Should secondaries be the primary comparison?

In the last couple of months there have been some marvelous IPOs and acquisitions happening in the technology space. Facebook’s likely IPO is the elephant in the room but in the meantime there have been some shockwaves with, for example; LinkedIn and Skype.

Secondaries surging !

This has lead to a surge in the secondary trade (i.e. non-public trade between shareholders) of Groupon, Zynga and Facebook equity. Directly this has lead to discussions of regulations and complaints about “opaque markets”, overvaluation etc. I was also lucky enough to attend a number of talks in London over the last weeks, with VCs discussing these and similar issues. One thing I really embraced was the notion of how scarce this type of equity is and thus might merit a higher price.

So what has this got to do with IP? Well to me the same reasoning rings very true for IP and especially investing in IP. Valuation of IP receives a lot of complaints from many people (accountants and academia to mention some) and is seen as something opaque and in need of regulation. There have been many ( more or less unsuccessful) attempts at making the market transparent (e.g. Ocean Tomo, , IP-X, IPXI, Yet2) but nothing has become a de facto standard.

IP Secondaries surging !?

Regardless of this, a large number of IP transactions take place every year (for example Apple/Freescale, Microsoft/Novell, HTC/ADC or of course the never ending Nortel)showing that even without a primary market, the secondary market will give plenty of exit opportunities. The key, however, is that the assets must be of good quality and/or strategic – just as with the equity mentioned above (or have a missed a surge in secondary trading of Lunarstorm or Friendster?)

Then there’s also a constantly growing number of venture/PE backed IP vechicles being set up (how many of you have heard of Juridica, Digitude, IPGest, ?). And of course also some very large vechicles attracting large sums of venture money like Round Rock and RPX. And if that’s not enough, you should really take a look at IV’s investors , if that’s not the cream of the crop, then I don’t know what is and somehow they were able to be convinced to invest without public prospectuses.

So I guess my point is that comparing IP with something transparent and established like the stock market with extremely liquid trading and instant pricing models might not do IP justice. But instead comparing it to the “mysterious” market of secondary investment, where exits are fewer and larger as well as investments being not for everyone but instead for the seasoned players understanding the market.

Based on this I’m actually very interested in two upcoming workshops at CIP Forum next week, where large portfolio transactions and the possibility of a European IP market will be debated. Maybe they will prove me wrong..

Marcus Malek

Follow me on twitter

Monetizing R&D intangibles

In my job, I work quite a lot together with medical doctors and professors carrying out research projects where some form of commercialization potential has been identified. Often it is my role to come in as a business developer and by an initial intellectual asset due diligence process distinguish which of the R&D building blocks that are truly value creating and how these potential values may be extracted. As a part of this, I get to see quite a number of grant applications and discuss how these can be re-designed for effective communication of a project's value with a basis in their intellectual assets.

Tacit valuation model for early stage research

I think that it is interesting to think that a grant reviewer will (although probably to a large extent tacitly and indirectly) value the underlying potential of research activities and new technologies, and eventually determine whether the sought amount is a feasible investment. Certainly there are parallels with such an implicit valuation model to patent valuation where a challenge is to identify suitable metrics for estimation of the value of a technology.

So what are some of the soft metrics that could determine the value of a technology for a grant reviewer?

Value of scientific excellence

Most grant reviewers probably would like to say that their sharp eye spotted the Nobel Prize candidate long before its nomination and that it was that particular early-stage grant that enabled the discovery. However, in reality scientific brilliance may be difficult to determine. Especially so, if the grant reviewer's expertise happens to be in another area than what the application is describing. One way to "outsource" this determination is to rely on citations in scientific journals. A citation count corresponds to the number of times other research papers reference the results of a publication-of-interest. But it is not self-evident how to value citations solely based on the number. How would you distinguish between?

• A higher number of citations due to a rather basic discovery
• A low number of citations in highly respected journals
• A high number of citations but none within the same research area
• A low number of citations

Value of personal brands

Another aspect that is often quoted as high perceived value in the eyes of grant reviewers is to have successful competences associated to a project. Metrics to measure the significance of human capital include;

• Curriculum Vitae (e.g. previous positions and experience)
• Academic titles
• Citations (e.g. H-index, citations per year, total citations)
• Publications (e.g. how many, in which journals, co-authors)
• Previously raised financing through grants and commercialization

Value of association to other trademarks

Association of research projects with other entities and initiatives can be interpreted as different identities and perceived values for projects. Here are some examples;

• Market closeness: Letter of intent from a collaborating company
• National/regional importance: Proof of participation in research platform (e.g. IMI, FP7)
• Societal value: Grant approval letter from major foundation (e.g. B&M Gates Foundation)

Value of legal clarity and technology transferability

For grant reviewers that are interested in seeing research results being utilized and commercialized, value metrics may include;

• Patents (e.g. number of patents, coverage, assignee/inventorship)
• Agreements (e.g. consortia agreements - ensuring that rights to results are governed)
• Freedom-to-operate evaluations

However, there are also newer metrics in the knowledge economy such as quotes on how many registered unique users one's database has. Other interesting metrics could for example be generated in open innovation projects such as Folding@Home (where a complex biological computation is distributed on 250 thousand CPUs of personal computers) where the project could claim to have access to 25 000 CPUs (assuming 10% usage of each CPU).

Will we see the numbers of "Digg it"-clicks, twitter hits and LinkedIn connections in future grant applications as metrics for societal interest and networks?

Tobias Thornblad

(Contact via Twitter)

IP Value in Pandemic Swine Flu Times

This weekend I decided to postpone a trip to Washington DC as a result of the recent swine flu outbreak. As media has been following the pandemic alert levels ever since the Centers for Disease Control (CDC) and Prevention’s first announcement on April 23, as an inspiration from Duncan Bucknell's tweet today about IP value I thought it would be interesting to look at how the value of IP may change as situations in the world change. The post became quite long as I got carried away so bear with me...

Industry Impact and Emergency Preparation in Swine Flu
As the threat becomes more immediate, many of the giants, such as MedImmune and AstraZeneca, gets into standby positions to participate in playing their parts in making the world situation better. This is to be expected, of course, since few companies would be uninterested in ‘saving the world’ while supplying vaccines, drugs, or diagnostic tests for a demand that can reach pandemic levels in very little time. An interesting aspect, however, is the fact that many of the most promising technologies (e.g. unapproved drugs and medical devices) still have many years to commercialization but in an emergency situation may get authority by the FDA to be released on the market as an emergency plan without having finished clinical trials. This creates an interesting situation for biotech companies who has recently been suffering during the financial crisis since their expected return-on-investement from an investor’s perspective may go from 5 years to 0.

One example of a sudden change was the share price of Rockville based biotech company Novavax, that experienced a 173% increase during the midmorning trading on Monday, closing up 80% at the end of the day, after it had announced that it could produce a vaccine in as little as 10 to 12 weeks using an emerging vaccine production technology. The technology uses virus-like particles rather than the entire virus strain and is currently not approved by federal regulators (it is currently being tested in a clinical trial involving 300 patients). Other promising technologies to follow in relation to the swine flu are being developed by Bacilligen Inc. and Cel-Sci Corp..
In its recent guidance to Influenza laboratories issued on April 25, the WHO stated that "Rapid antigen tests designed to detect Influenza A viruses should be able to detect this swine virus but due to the low sensitivity, compared to other lab diagnostic methods, may give false negative results". I thought it would be interesting to look at influenza diagnostic technology using PCR from an IP standpoint since this is considered to be faster and more reliable than other methods (e.g. immunodiagnostics).
IP Value Case Study: Qiagen NV
Company Background
Qiagen claims to have the worldwide broadest portfolio of molecular screening solutions for viral infectious diseases and that public health institutions and more than 80 reference laboratories around the globe use the company's molecular tests and testing components for surveillance and research of viral infections. Qiagen is the leading provider of Avian Flu (H5N1) molecular detection tools worldwide and has also developed the first test for the detection of SARS.
Swine Flu Technologies
The solutions for swine flu screening, testing and research which Qiagen provides include (as declared in their press release);
1) QIAGEN's artus Influenza Kit, globally one of the most widely used assays in influenza screening, uses Polymerase Chain Reaction (PCR) and runs on LightCycler, a widely used detection platform.
2) QIAGEN's Resplex II v 2.0 assay, a multiplex test which is also PCR based, not only differentiates between Influenza Type A and B, but also detects whether a sample contains additional respiratory related viruses.
3) QIAGEN components, a number of components used for testing of samples including sample preparation reagents, PCR enzymes, and instrumentation. These components are widely used by laboratories to create their own tests (so called homebrew assays).
“The primers, which define the starting and end points of a genetic sequence that is amplified to make the target sequence visible, match 100 percent for the artus kit [artus Influenza LC RT PCR Kit (at € 1.857,00 for the (96) RUO kit) ] We are now working closely with reference institutions to have both assays further re-validated and optimized based on clinical samples”, was stated by Dr Thomas Grewing (Senior Director R&D Qiagen Hamburg).
Current World Impact of Technology
The CDC have announced that they have created diagnostic screening tests that use the components (3) developed by Qiagen after having identified a study performed in Norway that incorporated the components.

Right-based Property
Trademarks: QIAGEN®, QIAamp®, artus®, (QIAGEN Group), LightCycler® (Roche Diagnostics).

Patents: The PCR process is covered by the foreign counterparts of U.S. Patents Nos. 5,219,727 and 5,322,770 and 5,210,015 and 5,176,995 and 6,040,166 and 6,197,563 and 5,994,056 and 6,171,785 and 5,487,972 and 5,804,375 and 5,407,800 and 5,310,652 and 5,994,056 owned by F. Hoffmann-La Roche Ltd.

Technology Capabilities
A quick patent citation analysis of the 13 patents stated above retrieves a total of 604 forward citations (i.e. patents that refer back to the 13 patents as ‘prior art’). Where the top assignees citing back to these patents are;
1. ROCHE DIAGNOSTICS GMBH (16%)
2. APPLERA CORP (5.1%)
3. MAXYGEN INC (3.5%)
With Qiagen itself being responsible for 1.6% and Roche 16% (being the marketer of much of Qiagen’s technologies) of all the forward citations, this tells me that the companies are continuing to build on this technology and are likely to have a lot of in-house capability in relation to this specific technology.
Below is the patent citation distribution over years:

Current Value-in-use Contexts
Current technology use context: The artus Influenza LC RT-PCR Kit is for research use only. Not for use in diagnostic procedures. The QIAamp Kits are intended for general laboratory use. No claim or representation is intended to provide information for
the diagnosis, prevention, or treatment of a disease. (according to Qiagen’s product handbook)

License bundled with sale of kit: Purchase of artus PCR Kits is accompanied by a limited license to use them in the polymerase chain reaction (PCR) process for human and veterinary in vitro diagnostics in conjunction with a thermal cycler whose use in the automated performance
of the PCR process is covered by the up-front license fee, either by payment to Applied Biosystems or as purchased, i.e. an authorized thermal cycler. (also according to Qiagen’s product handbook)

Discussion
The data above is obviously way too little information to base a decision as in regards to the “true” value (if there even exists a “true” value) of the IP above, especially since there are multiple categories of assets that are not accounted for, such as related methods, know-how, capabilities, trade secrets, supplier agreements, financial assets, virtual libraries of sequences, databases of research data, etc., that would all affect the value of the technology. But I think that it is still an interesting thought experiment, that a number of registered intellectual property rights (with the right to exclude) may in a pre-“swine influenza” era (i.e. pre-23 April 2009) had a certain value with its limited value in use since the technology was (actually still is) not to be used for diagnostic purposes. However, in the current situation when CDC has publicly announced the use for the technology in diagnosis, the IP value has (or rather is likely to have from an investor’s perspective) dramatically changed.
Something tells me that the patent citation frequency, which has been declining since 2003, will increase for Qiagen’s technology and a number of players will enter the same space trying to claim market share using substitute technologies (see figure below). Maybe IP and patent information will be the best metric to determine stock market purchases and company value in the knowledge economy...

Tobias Thornblad
(Follow me on Twitter)

Interesting discussion about the value of IP in the blogosphere initiated by: Duncan Bucknell

Here’s an overview of the patent citation data for those of you wondering what companies that are developing technology referring to Qiagen’s patent (Y-axis: Assignees; X-axis: IPC codes; Size of circles - relative number of patents).

More of my previous biotech case-studies:
Monsanto: Successful Value Creation in Intellectual Asset Management
23 and me: Community based research

The IP marketplace in 5 years?

I recently answered a question at LinkedIn with the same question as the title above. I found it very close at heart and thought I'd incorporate it here for further thoughts and some more elaboration

When I think of the IP marketplace I envision sales and acquisitions of IP and not the roll of IP within the marketplace (i.e. technology). The closest embodyment so far would be Ocean Tomo, which seem to have hit a slump with its last auction being seen as a failure (see here and here). In recent years we have seen a surge of different players entering the market (Ocean Tomo being one) and I am a firm believer that this is a field in its infancy, which I have written about here and here.
Before elaborating more on how I see the IP marketplace in five years, I'll take you throug my reasoning. I have chosen only to look at patents as they are by far the most liquid asset.

The IP Marketplace today

First 4 observations I hope we can all agree on:
*Corporations continue to file enormous sums of patents each year, thus "non-core" patents will likely only increase and so will supply for a market.
*Not least in this recession, bigCo,smallCo and inventors are having an easier time to motivate divestiture of patents and are also in greater need of liquidity.
*Non-us legislations are slowly catching on the US model of heavy patent litigation (examples are EU harmonization attempts).
*Increase in large scale patent acquisitions by e.g. trolls, RPX, IV etc.

Looking at above factors; increase in supply and demand combined with legislative action - the obvious answer would be that the IP marketplace would be booming. However this is not that straightforward.

The main reasons for that being:
* Selling (or out-licensing) naked patents is very hard and time consuming and is very much a tacit skill compared to selling many other asset classes which have no element of negotiation as well as much historical data.
* IP landscapes are often cluttered due to wide X-licenses, encumbrances / deal clauses, standards and what's commonly seen as the "troll threat".
* The marginal value for naked patent acquisitions / in-licensing is situation based and that value is often logarithmic from buyer point of view.

I think that in 5 years the IP marketplace will continue to be built up by three sub-markets:
* BigCo broad licensing - continuing with wide X-licenses to increase FTO.
* Liquidity Divestitures - from BigCo to inventors, patents for sale will go up.
* Patent aggregators - nothing indicates any slowdown of RPX, IV trolls.

The IP market moving forward - more behavior than a unified exchange

However I believe there will be great changes, but within quality and behavior as companies recognize strategic value of patents and also the importance of dealing with acquisition or divestiture properly. E.g.:
* Companies will actively start looking for certain technologies when planning a new venture / spin out / line-extension slightly outside of core.
* Patent sales will require more and dedicated work by the seller if looking for short term ROI. The model with an unspecified Cease & Dsesist, countered by a declaratory judgement and then a long wait in Texas, Cali or Delaware is not scaleable and slow - not to mention unpopular.
* With laws passed that could open up for lawsuits also outside of the US, savvy companies will start to be proactive when considering defensive or offensive IP acquisitions to strenghten portfolio.

One could draw the easy parallel of IP and general business where certain amounts of analysis, preparatory work, appealing sales material etc. are given and anyone not complying with the norm has no chance (e.g. not having a thorough business plan, strong PPT and proof of concept if driving down Sand Hill Road). My meaning being that such a norm has not been set in the IP sphere yet.


The emerging new actor

In light of an increase in "homework" (i.e. analysis) needed I see the emergance of a new actor. Such an emerging actor would be similar to an m&a department within an investment bank. An actor dealing with sellers and buyers, possibly being a strategic partner to BigCo when divesting/acquiring patents. Cases are built around business, technical and legal strenghts. Key metrics are profitability, portfolio strength, ROI and regional / technological FTO. This actor will also, like the banks, rely heavily on trust and look for long term partners rather than short term assertion raid. Which is also the reason why such an actor in the long term could develop a scaleable model of naked patent sales - which I see as the true key of a functioning patent marketplace.

// Marcus Malek
(follow me on twitter)

The IP Store?

During the recent weeks there has been heavy posting in the blogosphere regarding new breeds of IP companies, where RPX (covered here and here) perhaps have gotten most attention, with their interesting business model of being an anti-NPE. Also seeing much attention is two even more interesting breeds; Article One Partners ( covered here) and its open source cousin Open Invention Network (again covered by Securing Innovaton, here).
There is however more commotion in related fields like patent valuation, where the search for the golden standards still goes on (e.g. here ) and another conceptual thought on the subject here.
Yet another interesting new breed of service is launched by Stanford (discussed here) where IP related data will be public. Last but not least, the FTC hearings some time ago, both parties (Intellectual Ventures vs. "rest of the world") agreed that more data is something they all would like to see.
These recent postings have lead me into thinking what an IP marketplace could look like.

What is an efficient IP market?
I would believe that many people want to look at the IP market the way we have looked at every other marketplace the last half century or so. Now pursuing a thesis within Patent Valuation I can also conclude that academics sometime try and fit a square peg in a round hole with applying classical financial theories to an IP setting. The most striking being that not even all authors are clear on what a patent actually is and many also dive head into the logic of patents=products. Whether you are pro or con NPEs they at least crush that myth with their business model. Looking at a (IP) market with the view that it is a means of generating revenue elsewhere (i.e. products or services), then it is not difficult to see how people are working hard to closing the NPEs "loophole".

This has me thinking, how would this be handled, would you have to be a producing company to be able to litigate or perhaps wider use of cross licenses as damages or perhaps just less damages could be solutions. Anyhow - these are all complex and strive towards "fixing" an existing loophole. Arguments are often that litigation intensity and cost have people running away from patents and keeping things secret instead. I sometimes wonder if perhaps more effort should be put into building a new marketplace suited for IP rather than trying to jam IP into the existing product market.

What if all would change and instead of buying and selling patents, companies get more savvy and leverage licensing schemes instead and remaining the owner of the patent, thus not giving NPEs enforcement options. Now I know there are inherent flaws with this, where the biggest perhaps is the difficulties to match two parties. This is why I am so glad that the "big fish" seem united in thinking that more data is needed and I am also really exited about the new Stanford service. A part from those progresses I still believe that much can be done by just trying to build such a (or any other) marketplace from scratch and having legislators set the norms proactively rather than obtaining a large backlog and reacting to whatever loopholes people find. Just look at the way Apple constantly set the norms by setting up marketplaces like Itunesstore and Appstore.
So question is - is there a Steve Jobs in any PTO?

Thoughts on building an IP marketplace

In light of recent Ocean Tomo success and the ever growing interest in IP and intangibles (especially as it makes out 80 percent of market cap.. or what did Pat say ;) ) there are many ideas floating around and lot of effort put into thinking about an IP-marketplace. This will be a first post of hopefully many as I will try to focus on the financial / transactional side of IA / IP.

One could go on in eternity regarding the contextual nature of IP valuation and whether accounting principles are up to date - but that is not my intent. In this post I'm thinking about the actual markets. In light of CDOs I won't debate the future existance of securitzed IP to generate leverage - that is bound to happen. What I am interested in is governance, transparancy and liquidity.

First of all I would like to tip my hat to Ocean Tomo - true pioneers and deserve all appraisal. But what if (or when?) success (i.e. hight returns) leads to competition (as market theory has shown) and we all of a sudden have multiple OT's where some only take 8% of the cut and others 7% etc. Where would the buyers and sellers want to be?

How would markets attract both buyers and sellers if they require physical presence?
Would it be entirely online-based with a search function for all markets?
Would biotech complexity always be handled at high end 10% marketplaces with nice prospectuses?
Will we see an overall "garage sale effect"? (i.e. steep fall in percentage of lots sold as companies would try to sell all kinds of "crap" IP - perhaps to boost liquidity in light of the turmoil).

I personally trust market forces on this one out. But wait a minute - there might be a regulatory issue overruling it all as Ocean Tomo have some interesting pending applications.
As interesting they are on their own I see the following two key issues:
1) How will the infamous Bilski ruling affect these applications
2) If granted - will OT go open (á lá DNA), closed or somewhere in between?

Interestingly, they are not alone in this field. Wonder how Bilski influences this one?

Finally, some food for thought. It could be an interesting system if:
1) All corporations understand the potential in leveraging IP (i.e. not only as a legal necessity)
2) IP markets start growing
But the markets and securitization are privately owned (and governed ?) and you have to pay a royalty for calculating a value on IP you want to acquire.

Please share your thoughts on where the "IP market" ship is heading.
All aboard !?

Marcus Malek