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From Ideas to Assets
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From Ideas to Assets
Investing Wisely in Intellectual Property

Edited by
Bruce Berman
John Wiley & Sons, Inc.
This book is printed on acid-free paper. ∞
Copyright © 2002 by John Wiley & Sons, Inc., New York. All rights reserved.
Published by John Wiley & Sons, Inc.
Published simultaneously in Canada.
No part of this publication may be reproduced, stored in a retrieval system or transmitted
in any form or by any means, electronic, mechanical, photocopying, recording, scanning
or otherwise, except as permitted under Section 107 or 108 of the 1976 United States
Copyright Act, without either the prior written permission of the Publisher, or authoriza-
tion through payment of the appropriate per-copy fee to the Copyright Clearance Center,
222 Rosewood Drive, Danvers, MA 01923, (978) 750-8400, fax (978) 750-4744. Requests to
the Publisher for permission should be addressed to the Permissions Department, John
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This publication is designed to provide accurate and authoritative information in regard
to the subject matter covered. It is sold with the understanding that the publisher is not
engaged in rendering professional services. If professional advice or other expert assis-
tance is required, the services of a competent professional person should be sought.
ISBN 0-471-40068-8
Printed in the United States of America.
10 9 8 7 6 5 4 3 2 1
v
About the Editor
Bruce Berman, editor, is president of Brody Berman Associates, Inc. in New York,
the leading marketing and communications firm for intellectual property owners
and investors. He conceived and edited Hidden Value: Profiting from the Intellectual
Property Economy (Euromoney-Institutional Investor), a critically acclaimed anthol-
ogy that was published in 1999. Mr. Berman is a member of the editorial advisory

board of Patent Strategy & Management, and works closely with technology and life
sciences companies, consulting organizations, law firms, and financial institutions.

vii
Acknowledgments
A unified vision of intellectual assets lends itself to diverse perspectives. In addi-
tion to each and every author who devoted significant time and care, and without
whom this book would be impossible, I am indebted to a number of people, sev-
eral of whom should be singled out. Their thoughtful comments, counsel, and en-
couragement made a great deal of difference in the final product. They include Sam
Adler of American Lawyer Media, Christopher Fine of Goldman Sachs, Stephen
Fox of Hewlett-Packard, Thom Goodman of Corporate Legal Times, James Gould
of Morgan & Finnegan, Dooyong Lee of LPS, Russell Parr of Intellectual Property
Research Associates, Alexander Poltorak of General Patent Corporation, Kevin
Rivette of Aurigin Systems, Dan Scotto of Banc Paribas, and Darlene Slaughter of
IFI CLAIMS.
Producing From Ideas to Assets required almost two years of research and
hundreds of telephone conversations, e-mails, voice messages, faxes, arguments,
and revisions. One person deserves special mention: Dr. James Woods of Deloitte
& Touche was a constant source of information and sober analysis. I am indebted
to him and his crisp perspective for helping to keep objectives and audiences in
clear sight, even when they appeared distant. Another source of eternal light was
Samson Vermont of Hunton & Williams’ IP practice, editor of Patent Strategy &
Management. Not only did Sam write a significant chapter, his patient comments
on various aspects of the book helped to make it stronger in many ways.
Jennifer Liu provided exhaustive research and organizational support on the
Data Bank section of the book; Mary Sexton, the cover concept; and Maya Smith,
editorial oversight. Not to be forgotten are Susan McDermott, my editor at John
Wiley & Sons, and Associate Managing Editor Sujin Hong, whose editorial and
organizational skills are in evidence throughout. Both bore the slings and arrows

of my candid memoranda.
Finally, hugs for my wife, Sharon, and daughter, Jennifer, who in the course
of compiling this book have come to recognize and, thankfully, tolerate the vicis-
situdes of lofty goals and untimely deadlines. They are my most tangible assets.

For Sandler, O’Neil & Partners, and
the victims and heroes of September 11, 2001

xi
Contents
Foreword xxiii
Introduction xxv
Part One: Identifying and Understanding Intellectual
Property
Chapter 1 Intellectual Property “101” 3
H. Jackson Knight
Perspectives 3
Keys to Business Success 4
Understanding Intellectual Property—Why Bother? 5
Understanding the Value of a Company’s
Intellectual Property 13
How to Use IP Advisors Effectively 22
A Final Thought 24
About the Author 25
Chapter 2 How to “Read” a Patent 27
Walter G. Hanchuk
Perspectives 27
Introduction 28
The Anatomy of a Patent 29
Types of Patents 55

How to Evaluate Strengths and
Weaknesses of a Patent 60
Patent Checklist 61
Conclusion 62
Notes 63
About the Author 63
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Chapter 3 Capturing Innovation 65
Jeffrey L. Brandt
Perspectives 65
Turning Intellectual Assets into Valuable
Business Assets 66
Innovation and Invention 66
Getting Good Patents 73
Timing: The Interrelationship between Innovation
and Commercialization 77
Summary 80
About the Author 80
Chapter 4 Clarifying Intellectual Property Rights
for the New Economy 83
Margaret M. Blair, Gary M. Hoffman, and Salvatore P. Tamburo
Perspectives 83
Introduction 84
The Growing Role of “Unseen” Wealth 85
The Measurement Problem 88
The Role of Government in Determining
Property Rights over Intangibles 92
The Brookings Proposals for Improving Intellectual
Property Rights Protection 93
Lessons and Conclusions 103
Notes 103
About the Authors 107
Part Two: Exploiting Intellectual Property
Chapter 5 Managing IP Financial Assets 111

Alexander K. Arrow
Perspectives 111
Many IP Assets Are Financial Assets 112
Dealing with Financial Assets: Wall Street 114
Lessons and Teachings of Financial Asset Management
Apply to Intellectual Property 115
Patent Values and Call Option Values 116
The Black-Scholes Formula 120
Options Pricing Theory and Live Market Data 122
A Healthy Financial Market for IP Assets 128
IP Asset Derivatives 132
xii Contents
Conclusion 135
Notes 135
About the Author 137
Chapter 6 The Process Laboratory 139
James Jorasch
Perspectives 139
From Drill Bits to Digital Bits 140
The Marketing-Driven Approach 141
IP in the Casino Gaming Industry 142
Business-Driven Inventing in the Pharmaceutical
Industry 145
The Business-Driven Patent Process 147
Managing the Risks 148
The Inventing Team 149
An Ongoing Process 150
Extending the Life of an Invention 151
Walker Digital Corporation: A Business-Driven
IP Lab 153

Conclusion 155
About the Author 155
Chapter 7 Venture Investment Grounded in Intellectual Capital 157
James E. Malackowski and David I. Wakefield
Perspectives 157
In the News 158
Introduction 159
Patent-Based Deal Flow 160
General IC-Related Investor Due Diligence 162
Patent Investment Paradigms 167
Patent Investment Deal Structure 170
A Final Thought 174
Abbreviated Patent Security Agreement 174
Notes 177
About the Authors 177
Chapter 8 From Tech Transfer to Joint Ventures 179
An Interview with Jack Granowitz of Columbia Innovation
Enterprises, Columbia University
Perspectives 179
Methodology for Innovation 183
From Research to Revenue Stream 184
Contents xiii
Spin-Offs 185
Patents Pending 187
Chapter 9 Making Innovation Pay 191
Stephen P. Fox and Guy J. Kelley
Perspectives 191
Introduction 192
Background 192
Problems with the Traditional Approach 195

Going Beyond the Ordinary 196
The Tools and the Workshops 197
Results of the Workshops 202
Shareholder Perspective 204
Notes 205
IP Dialogue: “HP Invents New Ways to
Manage Its Innovation” 205
About the Authors 209
Chapter 10 Patent “Brands” 211
Bruce Berman and James D. Woods
Perspectives 211
Firm Value Depends on IP Value 215
Firm Value Also Depends on Brand Management 219
Why Establish an IP Brand? 220
Ways of Branding IP 222
Obstacles to Branding IP 226
Conclusion 230
Notes 231
About the Authors 231
Chapter 11 New Economy Innovations from an
Old Economy Giant 233
Jeffrey D. Weedman
Perspectives 233
A Treasure Trove of Technology 235
Real-World Successes and Opportunities 240
Marketing P&G’s Intellectual Property 244
About the Author 247
xiv Contents
Part Three: Measuring Intellectual Property Performance
Chapter 12 Measuring Intellectual Property Portfolio

Performance 251
Walter Bratic, Brent Bersin, and Paul Benson
Perspectives 251
Introduction 252
Implementation of IP Strategy 253
IP Value Extraction 254
Conventional IP Performance Metrics 255
Emerging Measurement Approaches 263
Other Nonfinancial Metrics 266
Conclusion 267
Notes 268
About the Authors 269
Chapter 13 IP Leverage 271
Russell L. Parr
Perspectives 271
Better Than Gold 272
Value of Intellectual Property 273
Source of IP Value 275
A Business Enterprise Framework 276
Licensing Royalty Rates 277
Innovate, Protect, and Leverage 278
Conclusion 289
Notes 290
About the Author 290
Chapter 14 Using Patent Indicators to Predict Stock
Portfolio Performance 293
Francis Narin, Patrick Thomas, and Anthony Breitzman
Perspectives 293
Introduction 294
Background: Identifying Quality Patents 295

Data 296
Key Indicators 297
The Technology Quality Model 298
The Technology Market Model 301
Contents xv
Conclusion 305
Notes 306
About the Authors 306
Chapter 15 Patenting Activity as an Indicator of
Revenue Growth 309
Darlene Slaughter
Perspectives 309
Introduction 310
Finding the Growth Areas: Five Industries 310
Pharmaceuticals 314
Biotechnology 316
Telecommunications 321
Patents for Automated Business Methods 323
Summary 324
About the Author 325
Chapter 16 The Economics of Patent Litigation 327
Samson Vermont
Perspectives 327
Introduction 328
The Last Barrier 329
Patent Costs and Benefits 330
Patent Litigation Costs 334
Decision Analysis Primer 335
A Hypothetical Case 340
Mama Tree 342

Papa Trees 346
Final Thoughts 357
Notes 360
About the Author 371
Chapter 17 Avoiding Transaction Peril 373
Mark Haller, Edward Gold, and Brian Blonder
Perspectives 373
Introduction 374
The Present State 375
Our Mission 375
Phase I—Strategy and Scope 377
The Culture of IP Management 379
xvi Contents
Phase II—Inventory and Review 380
Phase III—Analysis and Response 384
Notes 391
About the Authors 392
Chapter 18 Leveraging Brand to Generate Value 395
Jeffrey Parkhurst
Perspectives 395
Brands and Shareholder Value 396
The Nature of Brands 399
A Brief History of Brand Valuation 402
Case Histories 403
Brand Valuation Techniques 404
The Interbrand Approach 413
Quality Control 416
Summary 418
Notes 418
About the Author 420

Part Four: Intellectual Property Transactions and Finance
Chapter 19 The Basics of Financing Intellectual
Property Royalties 423
Joseph A. Agiato
Perspectives 423
Introduction 424
What Is IP Royalty Financing? 424
Debt versus Equity 425
What Is the Market? 426
Client Motivations, Filling a Market Niche 428
Ability to Settle Costly Infringement Litigation 430
Catastrophic Risk Reduction 431
Transaction Profiles 432
Sample Fact Patterns for IP Royalty Financing 433
Transaction Process 435
Setting Up an Internal Process 437
Notes 439
About the Author 440
Contents xvii
Chapter 20 Credit Analysis of Intellectual Property
Securitization 441
Jay H. Eisbruck
Perspectives 441
Introduction 442
A Brief Explanation of Securitization 444
Patent Licensing Revenues 445
Trademark Revenue Securitization 448
Music Royalties 449
Future Film Receivables 452
The Future: Pooled Transactions and Other IP Assets 456

Conclusion: IP Analysis Must Be Fine-Tuned 457
Note 458
About the Author 458
Chapter 21 Asset-Backed IP Financing 459
Douglas R. Elliott
Perspectives 459
Introduction 460
A Brief History of Finance 462
Asset Financing: An Investment Banking Perspective 465
Investment Banking: Mechanics for Intellectual
Property Assets 468
Technology IP Sales 475
Royalty Trust 478
IP Debt Leveraging 479
Synthetic License Monetizations 480
IP Financing Strategies: Pros and Cons 482
Notes 483
About the Author 483
Chapter 22 New Patent Issue: BioPharma Royalty Trust 485
Bernhard H. Fischer
Perspectives 485
Rationale (October 25, 2000) 486
Transaction Overview—BioPharma Royalty Trust 487
Structure—The Role of the Collateral Trustee 488
Asset Analysis—HIV/AIDS Medicines 489
xviii Contents
Ratings Detail Profile 489
BioPharma Royalty Trust—Fact Sheet for a Patent
Securitization 490
Key Transaction Details and Features 491

About the Author 495
Chapter 23 The Relevance of IP Analysis in Technology-
Driven M&A Transactions 497
R. Russ O’Haver
Perspectives 497
Introduction 498
M&A Trends and Implications 498
Identifying and Executing the Transaction 501
Conclusion 508
Notes 509
About the Author 509
Chapter 24 Patents on Wall Street 511
Christopher R. Fine and Donald C. Palmer
Perspectives 511
Introduction 512
Why Some Bankers Undervalue IP 514
The Reemerging Power of IP as a Corporate Asset
and Strategic Weapon 517
IP and the Role of the Strategic Advisor 520
IP and Due Diligence 523
IP in Negotiations 526
Valuing IP for M&A and Other Transactions 529
Fair Value Measurements 530
Present Value of Expected Future Cash Flows 531
Option Pricing Models 531
Conjoint and Relative Utility Analysis 532
Cost of Development 534
Cost of Replacement 534
Expected Cost of Infringement 534
Price Minus Book Value 535

Conclusion 535
Notes 537
About the Authors 539
Contents xix
Chapter 25 Creating Tomorrow 541
Ian Harvey
Perspectives 541
Introduction 542
IP Futures #1: Patents at the Center of Corporate
Strategy 544
IP Futures #2: International Investors Increasingly Will
Assess Companies’ Patent Policies 545
IP Futures #3: People Who Understand Patents Will
Be at a Premium—and So Will Patent
Intermediaries 546
IP Futures #4: Small Research Companies 547
IP Futures #5: Countries That Are Good at Innovation 548
IP Futures #6: Watch Out for a Whole Range of
New Kinds of Business Partnership 549
IP Futures #7: Patents at the Heart of Corporate
Valuations 552
IP Futures #8: Patent Law Will Slowly Coalesce Across
the World 554
IP Futures #9: Patent Life Will Come Under Scrutiny 555
IP Futures #10: IP Professionals Must Be Drawn into
Wider Political Debate 556
Conclusion 558
About the Author 558
IP Glossary 561
Data Bank 577

301 Top Patentees, 2000 577
U.S. Patent Grants: Key Industries, 1995–2000 584
U.S. Patent Grants: Top Companies in Key Industries 585
Top IP Damages Awards, Licenses, and Transactions
(1980–2001) 586
Average Amount of R&D Spent per Patent Awarded 593
IBM’s Patent and Royalty Income, 1988–2002 594
Licensing Revenue: Universities & Research
Institutions 595
Comparing Company Patent Profiles of Merck
and Pfizer 597
Company Patent Profile: Merck & Co. Inc. 598
xx Contents
Company Patent Profile: Pfizer Inc. 600
Notes on CHI Comany Patent Profiles 602
Intellectual Property Value Trends (1Q and 2Q 2001) 603
Known Completed IP Securitizations 605
The World’s Most Valuable Brands 606
Highest Market Capitalizations + Patent Awards 610
Notes on U.S. Patent Issues for 1990–1999 for Market
Cap and Brand Value Charts 611
Further Reading 613
IP Web Sites and Links (Annotated) 615
General IP Information 615
IP Available/Wanted—Licensing Transactions 617
IP Analysis and Management Tools 617
Index 619
Contents xxi
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xxiii
Foreword
The publication of From Ideas to Assets: Investing Wisely in Intellectual Property by
Bruce Berman comes at an opportune time. Businesses that rely on innovation, such

as those in information technology and science, are at a crossroads. Following the
longest continuous economic boom in U.S. history, the nation is caught in its worst
economic downturn in decades.
Many companies that previously looked promising will soon fail. Others will
survive, but gain little or any competitive positioning. A few will emerge better
situated than when the recession began. A company’s ability to innovate, protect,
and maximize innovation faster and more effectively than its competitors will play
a key role in its ability to prosper. Proprietary rights, such as patents, copyrights,
trademark, trade secrets, and intellectual property-related licenses, already integral
to the performance of public companies, are taking on new meaning. From Ideas to
Assets is the first multidiscipline guide for practitioners, investors, and managers
designed to help them stay on top of their own business as well as others’.
Companies have become increasingly competitive and dependent on market
forces. Competitive industry characteristics, including capital requirements, indus-
try profitability, and market growth rates, have changed the way Wall Street looks
at companies. These characteristics are impacted by broader forces, including in-
tra-industry rivalries and the threat of substitute or improved products, sometimes
referred to as “disruptive technologies.” Intellectual property helps to strengthen
new products and sustain differentiation, which enable market growth and pre-
mium pricing, two fundamentals for achieving high rates of return. Understand-
ing and evaluating a company’s ability to innovate in a strategic and quantifiable
manner is now the concern of securities analysts as well as patent attorneys.
Recently, I spent time with senior management of over 250 leading informa-
tion technology companies. While they acknowledge the ominous economic cli-
mate, almost universally they expressed optimism that internal research and de-
velopment initiatives would yield new or enhanced products which would
strengthen their competitive position. While companies such as Compaq, Hewlett
Packard, and Sun Microsystems have recently scaled back sharply on planned
capacity and have cut staffs by 5 to 10 percent, R&D has remained largely un-
touched.

Some equity analysts are starting to attempt to monitor intellectual property
productivity. Their goal is to go beyond a mere tallying of patent numbers and to
look at how patents and other IP rights are actually being used by companies. IBM
xxiv Foreword
appears to be among the most effective in this regard. Not only has it amassed
enormous numbers of patents, and in some cases, used them in conjunction with
trademarks, it has done so with unprecedented success.
Of the 2,883 U.S. patents IBM was granted in 2000, nearly 1,000 were awarded
for software. One third of calendar 2000’s patented technologies were in the mar-
ketplace less than a year later. More important, IBM’s patent and IP royalty licens-
ing (including copyrights and trademarks) from all of its IP rights, and separate
from product sales, generated $1.6 billion in revenues.
I see encouraging signs that companies like Hewlett Packard and Sun
Microsystems, as well as those in other sectors, are increasing their external com-
munication of patent productivity metrics. While these companies may not report
IBM-like numbers for some time, patents and other IP are playing an increasingly
crucial role in their success. H-P and Sun each spend 5 to 10 percent of annual sales
on research and development.
Over the long haul businesses must continuously innovate to sustain prod-
uct leadership. However, many are still practicing or analyzing innovation in an
undisciplined or irrelevant manner. I believe that Bruce Berman’s perceptive From
Ideas to Assets offers investors, managers, and others involved in business decisions
the greatest breadth and depth of any resource on intellectual property available
today. The book’s four structural segments, as well as its imaginative Data Bank,
Glossary, and annotated web links make IP more compelling and easier to under-
stand. They take readers from the lab through competitive advantage, economic
return, quantitative analysis, and, finally, to consideration of how best to monetize
intellectual property. For serious investors, and who among us is not in some
manner an investor, From Ideas to Assets provides the background and context
necessary to put today’s innovation into tomorrow’s financial perspective.

John B. Jones, Jr.
Managing Director,
Salomon Smith Barney
John B. Jones, Jr. has been following computer hardware, servers, and other tech-
nology sectors as a stock analyst since 1985. Institutional Investor, Greenwich As-
sociates, Reuters, and The Wall Street Journal have consistently ranked him at or near
the top in research, earnings forecasting, and stock selection.
Introduction
New Foundations, New Frontiers
Most investors agree that technology and innovation not only have changed how
business is conducted, they have replaced the foundation on which it is based.
Suddenly, understanding the rights that protect various types of innovation,
better known as intellectual property, and how to deploy them, have become a
focal point foPr investors and executives concerned about superior performance
and return. Fueled by the digitalization of information, really no one can afford to
ignore the importance of certain patents, trademarks, and copyrights. The fact is,
they still do.
IP AFFECTS MANY
Intellectual property (IP) affects a much broader range of owners and investors
than it may at first appear to. Those with an important stake in IP include senior
executives, especially CFOs and CEOs, investment bankers, inventors, marketing
strategists, financial analysts, venture capitalists, employees, board members, re-
search and development (R&D) directors, and money managers.
Patents, in particular, are abstract and seemingly impossible to understand
without specialized training. 174,911 utility and design patents were granted in
2000 to U.S. and non-U.S. companies by the United States Patent and Trademark
Office (USPTO). Based on current applications, more than 245,000 patents are pro-
jected for 2001. However, only a small percentage of all active patents appear to
be “productive.” (Fewer than 3 percent generate royalty income.) Despite their im-
portance, patents and other IP remain more of a mystery than ever. The top busi-

ness schools have yet to make IP a part of their curricula. Attorneys still remain
the primary resource for facilitating IP business and investment decisions, not
company executives and money managers. Moreover, investors are starting to hold
those responsible for the care and nurturing of companies accountable for IP. Not
only do intellectual assets represent a significant investment in R&D dollars, they
represent much of the equity on which market value is based. Yes, IP rights and
the inventions they protect are complex, but they are well within the reach of rea-
sonably intelligent, motivated persons without specialized training.
xxv