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Third WIPO-INSME International Training Program: Financing your business with Intellectual Property ––– Major trends Third WIPO-INSME International Training Program: Financing your business with Intellectual Property ––– Major trends in IP monetization ––– Geneva, December 1 st, 2010 ––– Sylvain Roy, High Spin Licensing 1

Contents: 5 themes highlighting world trends in IP licensing and IP monetization #1 Growing Contents: 5 themes highlighting world trends in IP licensing and IP monetization #1 Growing volume of activity #2 Growing complexity and specialization #3 Interdependence #4 Increasing strategic value #5 National specificities, reduced international discrepancies 2

Theme #1: Growing volume of activity (and lots of place for further growth) - Theme #1: Growing volume of activity (and lots of place for further growth) - IP is considered as property – as it should be – rather than monopoly - IP is becoming routinely traded, and IP trade is increasing in volume, worldwide - Transnational companies spread knowledge and are responsible for the bulk of licensing activity - Companies are no longer using IP solely as a defensive tool, and see IP monetization as an attractive value added activity that can increase the ROI for R&D and market development which have already been spent for existing products 3

#1 Why business loves patents 1/2 - Provisional protection of an innovation (pending appl) #1 Why business loves patents 1/2 - Provisional protection of an innovation (pending appl) - Building monopoly position; blocking other from entering a market - Assembling portfolio of rights to create financial strength (and improving balance sheet) - Getting a seat at the table for standards setting - Creating marketing messages and becoming more visible in the market Sources: EPO 4

#1 Why business loves patents 2/2 - Generating license income - Building a base #1 Why business loves patents 2/2 - Generating license income - Building a base for infringement claims (“troll” model) - Preventing lawsuits - Measuring the performance of the company or individuals - Communicating innovativeness to investors - Avoiding the feared, but unknown, consequence of not patenting Sources: EPO 5

#1 The IP licensing market has exploded in the last 20 years worldwide Licensing #1 The IP licensing market has exploded in the last 20 years worldwide Licensing should further grow from US$110 billion (2000) to. . US$500 billion (2015) (including copyright and trademark) Intellectual property receipts, US$bn Sources: Ernst & Young; Athreye and Cantwell, 2005; The Economist 6

#1 The technology licensing market is a fraction of the larger IP licensing market #1 The technology licensing market is a fraction of the larger IP licensing market 7

#1 Growing volume of patents, but relatively few patents are being monetized - 10, #1 Growing volume of patents, but relatively few patents are being monetized - 10, 000 new patents are issued every week (world) - Only a fraction of patents and disclosures end up having any economic value; it is generally agreed that only 5 -10% of issued patents have a significant commercial value - Patent rights generally have value if : Revenues + Volume + Infringement (competition proving the vitality of the market) Sources: OECD; Milken Institute 8

#1 Growing volume of patents, but relatively few patents are being monetized - Less #1 Growing volume of patents, but relatively few patents are being monetized - Less than 3% of patents generate royalty income - Less than 50% of licensed patents generate income - average revenue per license of € 45, 000 (Switzerland, 2000) 9

#1 Substantial growth can result from better IP management and licensing practice - Intellectual #1 Substantial growth can result from better IP management and licensing practice - Intellectual Property is still a significantly untapped resource - Innovating companies can increase their operating income by 5 -10% from the sale or license of patents and proprietary technologies v Few companies earn more than 0, 5% of their revenue from licensing Sources: Harvard Business Review; Mc. Kinsey & Co. , Nov. 2002 survey 10

Theme #2: Growing complexity and specialization - Still, bottleneck issues limit monetization efficiency - Theme #2: Growing complexity and specialization - Still, bottleneck issues limit monetization efficiency - Increased competitive research, development costs and compliance costs encourage IP trade - A growing secondary market for IP increases overall market efficiency - More players are becoming able to identify and grab under-valued IP - IP issues and strategies are becoming leading indicators of company performance 11

#2 Globalization and consolidation of R&D - R&D has become increasingly concentrated to take #2 Globalization and consolidation of R&D - R&D has become increasingly concentrated to take advantage of economies of scale and clusters of knowledge - Transnational firms are changing the way innovation is transmitted and leveraged around the world; their share of R&D spending is increasing dramatically - Some industrial companies will transform partially or completely into R&D companies, taking advantage of relative growing value of IP 12

#2 Bottleneck issues affecting IP monetization - IP protection costs (not all inventions worth #2 Bottleneck issues affecting IP monetization - IP protection costs (not all inventions worth protecting) - Un-harmonization of patent rules (US first to invent vs. EU first to file patent systems) (biotech patents remain un-harmonized across EU on gene sequences, stem cells) (claims of issued patents can vary from one country to another) but there is a drive toward Global consistency - Patent complexity and patent claims incertitude (broad upstream pioneer patents) (large number of claims are granted twice) (claims of issued patents can vary from one country to another) - Under-reported royalties (affecting up to 88% of deals; nearly 50% of licenses have under-reported royalties in excess of 25%) - Lack of valuation guidelines Sources: Invotek 13

#2 New players and innovative business models - Secondary, speculative markets : - IP #2 New players and innovative business models - Secondary, speculative markets : - IP banks buying patents and reselling at profit - IP securitization (sale of IP for a pricing based on future royalty income; e. g. David Bowie’s portfolio) - Dedicated commercialization platforms: - IP showcases, on-line listings - IP auctions (Ocean Tomo, e. Bay) - Enforcement speculative market: - “IP trolls” (buys patents and seek royalties) - Private-equity funding research dedicated to generate and exploit IP (Intellectual Ventures) 14

#2 IP value now provides a benchmark to evaluate companies performance • Equity indexes #2 IP value now provides a benchmark to evaluate companies performance • Equity indexes used to cover portfolios of large industrial and technology companies: – Jones Industrial Average (1896) – Standard & Poor’s 500 (1957) – NASDAQ Composite Index (1971) Ocean Tomo 300 10 year performance tracking data • New index: – Ocean Tomo 300™ Patent Index (2006) covers a portfolio of 300 companies that own the most valuable patents relative to their book value 15

Theme #3: Interdependence - Trends today is away from independence and toward a vital Theme #3: Interdependence - Trends today is away from independence and toward a vital need for the talent of others - Considering increasing costs (for research and for non-inventive activities), companies don’t rely on their own capability to fill the product pipeline - Competitors engage in overlapping research and product development, and license each other’s technology - Revolutionary IP-driven deals are now done across industries 16

#3 Privileged relationship and legal vehicles - Licensing (grants of rights) - Options (access #3 Privileged relationship and legal vehicles - Licensing (grants of rights) - Options (access to future technology) - Technology transfer (assignment of ownership) - Donation and divestiture (with or without tax incentive) - Hybrid agreements (often complex and sophisticated): option/license, joint-venturing, cross-licensing, corporate partnering, co-promotion or co-marketing arrangements, strategic alliances and consortium licensing 17

#3 Strategic alliances among competitors - Companies are learning and accelerating innovation pace through #3 Strategic alliances among competitors - Companies are learning and accelerating innovation pace through acquisition and partnering - Partnering topics includes: - Joint R&D, product development - Joint commercialization - Patent Pools (Framework for agreement among patent holders to license their IP to one another or to aggregate and cross-license IP rights) - Joint litigation (avoiding “patent trolls”) (Pharmaceutical and Biotech: Co-dev deals have increased 25 -fold since the early 1980’s; emphasis now on shared manufacturing rights, shared promotion rights, shared profits from commercialization) 18

Theme #4: Increasing strategic value - IP has generally become a corporate priority and Theme #4: Increasing strategic value - IP has generally become a corporate priority and IP strategies are more aligned to core businesses - IP licensing justifies distinct, and often performing, business units - Rapid evolution of best practices, regarding notably contractual clauses and “win/win” negotiations - Increased selectivity, notably in the willingness to trade non-core patents - Increased willingness to enforce patents; litigation determines ultimate disposition conditions 19

#4 Higher value of IP contributes to selectivity - Now emphasis on individual patent #4 Higher value of IP contributes to selectivity - Now emphasis on individual patent value instead of “batch” or portfolio valuation - Main factors influencing individual patent value: - Legal factors: scope of the technical disclosure (description, drawings); interpretation of claims (width, reach and clarity) - Market factors: correlation between the patent and products and market needs, existence of transaction on comparable patents and technologies - Financial factors: contributing value of the patents to profit margin, market share or reduction of manufacturing costs Again, no value without Revenues + Volume + Infringement 20

#4 Several non-IP factors can influence the value of a licensing deal - There #4 Several non-IP factors can influence the value of a licensing deal - There are 100+ factors influencing pricing of licensing deals and royalty payments, among which: - Stage of development of the technology - Access to ongoing R&D via grantbacks and grantforwards - Structure and spread of payments - Warranties, indemnification - Exclusivity, territories, etc - There is no such thing as average industry royalty rates! - Royalty is the last element to be covered during negotiations 21

#4 Examples of IP licensing successes (Chemistry industry) • Eastman Chemical Co. : in #4 Examples of IP licensing successes (Chemistry industry) • Eastman Chemical Co. : in 1999 -2002, closed 20 license deals worth $50 m plus $100 m in NPV • Bayer: 350 business units contributes to IP; offers technology packages (each contains 3 -5 patents plus supporting information); each success is worth $1 -10 m, at a profit margin averaging 78% • Du. Pont IP monetization results (2001): $377 m in royalty income (2% of total revenues, but contributed to 23. 3% of total Du. Pont profits!) 22

#4 Examples of Corporate IP strategies (Chemistry industry) • Proctor & Gamble: all technologies #4 Examples of Corporate IP strategies (Chemistry industry) • Proctor & Gamble: all technologies are more or less available for Out-licensing; value contribution of licensing would make it among its top-10 brands • Du. Pont: strong success in licensing to China and India; creates technology specifically for licensing • Dow Chemicals Co. : emphasizes strategic patenting and uses IP strategy to direct R&D priorities; Dow has fewer technologies to offer on licensing (Dow downsized its estate from 20, 000 to 10, 000 patents (1992), saving $40 m over 5 years in patent-maintenance fees alone) 23

#4 Examples of Academic IP strategies (U. S. Universities) • MIT: has been spinning-off #4 Examples of Academic IP strategies (U. S. Universities) • MIT: has been spinning-off companies for 50 years; strong in engineering and physical sciences, #1 university in number of start-ups • UC San Francisco: focus on licensing technologies that have a substantial impact • U of Florida: high income relative to research expenditure, focus on developing clinical or commercial applications from basic science discoveries 24

Theme #5: National specificities, reduced international discrepancies - IP is still mostly traded among Theme #5: National specificities, reduced international discrepancies - IP is still mostly traded among large corporations - United States still ahead in almost all areas of IP - Europe: top-down approach to research financing, uneven access to capital - Developing countries are fast growing patent filers, their industrial champions grab assets through Mn. A; China no 1 filing country (2005 onward) - Relative harmonization of IP rules, but important discrepancies in enforcement 25

Examples of regional discrepancies #5 (Biotechnology industry, 2003) • U. S. leads in invention Examples of regional discrepancies #5 (Biotechnology industry, 2003) • U. S. leads in invention disclosures, patents filed and granted, licenses executed and licensing income • European universities surpass their U. S. counterparts in start-ups established • United States and Europe have an equal total number of companies, but. . . – – Number of persons employed: US = 2 x EU R&D spending: US = 3 x EU Venture capital raised: US = 3 -4 x EU Access to debt finance: US = 4 x EU 26

#5 National specificities: a snapshot U. S. / Canada • United States – dominates #5 National specificities: a snapshot U. S. / Canada • United States – dominates research and high tech industries, due in part to direct and indirect role of government in setting environment for innovation – R&D funding driven by national security concerns – unmatched academic entrepreneurship, leads the world in availability of venture capital but shortage of funds for fundamental research – revolutionizes the management of intellectual property • Canada – performing research networks, fastest growth for external patent applications and industrial R&D investment among G 7 – shortage of skilled managers able to grow high tech start-ups; gaps in the risk capital system for financing early-stage ventures – first in terms of cost competitiveness for biomedical R&D, second highest number of biotech companies (world) 27

#5 National specificities: a snapshot • France Europe – innovation policy characterized by layers #5 National specificities: a snapshot • France Europe – innovation policy characterized by layers of complexity, but made great progress in terms of government funding for research; scores 5 th in R&D spending (world) – highly individualistic and entrepreneurial spirit, but the country is risk averse (partly due to high tax rates) – high number of scientists, goal to raise R&D investment to 3 percent of GDP by 2010 – pool of large innovative transnational corporations • United Kingdom – abundant capital: strength in public spending (and charities funded research), and by far the largest private equity and venture capital market in Europe (2 nd only to US) – relatively fewer patents and fewer start-ups – majority of university spin-offs are unsustainable (mostly in pharmaceuticals, biotech and high technology) 28

#5 National specificities: a snapshot performing small countries • Switzerland – high innovation, highest #5 National specificities: a snapshot performing small countries • Switzerland – high innovation, highest biotech density worldwide, thanks to renowned universities, tax environment and banking system – ranks 2 nd, worldwide in active patents per residents, strong in health, pharmaceuticals, medical technology, IT, electronics and instruments • Finland – great emphasis on exploitation of research results • Israel – good start-ups incubation up to prototype phase; innovates but added-value leaves (mostly to United States) – specialized military units generated 3, 000 start-ups, strong interdisciplinary technologies (mathematics, physics, computer science) 29

#5 National specificities: a snapshot CHINA • China should be at the center of #5 National specificities: a snapshot CHINA • China should be at the center of any IP strategy – first country in terms of patent application filing (ahead of JP, US, EU and PCT) since 2005 (480’ 000+ filings!!) – issued Chinese patents, • 2007: 245'161 (original Chinese patents 153'060; foreign patents 92'101); • 2006: 210'490 • 2005: 173'327 • Chinese Technology Trade Market (TTM) – enormous growth in TTM, from US$ 3, 75 b (1996) to 22, 73 b (2006) – patent based deals was US$ 1, 69 b, 11% of IP based deals, 7% of total – about 65% of deals involve Know How, related to outsourced technology development and technical service contracts – surprisingly, transactions are mainly between domestic organisations 30

National specificities: a snapshot CHINA #5 • Challenges – lack of framework to commercialise National specificities: a snapshot CHINA #5 • Challenges – lack of framework to commercialise technologies for trading (overall level of commercialisation is low, roughly 10%) – inadequate IT infrastructure – no established professional Chinese technology trade agents – inadequate laws on technology transfer and poor enhancement leading to loopholes and irregularities in the market and lack of confidence by IP owners. . • Critical Success Factors for business in China – – Knowledge about doing business in China. The right technologies that are valuable to China. A tailored business model that is based on long term partnership. Flexible approaches to cater for the carried needs by Chinese partners. 31

National specificities: a snapshot CHINA #5 • Other risks and Problems – – know-how National specificities: a snapshot CHINA #5 • Other risks and Problems – – know-how (trade secret) is hard to protect in China. many IP lawsuit cases involve know-how leak from former employees. different interpretation of “contract”. the government policy is “market in exchange for technology” so Chinese regulations tend to protect licensees. – post-contract risks: contract renegotiation, “clever” accounting and contract interpretation, foreign exchanges control for payments under licensing agreements. 32

#5 CHINA : IPR situation CHINA : • Negative aspects – – – general #5 CHINA : IPR situation CHINA : • Negative aspects – – – general lack of awareness of and respect of IPR rapid improvements to laws but enforcement is weak poor quality and potential corruption of local judiciary high cost and lengthy legal process for IP cases risk assessment is difficult. • Positive aspects – – – increasing press and media coverage for IPR protection gradual knowledge base improvement about IPR no longer just a “foreigner’s problem” business secrets are protected under Chinese regulations establishment of IP special courts and training of judges. 33

#5 CHINA : IPR situation • Any patentability or novelty search should include a #5 CHINA : IPR situation • Any patentability or novelty search should include a search of Chinese patents – – SIPO CNPAT CNIPR EPPIS www. sipo. gov. cn/sipo_English/ http: //search. cnpat. com. cn/Search/EN/ http: //english. cnipr. com/enpat/ http: //pub. cnipr. com/enpubpisfts • Searching Chinese patent databases – no complete update/coverage information available – relevant information may be overlooked when searching with English keywords/applicant names – machine translation tools still in development stage – certain functions are currently only possible via the Chinese interfaces: – always combine different (free) sources – use both English and Chinese interfaces whenever possible/necessary – compare the results (e. g. different machine translation results). 34

Final remarks for IP owners (and for their IP counsels and consultants) - Know Final remarks for IP owners (and for their IP counsels and consultants) - Know what you have (assess your IP importance and value) - Know where you stand (assess the IPR landscape relevant to your key business) - Aim for the best and prepare for the worse - Define winning exploitation strategies to secure market shares, involving your IP and third-parties IP - Develop a wider network of expertise connected to the market - for assessment and implementation of IP monetization strategies - where internal resource collaborates with specialized external firms 35

Thank you! Sylvain Roy Managing Partner HIGH SPIN LICENSING sroy@hslicensing. com +41(0) 78 741 Thank you! Sylvain Roy Managing Partner HIGH SPIN LICENSING [email protected] com +41(0) 78 741 4321 www. hslicensing. com High Spin Licensing is a licensing agency focusing on developing markets for patents and technologies worldwide Please refer to us should you need to: find, sell or license technologies and IP rights. 36