Assessing the value of patent portfolios: evidence from ...is.jrc.ec.europa.eu/pages/ISG/patents/documents/FedericoMunari... · July six IT firms including Microsoft, ... Traditional

Federico Munari –Sevillewww.evpat.unibo.it

Assessing the value of patent portfolios: evidence from the EVPAT project

Federico MunariUniversità di Bologna

[email protected]

Federico Munari – Università di Bologna

Agenda

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• Patent portfolio valuation: key issues

• Economic approaches for valuing patent portfolios

• Practitioners’ approaches for valuing patent portfolios

• A case-study of patent portfolio valuation

• Bridging theory and practice: what do we need?

Federico Munari – Università di Bologna 3

The valuation of patent portfolios:

key issues


The importance of patent valuation

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• The expanded use of patents and the strategic importance attached to them create new needs and challenges for patent valuation

• In the current competitive environment, patents need to be valued o More frequently

o In a broader set of transactions

o For a broader set of stakeholders


“ Valuing patents. Doing the maths”(The Economist)

• “GOOGLE'S $12.5 billion acquisition of Motorola Mobility seems pricey. The sum amounts to a 63% premium on the ailing device maker's share price before the deal. The purchase is widely regarded as being about Motorola's patents, which Google needs to defend itself from a spate of recent lawsuits. […]

• In December of 2010, Novell sold off its portfolio of 882 patents for $450 Million. […]

• Still, valuing intellectual property remains more art than science. In July six IT firms including Microsoft, RIM and Apple paid $4.5 billion for 6,000 patents owned by Nortel. […]

Source: The Economist, 17 August 2011

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“Patent hunting is latest game on tech bubble circuit” (Financial Times)

• “A new kind of bubble is inflating in high-tech, […]

• You could call it the Great Patent Bubble of 2011. In the month since an auction of patents from the bankrupt Nortel Networks ended with a shockingly high bid of $4.5bn, or five times the initial offer, the favouritegame in tech circles has been to find the next big chest of buried gold. […]

• Despite having only one licensee for its internet security technology and royalties of just $17,000 in its latest quarter, VirnetX’s 14 US and 16 non-US patents pack a punch: with lawsuits out against Cisco, Apple and Avaya, among others, its stock market value has jumped more than fivefold in the past year, to $1.6bn. […]

• How, though, to assess the value of such patent holdings?”

Source: Financial Times, 27 July 2011

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http://www.ft.com/intl/cms/s/2/d5d19b16-a3d5-11e0-9f5c-00144feabdc0.html

http://markets.ft.com/tearsheets/performance.asp?s=us:NRTLQ

http://markets.ft.com/tearsheets/performance.asp?s=us:CSCO

http://markets.ft.com/tearsheets/performance.asp?s=us:AAPL


How to value patent portfolios? Bridging the theory – practice gap

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EconomicApproaches

Practitioners’ Approaches

PatentPortfolio Monetary

Value

• Renewal Data• Transactions• Inventors’ survey• Stock market valuations• VC valuations

(i.e. Pakes, Griliches, Hall,Schankerman, Haroff,

Bessen, Gambardella, Lerner, and many others)

• Cost based• Market based• Income based• Real options

(i.e. Smith & Parr, Ratzgaitis, Berman, Boer, Harrison, … )


Project EVPAT: objectives and activities

• The research project EVPAT (Economic Valuationof Patents) has been carried out by the Departmentof Management of the University of Bologna with thefinancial support of the European InvestmentBank (EIBURS programme)

• The project aimed to develop, improve and validate analytic models for the assessment of the economic value of patents, through a series of research and training and diffusion activities.


Munari, F., Oriani, R. (2011) “The Economic Valuation of Patents: Methods and Applications” – Edward Elgar

Topics• Why, when and how to value patents? An introduction

• A law and economics introduction to patent law and procedure

• Economic and management perspectives on the value of patents

• Patent exploitation strategies and value creation

• Traditional valuation methods: cost, market and income approach

• Advanced valuation methods: the real options approach

• Valuing patents through indicators

• Patent portfolio management

• Patent licensing contracts

• Economic approaches to patent damages analysis

• Valuing patents for accounting purposes

• Patent-backed finance

• Stock market valuation of patent portfolios

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The software Intellexto for patent valuation

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Economic approaches for the valuation of patent portfolios


Economic approaches for the valuation of patents:a survey of the literature (Munari and Sobrero, 2011)

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Patent value

Estimates based on patent-holders’ behavior

• Renewal-data• Commercial transactions

Estimates based on Inventors’ surveys

Estimates based on investors’ valuations

• Stock-market value• VC valuations

Approach Focus

• Single patent

• Single patent

• Firm’spatent portfolio

Patent value

Estimates based on patent-holders’ behavior

• Renewal-data• Commercial transactions

Estimates based on Inventors’ surveys

Estimates based on investors’ valuations

• Stock-market value• VC valuations

Approach Focus

• Single patent

• Single patent

• Firm’spatent portfolio


How to value patent portfolios? Insights from the economic literature (Munari and Sobrero, 2011)

• There is a high heterogeneity in the value of patents

• The average value of patents strongly varies acrosssectors/technologies (↑ pharma; ↓ software)

• The average value of patents tend to be higher for patents jointlyfiled at the EPO/USPTO (Hall et al., 2008)

• The correlation with the firm’s market value is higher for highquality patent portfolios (i.e. with more forward citations)

• There is a significant correlation between economic value of patentportfolios and indirect indicators (i.e. forward and backwardcitations, nr.IPC classes, family size)

• For start-up companies, large and strong patent portfolios tend topositively influence the valuation by VC funds


Which indicators are associated to the valueof patents? (Omland, 2011)

Topic Common indicators Rationale Empirical support

Legal status Grant Y/N;Pending Y/N;

Valid patents strongly discourage competitors to use the invention.

Strong

International scope

Number of countries in which patents on the invention have been applied for;

Triadic patent Y/N

Each patent is valid for a certain territory only. Covering all markets by patents requires significant investment.

Strong

Forward citations Number of citations received from later patents, corrected for time-dependency

Further investment into related developments made; Invention contained useful aspects; Relevance of invention in later technology space

Strong

Opposition and Litigation

Survived opposition Y/N; Survived annulment Y/N;

Infringement lawsuit Y/N

If competitors invest money in order to challenge the patent (or if they illegally use the technology), then this means the patent is valuable if it is upheld.

Strong

Technological Scope

Number of 4-digit IPC classes assigned to the patent

A broader technological scope could mean the market for the invention is larger.

Limited (contradictory findings)

Claims Number of claims The breadth of the claims defines the scope and effectiveness of protection from imitation

Limited (few tests)

Patent Filing Strategy

Choice of PCT system Y/N Choices in the application process may reveal patent value as perceived by the applicant.

Weak (one indicator falsified, others essentially untested)

Inventors No. of inventors Number of inventors related to size of R&D investment;

Patents of key inventors are more likely to be valuable;

Limited (few tests)


How to value patent portfolios? Insights from the economic literature (Munari and Sobrero, 2011)

• Characteristics of the patent/ underlying technology

Legal status, Family size, patent scope, number of claims, backwardcitations, forward citations

• Assignee’s characteristics

Individual vs organizations, small vs. large companies,universities vs corporations

• Inventor’s characteristics

Past patents, experience in organization

• Characteristics of the invention process

• Geographic localization


Practitioners’ approaches for the valuation of patent portfolios


Patent valuation methods: qualitative and quantitative approaches (Munari and Oriani, 2011)

Patent valuation methods

Qualitative Quantitative

Due-Diligence Rating/Ranking Monetary Non-Monetary

Cost-based

Market-based

Income-based

Realoptions

Patentindicators

Patent valuation methods

Qualitative Quantitative

Due-Diligence Rating/Ranking Monetary Non-Monetary

Cost-based

Market-based

Income-based

Realoptions

Patentindicators


A comparison of different methods for valuing patents (Omland, 2011)

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Method Rationale Main information source

Time needed

Cost Reliability

Income Approaches

Expected future benefits = current value (by def.)

Expert information and some accounting data

HIGH* HIGH* HIGH*

Market Approaches

Past prices of similar patents indicate current value

Licensing database and some expert information or accounting data

MEDIUM MEDIUM MEDIUM*

Cost Approaches

Past cost indicates expectations on value

Accounting data LOW LOW LOW

Patent data-based Indicators

Patent data contains various clues on current value

Patent data VERY LOW

VERY LOW

LOW-MEDIUM**

* Depends on commercialization status and effort invested in valuation** Depends on correct application, the algorithms used and the commercialization status


How often is a valuation conducted due to the company’s needs? (Bader et a., 2012)

Sample:61 companies from the 500 top-patenters at the EPO

Bader et al. (2012)


How often are monetary valuation methodsapplied? (Bader et a., 2008)


Bader et al. (2012)


For which valuation occasions are monetaryapproaches used? (Bader et a., 2012)


Bader et al. (2012)


The valuation of patent and patent portfolios: criticalities (Munari and Oriani, 2011)

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• Lack of generally accepted and widely diffused methodologies

• High level of technical, market and legal uncertainty

• Limited understanding of the contribution to value creation

• Limited availability of comparable transactions due to the limited extension and transparency of markets for patents and technologies

• Difficulties in disentangling the contribution of patents from the one of other intangible and tangible assets

• Several different uses are available for patents

• Need for a combination of multi-disciplinary competences


Valuing patent portfolios for management purposes:

a case-study

Federico Munari – Università di Bologna 24-

Case-study Datalogic: the valuation of the patent portfolio

Datalogic is a world-leader in the production of scanning technologies. In year 2010 Datalogic launched a project aimed at valuing each patent in its patent portfolio, in the context of a wider organizational restructuring process. Its patent portfolio included more than 400 patent families. The aims of the valuation exercise were the following:

• Identify most importants patents through pre-defined and objective criteria

• Monitor technological areas covered by patent protection

• Update drivers for patent filing decisions

• Update drivers for renewal/expiration of patents

• Identify patents appropriate for licensing-out/sale

• Measure the monetary value of the whole patent portfolio


The valuation of patent portfolio in Datalogic

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Qualiltativevaluation

Monetaryvaluation

Rating/ranking method

• 20 criteria in 5 macro-areas• 4 units involved in the valuation• Scores assigned to each patent

Relief from royalty approach

• Link patents to product lines• Expected revenues --> Business

Plan• Royalty rate --> Industry standard

adjusted for the qualitative valuation

• Discount rate --> WACC


Bridging theory and practice:

options for scholars and policy-makers


FinKT Project: Financing Knowledge Transfer in Europe

Research project of the Dept. of Management, University of Bologna, in collaboration with Bocconi University. Funded by the European Investment Bank (Eiburs Programme 2012-2015)

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How to address the theory-practice gap? Options for scholars and policy-makers

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• Provide practical and rigourous examples of valuation- Collection of case-studies on patent valuation

• Improve the transparency of market for technologies andprovide comparables

- Database royalty rates, license transactions

• Address the issues related to uncertainty levels inconducting a valuation

- Provide a benchmark for the risk premium to be applied inthe valuation


Improve the transparency levels of market for technologies

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• Identify comparables to facilitate the application of the market-approach, or of the relief from royalty method

• Analyze in more detail which factors determines the economicconditions in licensing transactions (i.e. Sakakibara, 2010, Leoneand Oriani, 2010)

Commercial sources (mostly US)• Royaltysource• Royaltstat• Consor• Recombinant• ...

Open DB royalty rates,

licensingtransactions


Dealing with uncertainty in the valuation of patents

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• Which discount rates (risk premium) should be applied in thevaluation, depending on the level of technical, market and legaluncertainty of the patent(s)?

• Need for evidence (experimental studies?) related to patent transactions

Source: Frey and Leleux (2004), Nature Biotechnology

Assessing the value of patent portfolios: evidence from ...is.jrc.ec.europa.eu/pages/ISG/patents/documents/FedericoMunari... · July six IT firms including Microsoft, ... Traditional

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