The author of the book IP Due Diligence cites U.S. government statistics measuring amounts at stake in IP deals in the billions and trillions. We believe it. My firm and I have helped clients bring in investments of as much as $200 million or more secured by IP, including patents, trade secrets and trademarks.
Due diligence for yourself and for your deal partner
Of course, investors in (or buyers of) a target company will want to exercise due diligence, conduct an IP audit, and assess valuation and risk.
But why wait until you’re at the altar in an M&A deal? Why not build an IP portfolio now that will position your company for revenues, margins, market leadership, and capital valuation? It’s always a good idea to build a smart business. If you run your business for sales and profits, you can do business that way indefinitely and, at the same time, you will position the company for an optimal M&A deal if that should be of interest to you.
Here are three things to think about in IP due diligence.
1. Maximize the return on your investment in IP
Some businesses, especially Fortune 500 companies, treat IP, particularly patents, like a commodity to be purchased at the lowest possible cost. This is short-sighted. A better way to think about patents is to ask, “What’s the return on investment?” This can be hard to measure because the best use of a patent is not to license it for royalties, but to assure market leadership, revenues, and margins that derive from the exclusive legal rights to make, use, and sell the patented product. In other words, practice the patent yourself, for fun and profit.
For example, AbbVie owns a thicket of 100 patents that it uses to protect its $20 billion in annual sales of Humira. Its market capitalization at this writing is about $180 billion. Much of that revenue, and much of that valuation, is based on the patents.
Every one of AbbVie’s competitors is chomping at the bit for the chance to bring out a biosimilar, and they would have done so already but for the patents. AbbVie’s return on investment in the IP, including the cost of R&D, has to be way over 50%. But AbbVie receives ZERO dollars in monthly royalty checks.
The best way to make money on IP is to practice the IP for sales and profits on the patented product. Don’t even aim for royalty checks. Be the market leader. You can do quite nicely with receipts from sales.
Each day of Humira exclusivity is worth at least about $25 million or more to AbbVie. AbbVie was awarded 41 U.S. patents in 2019. Suppose they file about the same number of patent applications per year. And suppose they currently invest $20,000 in legal services in the preparation and filing of each patent application, for a total of $820,000. Now, suppose they negotiate a 20% lower “price” per patent application, for a savings of $164,000 per year. If the patent thicket is compromised — you get what you pay for — to the extent of allowing competition to enter the Humira market even one hour before their patents expire in 2023, the lost opportunity would dwarf the “savings.”
There’s another element here that is easy to miss in practice. You can be sure that AbbVie is charging a premium price for Humira, supported by the exclusive legal rights conveyed by its patent thicket. In your company, you can do the same in your pricing of your exclusive proprietary products. Don’t settle for the usual margins that you might expect from commodity products.
The question isn’t how much you invest in a patent. The question is what’s the return on your investment. The smart money isn’t in minimizing investment, it’s in maximizing return.
2. Beat your competition with a strong IP portfolio
You don’t do business in a vacuum; you do business in competition. And if your competitor has a stronger IP portfolio that yours, you’re at a disadvantage. Arm yourself with IP that will give you an advantage over your competitor.
If your competitor is bigger and better funded than you, perhaps you can be smarter and nimbler. For example, when our clients are decisive, we often can prepare and file patent applications better and faster than their competitors. And the filing date of a good, thorough patent application is often the key date in our first-inventor-to-file patent system.
3. Put IP agreements in place
You can create all kinds of valuable IP and blow it for lack of good agreements. Employees should be presented with confidentiality agreements that also require disclosure and assignment of inventions to the Company. Vendors and customers should be required to sign NDAs before they’re allowed in your R&D facility. Purchase agreements should be examined, and certain terms should be negotiated or effectively canceled with your own forms. Awkward conversations? Maybe, but a little diplomacy and firmness now can prevent costly disputes later.
Build your IP portfolio to maximize return on investment, even while you stay a step ahead of your competitor. And put agreements in place to protect your IP.
Your due diligence in protecting your IP will increase your revenues and margins, assure your market leadership, and add to your capital valuation.
Thanks to Edward Manzo for giving me a copy of the 1,400 page book by L.M. Brownlee, Intellectual Property Due Diligence (Thomson Reuters 2020) (in which Manzo is acknowledged for his contributions concerning patents).