BUSINESS
GETTING A GRIP ON INTANGIBLES Companies want to extract value from their unexploited intellectual property assets ANN M. THAYER, C&EN HOUSTON
T
HE U.S. PATENT & TRADEMARK
Office (PTO) issued 158,118 patents in 2000, an increase of 2.3% over 1999. According to current projections, PTO will issue more than 245,000 patents and pub lished applications this year, reports a patent-tracking service. The chemical industry accounts for one out ofevery seven patents awarded. General Electric, BASF, 3M, DuPont, and Bayer ranked among the
top 50 companies in patents awarded in 2000, with more than 300 each. On top of the ever increasing number of new patents, chemical and pharmaceutical companies are already sitting on stacks of intellectual property (IP). Few can develop and market every invention they create. Mergers and acquisitions also bring together IP estates of which only a por tion will be exploited under core business or market focuses.
Only about one-third of all companies have a formal process to assess the value of their IP portfolios, according to the licens ing Executives Society, an association of business and professional people who have an interest in intellectual property rights. Internet-enabled technology-transfer firms are now offering tools, such as marketderived metrics, that will help companies evaluate these assets. Once that step is done, they also intend to help producers market and eventually sell their IP. And companies are interested in exploring new routes. There is a lot of hidden value in un tapped intangible assets, says Robert R. Gruetzmacher, director for intellectual property and licensing in DuPonfs Intel lectual Assets Business (IAB). "Intellectual capital can include the knowledge in people's heads, technical know-how, and explicit or codified knowledge, if it's been documented. All of these things add value
Online Intellectual property e-marketplaces offer different features OFFERINGS
BioStreet.com http://www.biostreet.com
Life sciences
DealXchange search on buyer or seller criteria
Delphion http://www.delphion.com
Worldwide patents
Intellectual Property Technology Exchange http://www.techex.com Knowledge Express http://www.knowledge expr Patent & License Exchange http://www.pl-x.com Patex http://www.patex.com
Bioscience applications
Patent database, intellectual property management software, services Search tools based on buyer-specified profile
PharmaLicensing h tt ρ ://www. ρ h a r m a licensing.com TechExchange Online http://www.teonline.com
Drugs and biotechnology
UVentures.com http://www.uventures.com
University inventions
yet2.com http://www.yet2.com
Industrial markets
Life sciences
Materials, life sciences, and others Industrial, life sciences
Industrial markets
COST TO USE
KEY INVESTORS
Free subscription for buyers; agreements to list partnerable products and technologies Search patents for free; subscription for features such as secure link, data-mining tools Subscription and listing fees; no commissions on deals
Privately held by biotech executives and investors
Technology transfer information, licensing opportunities Valuation; listing and search based on use; financial, risk services Marketing tools, store fronts, deal facilitation
Free access to KE eMarket; full subscription is $200 for an individual, $4,000 for a location Subscription fee; fee for services and use of tools; commission is 5 to 10% of deals Free searching; listing fees on sliding scale, starting at $950; 5% commission on deals with $5,000 minimum and $50,000 cap; 7% fee for facilitation
Not identified
Company, industry information; licensing opportunities Patent database and listing of technology transfer resources Technology listing and matching
Free viewing of licensing listings; Privately held fee to list corporate and licensing information Enterprise Development Free technology posting; subscription for database access Corp.
Listing, matching based on intended use; related services f r o m partners
Free searching and viewing; commission on sliding scale starting at 7.5% of deal with $1,000 m i n i m u m Free searching; memberships start at $500 to list; 10% commission with $5,000 m i n i m u m and $50,000 cap on deals
IBM spin-off, Internet Capital Group
Privately funded
Eastman Chemical, Ernst & Young, TMCT Ventures, Softbank Corporatelntelligence.com, BTG International
Privately funded
3M, Bayer, Dow Chemical, DuPont, Procter & Gamble
SOURCES: Forrester Research, company data
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C & E N / A P R I L 2, 2001
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within an enterprise, but some of these things can be leveraged for value outside a firm as well." DuPont, with 17,000 active patents, created IAB in June 2 0 0 0 to promote and facilitate IP selling and licensing. IAB's formation marked a major shift, the company says, after "200 years of aggressively guarding its trade secrets and utilizing them chiefly within the company or its joint ventures." Similar efforts have been initiated at Dow Chemical, Eastman Chemical, and 3M. "The recognition is there," Gruetzmacher comments. 'As a science company, DuPont has world-class technology in many industrial areas. We believe, as others have found, that there are alternate routes to getting value for those technologies. Licensing is one option for creating more value." IP and licensing managers believe that licensing can offer large rewards if it is done right. They look with envy—and maybe with heightened expectations—to the example set by IBM, which increased its licensing income more than 30-fold over 10 years. In 2000, IBM invested about $5.2 billion in R&D and had more than $ 1 billion in licens-
ing royalties. The company received 2,886 patents last year, 42% more than the next nearest company NEC. Admittedly, licensing executives say, IBM is part of an industry unlike chemicals, where licensing is more easily done and multiple licenses for the same technology are often possible. Looking closer to home, about a third of the revenues generated by the pharmaceutical industry are based on licensed technology (C&EN, Feb. 15, 1999, page 19). And DovA licensing push, begun in 1994, reportedly led to a fivefold increase in licensing income in just three years. CHEMICAL COMPANY licensing managers also point to 3M. Despite having more than a third of its sales from products that it invented and introduced within the past four years, the company announced a new emphasis on IP licensing about two years ago. The company said it had ample IP, although not necessarily in its own markets, and was looking both to sell and buy to fill its product pipeline. "Today we are in the knowledge economy, and IP is the only remaining form of
a sustainable competitive advantage," says Nir Kossovsky chief executive officer and chairman of Patent & License Exchange, or pl-x. "Monetizing IP for the last 2 0 0 years has been built on a very simple premise —you invented it, you made it, you sold it, and you captured the economic benefit," he explains. In the past two years, a major shift away from this simple vertically integrated business model and a glut of IP have created a need for an efficient mechanism to transfer IP. "The old mechanisms were sufficient for low volumes," Kossovsky continues. "The high volume today is simply overwhelming the system."The value of licensing deals in all industries was an estimated $15 billion in 1990, and by 1998 it exceeded $100 billion. The value of what is untapped is estimated to be as high as $3 trillion to $5 trillion. "You have a huge rise in the volume of transactions, in the amount of IP, in supply on the sell side, and in demand from the buy side," he says. "Thus you have all the elements that demand an efficient marketplace." These drivers led to the creation of pl-x in 1999. The Internet is well suited to
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BUSINESS efficiently deliver IP management and transfer tools, Kossovsky explains, pl-x offers financial market-based metrics for IP valuation, marketing instruments, and transaction services such as standardized contracts, risk mitigation, and escrow through partners. With seed funding from Ernst & Young, pl-x raised $30 million in March 2 0 0 0 from venture-capital investors as well as Eastman Chemical. LIKEWISE, YET2.COM was founded in June 1999 and launched its Internetenabled IP marketplace in early 2000. The company began with seed capital from DuPont, followed soon after by a $20 million round of financing from venture-capital and strategic investors. In February, the company raised another $20 million. Strategic corporate investors include Bayer, Honeywell, and Procter & Gamble. Nearly 60 major companies, including many in chemicals, are founding sponsors. "More and more companies are seeing their licensing organizations as profit centers and are making demands on them," says Conrad Langenhagen, vice president for strategy, finance, and administration at yet2.com. 'There is a growing expectation out there that, if a company isn't getting a return on its R&D dollars in the form of licensing activity, then they are failing. yet2.com gives them a new channel of activity and can help them reach more potential buyers," he adds. "If we had tried to launch this business three years ago, we probably would have failed," Langenhagen admits, "because the level of maturity of companies and their need and desire to tap new sources of shareholder value wasn't there as much in this dimension. Right now, we're sort of riding the wave of increased sensitivity and visibility toward this type of activity" Individual companies and industry groups are working hard simply to measure the return from investing in R&D. Just more than a year ago, the Council for Chemical Research (CCR) launched a three-year study to quantify the contributions of research to the chemical enterprise and to society The study was initiated by Richard M. Gross, DoVs corporate vice president for R&D. CCR has enlisted Baruch Lev, professor in the Leonard N . Stern School of Business at N e w a r k University, known for his work on developing metrics for intangibles and "knowledge capital." Current estimates for the pretax return on R&D spending range between 20 and 30%. Studies such as those from the U.K. Department of Trade & Industry, which 28
C & E N / A P R I L 2, 2001
Chemicals Hottest technologies ranked by market valuation metrics CHEMICAL TECHNOLOGY
Titanium dioxide Graphite electrodes Wood polymer lumber High-performance polymers Corrosion inhibition Paints Fragrance & flavor compounds Acrylics Absorption & adsorption Lubricants
INTANGIBLE ASSET VALUE3 ($ MILLION)
$254.6 113.4 106.2 100.9 75.6 52.4 44.1 43.6 42.6 36.2
a As of Jan. 31. SOURCE: Patent & License Exchange
compiles an R&D scoreboard, see correlations between R&D intensity (measured as R&D spending as a percentage of sales) and profitability, sales growth, and market valuation in chemicals. And as companies track sales and profit growth from new and improved products, a disproportionate amount of these are found to come from new product launches compared with product line extensions. In marketing technology, it's important to think beyond initial or primary applications, say those trying to facilitate the process. "Vet2.com helps companies create descriptive marketing documents, rather than just posting obtusely worded patents. "\ve help translate a patent into something that talks more about what the technology is or is capable of doing and its features and specifications," Langenhagen explains. In addition to qualitative information, pl-x also has tools that interpret quantitative measures—such as units and ranges of values—to aid in searches. Online I P marketplaces "facilitate offering technology for licensing worldwide in a very efficient way together with an effective sales promotion," says Ralf Dujardin, IP manager at Bayer. "The online interaction with potential customers gives a clear benchmark for the market attractiveness of the posted technologies, which is essential for valuation and pricing of technologies based on a fair market value." Patents and technologies also can be grouped and packaged to be more attractive to buyers. Bayer has posted seven technology packages, composed of 45 patents, with yet2.com. The ones it has chosen to post tend to be patented early-stage or not fully exploited technologies that are outside the firm's current core business or
geographies, yet are still high quality and valuable, Dujardin says. With limited in-house licensing staffs, some companies post technologies on which they want to exert less time or effort. Eastman has close to 80 postings, primarily on pl-x and yet2.com. DuPont's 215 postings account for about 10% of the yet2.com site. "We're talking a numbers game," Gruetzmacher says. "As we get more packages on the site and provide more potential licensees with public notice that something is available, we expect more introductions to lead to more completed deals." Licensing executives believe that the approach will be cost-effective, especially since online commissions are more than competitive with those of traditional technology brokers. LICENSING EXECUTIVES also want to find licensees in other product areas or industries. Along with achieving a return on unused technologies, this is expected to open up new revenue streams that won't compete with a company's existing business and use of a technology Traditionally, IP licensing has been based on somewhat limited networking, relationships, Rolodexes, and shoe leather, executives say. They hope that they can reach a broader and previously unexplored potential market through the IP e-marketplaces. pl-x and yet2.com are not the only Internet-enabled firms addressing patent licensing and IP management. Of a dozen or more prominent technology exchange sites, some focus on specific market niches such as life sciences or information technologies. Their services and tools can range from the simplest databases, bulletin boards, or auction sites to more full-fledged operations offering consulting, marketing assistance, valuation tools, transaction capabilities, and financial or other services either directly or through partners. However, even once a potential licensee is found, negotiating the deal can still take anywhere from about 12 to 24 months, during which time the clock is ticking on a patent's life and possible royalty stream. Along with bringing more deals to the table, the hope is that online tools such as standardized documents will help speed the process, explains William H. Heise, director of licensing in Eastman's threeyear-old global technology ventures unit. As of early March, Eastman was believed to be the only company to have completed an online deal. Eastman licensed a polymer pelletizing technology to Bruckmann & Kreyenborg GranuHTTP://PUBS.ACS.ORG/CEN
liertechnik through pl-x. The companies had already been talking and used the site to solve issues surrounding valuation and risk mitigation, Heise says. Eastman also took advantage of insurance services that can protect either party if the licensed patent is ever found to be invalid. Despite the fact that few transactions have taken place, DuPont's Gruetzmacher believes there is excitement and optimism. 'Nobody's upset because deals haven't been made yet. It's just too soon," he says. "It's just the nature of this business that you have to kiss a lot of frogs." Dujardin notes that Bayer has been introduced to two potential licensees. Bayer, like other companies, has been using the online tools for internal asset evaluation and management as well as a window on technology developments across industries. IP E-MARKETPLACES claim they are bringing technology providers and buyers to their sites. Yet2.com says it has 25,000 registered users from 15,000 organizations and about 4 0 0 subscribers listing technologies. More than 100 licensing deals are in negotiation, Langenhagen says. 'The
there's going to be a lot of success, but I'm hoping so." From a seller's perspective, Heise expresses another major concern: "The big question is: Is there a buy side?" IP marketplaces obviously can't make money— and companies won't continue to use them—unless both sides are brought to the deal. So Heise says he tries to push home the point that buildingup inventory is fine, but if no one is buying it, then the inventory and its providers are going to go away 'Are people going to spend R&D dollars to search the Internet for technologies?" he asks. "I just don't know. Most scientists develop their own technology and get their own patents, even though it may have been cheaper, quicker, or both to license. So there may have to be a bit of a cultural shift in how R & D is done and scientists are rewarded." On top of that, "there are too many of these sites," he adds. " % u can't go to 20 sites a day and keep looking for technologies. I just want to go to one site or two. During the next few years, there needs to be consolidation based on who's got the right business model." •
activity on our site shows that 90% of the introductions are 'nonintuitive,' since the parties probably wouldn't have met before because they are in different countries or completely different industries." Kossovsky points out that pl-x's transactional capabilities only started up in September 2000. In the meantime, the company has sold many of its valuation metrics products, and subscribers have been using the site for asset management. Many of pl-x's more than 500 subscribers are now moving I P assets onto the marketplace, he says. Other sites say they are building traffic as w e l l Intellectual froperty Technology Exchange says it has 777 registered users, whereas UVentures claims 7,600 technology postings, and Patex boasts 15,538. Licensing executives concede that they are in an experimental phase with respect to online technology licensing. "We want to see how effective this is compared with more traditional means of shopping technology," Gruetzmacher says. Eastman's Heise echoes that sentiment, adding that "part of my strategy is to try out some of these Internet models and see which ones work. I'm not totally convinced yet that
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