In today’s global economy, there is an increasing convergence of intellectual property and finance. Wall Street is grappling with how, exactly, to recognize the true value of a firm’s intellectual property, even as an increasing share of the market involves intangible assets. Companies are also realizing that simply accumulating patents does not necessarily increase their firms’ value, but it is how those patents are used that can attract capital.
Meanwhile, to combat global efforts to contain healthcare costs and massive numbers of upcoming patent expiries, a deflated economy and other market pressures, more drug companies are looking to diversify their portfolios to stay in the black.
On the pharmaceutical front, many companies are diversifying their portfolios in anticipation of waves of patents ready to expire beginning in 2011.
The 2011 “patent cliff” is expected to erode $78 billion in global sales from brand drugs made by companies such as Merck, Teva and Mylan with patents set to expire anywhere from 2010 to 2014. Another $32 billion will be lost from continued erosion of already expired brands. Other factors expected to limit sales include price cuts, reimbursement restrictions, healthcare reforms and growing regulatory pressure to contain costs.
Consultants report that 57 percent of 2008 global pharmaceutical sales will be going off-patent within the next here years, and 75 percent within the next five. A majority of the top industry CEOs interviewed believe diversification – acquiring generic and consumer health companies, for example – is a way out of the crisis facing the industry after a prolonged focus on strategies focused on patent-protected, high-margin products.
To cope with these expected losses, drug companies are considering measures such as manufacturing more generic drugs and/or vaccines and focusing on more specialty care areas. Some companies also hope to make strides in specialist secondary care via the production of biologic therapies in the United States and Europe that could treat diseases such as rheumatoid arthritis and Alzheimer’s. Biologics are expected to grow by $41 billion between 2009 and 2014.
Novartis, for example, plans to cut costs and further diversify its portfolio as it prepares for patent losses on some of its most popular drugs: Diovan for hypertension; cancer drug Gleevec; and hypertension drug Lotrel. The Swiss company has 142 pharmaceutical projects in the pipeline and plans on bringing to market more biosimilars – similar versions of branded biologic drugs that can be sold at lower costs – via its generic division, Sandoz. It also will produce more generic drugs, eye care products, vaccines and diagnostic products. And it plans to strengthen its commercial position in rapidly growing markets in China, Russia, Brazil and India.
“Novartis remains committed to the core strategy of focused diversification in high-growth healthcare segments” as reported in company sources. Meanwhile, German drug company Bayer is cutting costs and jobs to redirect finances toward investments in developing and marketing pesticides and genetically modified seeds and focus more on emerging markets in Asia. US-based Merck’s growth strategy includes new and mature products, including branded generics and other products through local and regional partnerships or acquisitions.
In 2012, its patents for asthma treatment Singulair and two other drugs expire, with patents for popular drugs such as Propecia, Nasonez, Zetia/Vytorin, and the NuvaRing delivery system set to expire by 2018. But a spokesman stated that the company is “uniquely positioned to outperform the broader healthcare market and create value” because of its broader portfolio of medicines and vaccines, greater geographic footprint in key markets, its strong late-stage pipeline and research organisation, and an efficient customer-centered commercial model.
IP Investment Trends
Many investors are also looking to firms that have well-positioned IP in their portfolio, instead of those that simply accumulate patents. The IP needs to be clear of any risk of infringing on someone else’s product, and it needs to be able to be enforced. Accumulated patents must also be assembled in a logical way that creates something bigger that has the potential to open up new markets.
“A firm and its management which take the time … effort and care to develop strong patents” by working with patent agents/ attorneys, technologists and investing in strong legal filings, signals that the firm is likely a good investment. Patent counselors work with clients to help them design or improve business processes relating to their IP using patent analytics and database systems.
Particularly in the area of clean technology, there is currently a tendency for investors to be wary of weak IP positions – a view many also take when it comes investing in high-margin biotechnology businesses. Around $13.6 billion in venture capital dollars has been invested in the last five years.
“If you don’t have IP to keep everyone away, then you have nothing” and “You have to have 100 percent assurance … you can stake out your territory” and enforce a patent if necessary. This is particularly important in high-cost industries. “It’s not a question of whether the economy is good or bad, it’s a question of, ‘if I’m going to put $1 million in that company, are there going to be returns?”
There is a distinct relationship between IP and success in capital markets. Companies with solid patent portfolios that managed them well instead of just filing for patents – a process which can be very costly, particularly if the patent does not fit well into a firm’s broader business strategy – were most successful in attracting investment.
There are three key questions an IP holder should ask when determining how to use his or her IP-
- How good and useful is the underlying invention
- How well has that invention been captured in legal documents and is the patent itself strong enough to ward off potential infringers; and
- What is your strategy for extracting the value of the patent.
- If a company is assembling many patents, how do you build them in a way that they have the most value?
My observation, being in this field for over a decade is that “The above cited basic techniques have really just been developed over the last few years”. Those techniques – used to assess the strategic value of a firm’s IP – are now being used by some companies during mergers and acquisitions (M&A) screening.
Firms are looking at who has the best IP, how it is managed and how it fits strategically with what the firm does. Those in charge of M&A are essentially including IP earlier in their due diligence process when considering taking over or merging with other companies than they have done historically.
Firms have “historically taken the view of intellectual property towards the end of process if at all and what we see is that an increasing number of companies do, is move that perspective or data point forward in the process, rather than looking at just market share and values.”
Meanwhile, Wall Street is still grappling with how exactly to valuate intellectual property, particularly when it comes to the growing market of intangible IP. Current US accounting rules do not allow firms to record their patents and intangible IP on their accounting statements until that company is involved in an acquisition transaction with another firm. Yet the cash and intangibles asset categories are increasing on companies’ balance sheets as tangibles like equipment and real estate are decreasing, particularly in today’s sour global economy.
There’s a different perspective these days on where the value is in the business and with intangible assets representing about 81 percent of the S&P 500 market in 2009, according published reports, that is a large percentage of unaccounted for value.
Meanwhile, the Intellectual Property Exchange International (IPXI) – the first financial marketplace for the trading of patent rights – is scheduled to begin operating at the beginning of next year. The IPXI will work similar to an emissions trading cap and trade system, but without a ceiling of patent rights allowed to be exchanged. IPXI leaders have been in talks with some of the largest IP owners in the world on the design of the system.
Patent trolls – companies or individuals that buy up patents not to use them to innovate but for the sole purpose of enforcing them, also called “non-practising entities (NPEs)” – have traditionally been considered a costly nuisance to technology companies like Microsoft, Apple, Google, Verizon Wireless, but now, some also are perfecting the business model of patent enforcement – and it seems to be paying off. NPEs are essentially monetizing their assets – the patents – without any accompanying innovation. Instead, they attempt to force perceived infringing companies into licensing agreements.
As of April 2010, there were over 325 NPEs identified. Since 1985, NPEs have been involved in litigation with nearly 4,500 different operating companies in more than 3,100 actions; nearly 75 percent of the lawsuits were filed since 2003 alone and some have been successfully into negotiating $ 612 million in settlement.
I look at these NPEs … as a catalyst for the marketplace but believe them to be relatively small and expect them to remain relatively small. They are high-profile examples of the value of individual patent rights. Plus, NPE actions bring more attention to the prospective value of the IP portfolio of those companies being pursued. It’s bringing some recognition to IP as a valuable asset.