutcomes for EPO patents vary considerably. Leading companieshave their patents opposed far more often than on average. (vander Drift1989)

7/28/2019 GEST112_2006_S06_2

26/41

26


Patent ValueCorrelates of patent value 6. Opposition

annulment cases


Patent ValueData The 1977 sample of applications

Of the total of 57 782 patent applications (comprising

patents renewed to full term), only 24 116 (41.7%) were

initially granted.

Since obtaining patent protection in other than the own

jurisdiction is expensive, applicants will seek international

protection only for their more valuable inventions (Putman

1991).

Foreign patents should be more likely to pass the

examination process.

Patents owned by non-German applicants are attacked less

frequently than German patents (exception: US Patents).

13.3% of the German-owned patents are renewed to full

term, while non-German are more often renewed to full-

term.

7/28/2019 GEST112_2006_S06_2

27/41

27


Patent Value

Data The 1977 sample of applications


Patent ValueData Descriptive statistics

Focus on the 11 475 patents that were initially

granted.

Description of the mean values and standard

errors for the 6 indicators according to different

groups of patents.

Study of the following table:

7/28/2019 GEST112_2006_S06_2

28/41

28


Patent ValueData Descriptive statistics


Patent ValueData Descriptive statistics - Results

Patents which defeated opposition turn out to

differ with respect to most indicators from

patents that were held invalid or never opposed.

Comparison column 3 & 4: unopposed full-term

patents receive more citations, contain more

references and are part of larger patent families

than unopposed patents which were not renewed

to full term (same result holds for a comparison of

patents that were opposed and subsequently

upheld).

7/28/2019 GEST112_2006_S06_2

29/41

29


Patent Value

Focus on the moments, range and distribution of the scope andcitation measures.

Data Descriptive statistics


Patent Value

Most of the indicator variables have skew distributions,with the mean always larger than the median.

Citation counts both in the German and the Europeansystems are spectacularly low by USPTO standards. 2potential reasons:

1. Both the EPO and the DPA systems contain fewerapplications and granted patents/year than the USPTO.

2. Best-mode practice in the USA: applicants have toprovide an exhaustive list of patents that could beconsidered prior art. In Europe, all of the citations in thepatent report come from the examiner, not the applicant.

3. The examiners approach to referencing prior art is moreconservative and targeted in Europe than in the USA.

Data Descriptive statistics - Interpretation

7/28/2019 GEST112_2006_S06_2

30/41

30


Patent ValueEstimation multivariate specification

Combination of the above indicators to model the meanvalue of patent rights as a function ofobservables

Complex: no point estimates but only lower & upperbounds => use of an ordered probit framework. Thatmeans:

- Full-term patents delineated by a lower bound, , theparameter to be estimated

- is, at the same time, the upper bound for the value ofpatents which were not renewed to full-term.

The econometric model starts by specifying the logarithmofpatent valuation ln(V)as the sum of a linear functionXbof (ex post) observables and of an error term e

ln(V)= Xb + e


Patent ValueEstimation multivariate specification

Assumption that :

1. the error terms are distributed i.i.d

2. the normality of the error terms such that the probability of

observing a patent in the value interval between 1and 2 (where 2>

1) is given by (ln(2)/ - X/)- (ln(1)/ - X/) where is the

standard error of the disturbance and (.) is the cumulativestandard normal distribution.

The log-likelihood contribution for patents for which we observe finiteinterval bounds is given by:

lnLA(, , /X) =ln((ln(2)/-X/)- (ln(1)/-X/))(1)

7/28/2019 GEST112_2006_S06_2

31/41

31


Patent Value

lnLC(, , /X) =ln(1-(ln()/- Xi/))

lnLB(, , /X, ) =ln(1-(ln()/- Xi/))

Estimation multivariate specification

For observations with value greater than some known amount , butno data on a potential upper bound, the log-likelihood is:

(2)

Those patents that were renewed to full-term with unknown valuationcontribute

Finally, the log-likelihood contribution of those 9349 patents that werenot renewed to full-term is given by:

lnLD(, , /X) = ln((ln()/- Xi/))

(3)

(4)


Patent Value Estimation Results

7/28/2019 GEST112_2006_S06_2

32/41

32


Patent Value

Estimation Results

The scope variable is insignificant in these specifications.

All other variables turn out to have some explanatory power.

While references to the scientific literature are informativeabout the patents value, the average effect across alltechnology areas is smaller than for backward citations ofpatents.

The indicators summarizing the outcome of the opposition islarge and highly significant. A patent which has defeatedopposition in the opposition procedure is considerably morevaluable than a patent that was never attacked.

6.4. Valorization & Securitization

7/28/2019 GEST112_2006_S06_2

33/41

33


Patent Valorization & Securitization

Economic value of patents is increasing

Starting observations:

IPR generate competitive

advantage

Estimated value of patents

portfolio has increased in

recent years

IPR increasingly used in

firms valuation

Accenture Survey 2003:

Managing Intangibles is a

CEOs Top 3 priority


Capital Information

Product Human

ResourceKnow-

HowTechnology

Brand PowerBrand Power

Tangible Assets Intangible Assets

Goodwill Intellectual Assets

On Balance SheetOn Balance Sheet Off Balance SheetOff Balance Sheet

Plants, Equipment,Credit, etc

When These Management

Resources Ar e Rearranged

Patent Valorization & SecuritizationIntellectual Assets as Management Resources

7/28/2019 GEST112_2006_S06_2

34/41

34



Firms exploit patent value through multiple channels

Embedding protected inventions in new products/processes/services

Additional revenues from outward licensing

Access to new technologies (through inward or cross-licensing)


Patent Valorization & SecuritizationContribution of patents to economic value is hidden

Although critical, IP is under-valued

Traditional wall between research labs and business needs leeds tounexploitability of inventions e.g. Dow Chemical: 55% utilization rate of patents in 2002

Investors need reliable information on patent value

Today, few companies report on the value of their patents Multiple ways of evaluating patents, but no consensus

7/28/2019 GEST112_2006_S06_2

35/41

35



Current Financial IP Valuation Methods

Three broad categories:

Market approach: Valuation is determined by looking for similar

transactions involving similar IP. But there is no dynamic market in the

industry for the type of IP valuation and so there will not be many cases

to which the purposed transaction can be compared.

Cost approach: Valuation is determined by what it would cost to

substitute or design around the intellectual property protection. Unless

patent is narrow in scope, it may not be possible to design around

without infringing. Income approach: Valuation is determined from anticipated revenue

which is discounted at some rate according risk factors which could affect

revenue projections. This provides net present value (NPV).

Most common method used for valuations prior to securitization


Patent Valorization & SecuritizationSecuritization of IP Rights

Just as the electronics industry was formed when thevacuum tubes were replaced by transistors, and transistors

were then replaced by integrated circuits, the financialservices industry is being transformed now that securitisedcredit is beginning to replace traditional lending. Like othertechnological transformations, this one will take place overthe years, not overnight. We estimate it will take 10 to 15years for structured securitised credit to replace to displacecompletely the classical lending system -not a long time,

considering that the fundamentals of banking have remainedessentially unchanged since the Middle Ages.

Lowell L Bryan

7/28/2019 GEST112_2006_S06_2

36/41

36



Defining Securitization

A device of structured financing where an entity seeks to pooltogether its interest in identifiable cash flows over time,transfer the same to investors either with or without thesupport of further collaterals, and thereby achieve thepurpose of financing. Though the end-result of securitisationis financing, but it is not "financing" as such, since the entitysecuritising its assets it not borrowing money, but selling astream of cash flows that was otherwise to accrue to it.

Simplest form: Conversion of assets or cashflow intomarketable securitiesAsset-Backed Securities (ABS)

Origins: GNMA (1970s), Chrysler Financial Corp. (1981)

Estimated market size: $584 billion


Patent Valorization & SecuritizationIP Valuation and Securitization

Total asset value of patents worldwide: $1 trillion

Revenues from licensing in the US increased by 700%

between 1990 and 1998 to more than $100 billion

IP-backed securitization is recent Origins:

David Bowie (1997)

Dow Chemical (1992)

Recent hype in the field: Companies raising money by selling

bonds back from the income they receive from their IP

licensing.

7/28/2019 GEST112_2006_S06_2

37/41

37



IP Valuation and Securitization


Patent Valorization & SecuritizationAdvantages of IP-backed Securitization

A company which securitizes its IP can obtain a greater amount of

revenue than from a loan based on that future revenue

Capital is obtained immediately, rather than waiting for royalties to trickle

in over time

Securitization sets up a fixed interest for the duration of the deal

Securitization is non-recourse to the originator & irrevocability of the

bond sale becomes an insurance policy for the value of future royalties

Taxes do not have to be paid on the amount raised by the securitization

Owner retains ownership of the IP

Credit rating on securitization can be higher than the originators rating

because of the quality of the assets, credit enhancement, and the

isolation of the assets in a bankruptcy-remote entity

7/28/2019 GEST112_2006_S06_2

38/41

38



Types of IP-backed Securitization

Loans collateralized by title to a patent the lender loans at a loan to value ratio of between 25-30% of the

appraised value of the asset (depending on the asset quality,creditworthiness of the asset holder, and other risk factors)

The asset holder is happy because he has raised debt capital againstthe value of his asset without relying on the credit of his firm

Securitizations of cash flows emanating from patent basedlicensing agreements The patent is the underlying asset that generates cash flows as

defined by licensing agreements.

The securitizations can either be asset backed (based on guaranteedpayments as defined by a licensing agreement) or future flows (basedon projected royalty streams, generally riskier)

The structure for this type of deal is a special purpose vehicle (SPV)used in other asset backed securities which functions as a legal entity


Patent Valorization & SecuritizationProcess of IP-backed Securitization

7/28/2019 GEST112_2006_S06_2

39/41

39



IP Valuation and Securitization

Why companies are hesitating?

Lack of success stories so far: need a number of well publicized -and successful - cross border transactions for global IPsecuritization to truly take off

For multinationals with IP assets all around the world, IPSecuritization would not work in all countries

Requires a lot of work to develop the documentation that wouldcomply with everyone's laws as well as provide the ability toperfect those security interests in a particular country and the US

Nevertheless, IP assets can be the strongest assets in acorporate portfolio, they're a potential gold mine

Recent examples

Matsushita securitized patents under new Japanese METI system

Candies: bond pooling & selling income from its logos and licensing


Patent Valorization & SecuritizationIP Valuation and Securitization

Key questions:

Who has the actual ownership of the asset (co-ownership)?

What if the patented technology becomes quickly obsolete?

If the debtor can grant licenses to the IP, would that significantly

diminish its value by transferring the ownership?

What related assets (IP Rights) may be needed to exploit a

particular piece of IP and are they protected?

e.g. Coca-Cola: You can securitize the brand name, but in reality

that would not be enough because if a lender would ever have to

foreclose, the name Coca Cola without the underlying trade secret

formula is going to have diminished value

7/28/2019 GEST112_2006_S06_2

40/41

40



Conclusions

Markets for technology offer social & economic benefits

Patent exploitation requires well-functional technology markets

Efficient technology markets increase transfers of technology Better diffusion of knowledge

Technology transfer increases in developed economies Shift toward more open innovation processes Universities encouraged to enter patent markets & license out

Intermediaries help technology markets to function smoothly

Public technology licensing offices

E-Market places for technology

Private firms offering advice & linking technology buyers & sellers

All help to improve market efficiency & reduce transaction costs


Patent Valorization & SecuritizationConclusions

Public institutions have an important role to play

Improving administration of patent systems to bring

Better enforceability of patents

Faster generation of IP Rights (faster granting procedure)

Providing information to markets

Licensing markets requires timely information about patented inventions

IP valuation tools and methods

Educating and training

Make inventors aware of available options to protect & license inventions

Supporting patent management in the public sector

Foster technology transfers from public research organisations

Encourage & facilitate generation of IPR by public research institutions

7/28/2019 GEST112_2006_S06_2

41/41



Conclusions

Need for improved data collection, diffusion & analysis

Under what circumstances are patents used?

When are patents licensed?

When are patents used to block competitors?

When are patents used to negotiate access to 3rd-pary technologies?

How do licensing strategies affect perceived value of patents?

How is the value of a patent related to other patents?

What roles do patents play in technology markets?

Which are the barriers for the development of technology markets?

Documents

GEST112_2006_S06_2