January 2019 - Foresight Valuation Group

Carrots and Coins: The 2018 IP Valuation Year in Review:

Posted on January 30, 2019 5:24 pmModified on February 13, 2019 8:14 pmby Efrat Kasznik

A lot has been written on the impact of the new leadership at the USPTO on the value of patents. Since his appointment in early 2018, Director Andrei Iancu has managed to introduce new initiatives that increase transparency and uniformity in how the USPTO and the courts interpret patent claims and validity challenges, reforms that are largely considered to have a positive impact on the value of patents. Some market followers who keep track of the venerable “pendulum”, which signals the patent climate de-jour, were quick to note that the pendulum started swinging ever so slightly back in favor of patents (as evidenced by some renewed interest in the patent marketplace).

From an IP valuation perspective, one should take a broader view at the factors impacting the value of IP Assets, patents as well as other assets. While patents are legal rights that are profoundly impacted by case law and the USPTO examination policy, focusing on legislative and judicial developments in the US alone constitute a very narrow lens by which to evaluate IP portfolios and the value they bring to the companies that hold them.

Below are some of the main trends in that we have seen in 2018, based on the IP portfolios and transactions that came through the door in our IP valuation practice:

Over the last year, we have seen a clear increase in the weight of foreign assets in the IP portfolios presented to us; it used to be the case that the vast majority of assets were US assets, with a few counterparts that served more as a placeholder and less as a driver of economic value. Over the last couple of years, we have seen more and more patent portfolios used to support funding, strategic collaborations, international expansion or the sale of a company, where the major corpus of assets were foreign assets. More specifically, we have seen German, Korean, Chinese and Japanese assets anchoring an entire portfolio with very little and sometime no US counterparts at all. This is a telling sign of the increasing state of enforcement in foreign markets, as well as the increasing economic activity in foreign markets, which are usually the two reasons driving patenting decisions. I will stop short of also saying that this is a sign of the weakness of the US patent market, because I don’t believe that to be the case. Patenting decisions are made years in advance of the patent actually showing up. I also don’t believe that to be a ‘zero sum game’, i.e., if foreign IP assets drive more value, it doesn’t mean the US assets are worth less, but rather the entire pie is probably worth more.

Another trend that we are seeing emerge is the return of “carrot licensing”, which is a term used to reference licensing activity that is driven by technology transfer, as opposed to licensing driven by enforcement (also known as “stick” licensing). This form of licensing is more closely associated with emerging technologies, where the licensor is interested in creating markets for new products using an idea protected either by trade secrets or by patents. With enforcement models taking a back seat for a variety of legal and judicial reasons, particularly in the US, we are seeing more and more licensing activities involving new technologies and the IP rights protecting them. While enforcement is looking into infringement in mature markets, technology transfer is looking to carve new markets. This is a clear indication not only of the decline in the value of patents as “naked assets”, but it also indicated the increase of trade secrets as a form of IP protection that can be monetized together or apart from patents. We worked with a few European companies looking to expand worldwide using IP licensing as their main business model, seeing that IP licensing allows expansion into new regions without bearing the marketing, manufacturing and distribution cost associated with the complementary business assets needed to bring new technology to market.

There is a wave of innovation in the area of biotechnology, leverging on novel methods for molecular diagnostics and other technologies enabled by advances in genetic sequencing and gene editing, as well as the convergence of science with big data analytics and artificial intelligence (AI). Many of these technologies are initially developed by startup companies, that end up licensing to, or being acquired by, larger players. In such acquisitions or collaborations, we have seen IP rights – patents in particular – play a key role in determining the price and terms of the deal. IP assets in these areas are very valuable, and they gain their value from a technology transfer and new market perspective. As a matter of fact, IP assets in biotech and other life sciences companies are so valuable that they often survive the company even if the startup goes bankrupt for lack of funding, particularly if regulatory (FDA) approvals have been secured and other product milestones have been met.

Over the last couple of years, we have seen the emergence of new digital assets: databases, cryptocurrency, and other types of assets that made their way from the digital world into the business world. The valuation profession is slow to keep up with these assets, and as a result we have to be very creative in how we value them, as no guidelines, comparable transactions or other points of reference exist. One interesting case we have worked on this year involves the valuation of a digital token for a token-presale (a token is an asset used in a Blockchain environment to facilitate transactions on the network). From a valuation perspective, valuing tokens and cryptocurrency in general poses a challenge, as the very nature of the asset is not clearly defined: is it a security, a commodity or a currency? Should the asset, and therefore the valuation thereof, be regulated by the SEC? Many of these valuations are done for tax reporting purposes, however there is no clear policy by the IRS on some of these assets and the regulations are evolving, which makes the valuation exercise somewhat of a moving target.

In conclusion, our experience in 2018 indicated that patents are only one component of the modern company’s IP portfolio. There are other types of intangible assets, including new categories of assets we haven’t seen before, that are emerging in the new digital economy, posing new valuation challenges but adding more sources of value for companies. Additionally, new technological advances are creating fertile ground for technology transfer and open innovation, processes that depend on IP rights and which give IP Assets great value.

Helsinn v. Teva Decision: Secret Sales Qualify as Prior Art under the AIA

Posted on January 29, 2019 9:54 pmModified on January 29, 2019 10:02 pmby Lynn Dudinsky

The Supreme Court issued its decision on Helsinn Healthcare S. A. v. Teva Pharmaceuticals USA, Inc. on January 22, 2019, upholding and applying the pre-AIA on-sale precedent to post-AIA matters. This holding establishes that a sale or offer to sell, including secret sales and sales that do not publicly disclose the details of the invention, can qualify as prior art and invalidate a patent under the AIA.

The issue before the Supreme Court was whether the provisions in the Leahy-Smith America Invents Act (“AIA”) that bar a company from receiving a patent on an invention that was in public use, on sale, or otherwise available to the public before the effective filing date of the claimed invention is triggered by a company that sells its invention to a third party under a contractual obligation to keep the invention confidential.

Helsinn Healthcare S. A. (“Helsinn”) created a treatment for chemotherapy-induced nausea and vomiting using the chemical palonestron which is called Aloxi. Helsinn acquired the right to develop this product in 1998 and announced that it was initiating Phase III clinical trials in 2000 and was seeking partners to market the product. Helsinn entered into two agreements with MGI Pharma, Inc. (“MGI”) which included a license agreement granting MGI the right to distribute, promote, market and sell the product in the US in exchange for upfront payments and future royalties. Helsinn and MGI also entered into a supply and purchase agreement under which MGI agreed to purchase exclusively from Helsinn any palonosetron product approved by the FDA. Both agreements required MGI to keep confidential any proprietary information received under the agreement. Helsinn and MGI announced the agreement in a joint press release in 2001.

On January 30, 2003, Helsinn filed a provisional patent application covering the palonosetron product and subsequently filed four more patent applications over the next ten years claiming priority to this provisional application. The final application was filed in May 2013 and by virtue of its effective date, the patent that was granted (‘219 patent) from this application is governed by the AIA.

In 2011, Teva Pharmaceutical Industries (“Teva”) sought approval from the FDA to market a generic version of Helsinn’s palonestron product and was subsequently sued by Helsinn for infringing its patents, including the ‘219 patent. In response, Teva asserted that the ‘219 patent was invalid because it was on sale more than one year before Helsinn filed its provisional patent application in 2003.

The District Court determined that the on-sale provision did not apply under the AIA unless the sale or offer in question made the claimed invention available to the public. Based on this interpretation, the District Court decided that that on-sale provision was not applicable because Helsinn and MGI did not disclose the dosing information in their public statement and such information is claimed by the patents relevant in this case. Without disclosure of the dose, the District Court held that the invention was not publicly disclosed and thus not on sale.

The Federal Court reversed, concluding that the public disclosure of the sale is sufficient to trigger the on-sale bar, even if the public disclosure does not include the details of the invention. Therefore, because Helsinn and MGI publicly disclosed the sale, the Federal Court held that the on-sale bar applied.

The Supreme Court granted certiorari to determine whether, under the AIA, an inventor’s sale of an invention to a third party who is obligated to keep the invention confidential qualified as prior art for purposes of determining the patentability of the invention. It held that such a sale can qualify as prior art.

In making its decision, the Supreme Court noted that Congress imposed several conditions on the exclusive rights provided through the issuance of patents and one such condition is the on-sale bar. This condition reflects Congress’ reluctance to allow an inventor to remove existing knowledge from public use through the issuance of a patent on that knowledge. The Court explained how every patent statute since 1836 included an on-sale bar, including the statute in force prior to the implementation of the AIA. The AIA retained the on-sale bar and added a broad catchall phrase, “or otherwise available to the public,” and the Court looked to decide whether this addition altered the meaning of the on-sale bar.

The Court noted that while it had never addressed the exact question presented in this case, earlier decisions suggest that the definition of a sale or offer of sale does not require that each detail of the invention subject to the sale or offer of sale be available to the public. For example, the Court in 1998 held that an invention is on sale when it is the subject of a commercial offer for sale and is ready for patenting (Pfaff v. Wells Electronics, Inc., 525 U. S. 55, 67 (1998)). Past precedent focused on whether the invention had been sold, not on the level of detail publicly disclosed whether that detail related to the invention or the sale itself. The Court believed that there was sufficient pre-AIA precedent on the meaning of “on sale” to enable the Court to make the presumption that Congress adopted this meaning in the AIA since it reenacted the same language in the AIA.

The Supreme Court held that Congress did not alter the meaning of “on sale” when it enacted the AIA and thus, an inventor’s sale of an invention to a third part who is obligated to keep the invention confidential can qualify as prior art. While this decision only extends pre-AIA precedent to post-AIA matters, it is an important decision for emerging companies to comprehend. Many companies that we work with at Foresight seek to secure partnership with established companies during their pre-launch strategic planning and leverage these partnerships to show investors traction or product market fit before launching their products or services. While these activities provide objective metrics that can be relied upon by the company to make strategic business decisions and by the investor to de-risk their investment, such activities can have profound impacts on the company’s ability to secure patent protection for their innovation and must be done in combination with an established intellectual property strategy to ensure that such activities are done in a manner that does not trigger the outcome seen in the Helsinn decision.

If the Shoe Fits: The Case for Endorsements as a Branding Tool

Posted on January 22, 2019 6:14 pmModified on January 22, 2019 6:16 pmby Sebastian Custodia

Endorsements have long been a strategy for brand managers to help boost brand equity and product sales. Historically, high profile endorsements have primarily been reserved for the world’s largest companies – those with deep pockets. In today’s world of social media influencers, however, the strategy is far more available even to the smallest startups. And furthermore, with athletes and other celebrities increasingly diversifying their interests and personal brands, there is rising access to even the most coveted partnerships. Today, we are seeing endorsements being utilized by companies of all sizes and from all industries. From apparel, to financial services, to technology, big name endorsements have become a go-to for the world’s top brand managers.

Endorsements in the Basketball Shoe Game

Traditionally, we have viewed endorsements and partnerships as a way to gain an advantage over competitors and grow sales. No business utilizes such a strategy quite like the basketball shoe business. Since the introduction of the Air Jordan sneaker by Nike in the mid-80s, the generic, unendorsed basketball shoe has all but vanished. The vast influence of basketball endorsements has even carried over to other sports – for example, Nike’s website offers football and baseball cleats under the Lebron and Jordan brands. Nike has since made a concerted effort to corner the market by signing the game’s top stars to exclusive endorsement deals. To get an idea on just how highly the company values these deals, we can look to the 2014 deal made with Kevin Durant, reportedly worth $300 million over 10 years. And it gets better – just a year later in 2015, Nike signed Lebron James to a lifetime endorsement deal worth “north of $1 billion.” With deals like these, in addition to exclusive contracts with other stars such as Russell Westbrook, Kyrie Irving, Paul George, and retired superstar Kobe Bryant, it is difficult to imagine how any company could dream of challenging Nike’s dominance in the basketball shoe business.

This, however, is exactly what Under Armour set out to do. The athletic apparel company, which started with a simple mission to replace cotton undershirts with microfiber shirts for elite athletes, has since established itself as a viable challenger to Nike in the shoe game. How exactly did Under Armour set out to contest the company that once held over 90% of the sneaker market? Endorsements! One such endorsement in particular – Stephen Curry. In 2009, before he was one of the greatest shooters of all time, Curry entered the NBA under contract with Nike. When it came time to renegotiate, Under Armour saw its opportunity to leverage the power of endorsements and take a shot at Nike. Ultimately, in 2013, Curry signed a deal with Under Armour for just $4 million per year (a relatively insignificant amount in the world of celebrity endorsements, which Nike refused to match). Since then, Under Armour has made significant headway in the shoe business, and the original endorsement deal signed with Curry continues to be defined as nothing short of a “steal.” In 2016, one Morgan Stanley analyst estimated that the affiliation with Curry could be worth up to $14 billion to the company and its shareholders, on the back of a 350% increase in basketball shoe sales. And although Nike still owned the top 3 spots of endorsed shoe sales in 2017, Curry and Under Armour claimed the 4^th spot. As a result of all its success on the back of the 2-time MVP, Under Armour has signed Curry to an extension through 2024 in a deal that includes equity in the company. Following in the footsteps of Under Armour’s success, companies like Puma, Adidas, and New Balance have recently ramped up their endorsement efforts in the basketball world.

Endorsements as a Tool for Brand Revitalization

Companies like Under Armour, State Farm, Heineken, Capital One, and many more, use endorsements to grow their already healthy brands to new heights. But what about brands that have fallen from grace? How can brand managers revitalize a brand and return it to its former glory? In a previous post, I discussed how Levi’s leveraged stadium branding as a key component of its revitalization efforts; however, that is just one of many tools available. In fact, endorsements can also be an extremely effective strategy in rebuilding brand equity. While Under Armour is busy fortifying and growing its position in the shoe business, competitor New Balance is kicking off its comeback via an endorsement deal with NBA star Kawhi Leonard. The company hit its peak in the basketball world in the 1980s with its high profile partnership with James Worthy, but hasn’t released a performance basketball shoe model in about a decade. Even within the same industry and sector, we are witnessing endorsements being used as a multi-tool.

But the power of endorsements is not limited to the shoe business. Today, we are seeing another revitalization attempt from a brand that once defined the mobile category. Palm, the maker of the undeniably iconic Palm Pilot of the ‘90s, will lend its name to a new line of devices that recently launched. According to a recent Bloomberg article, two former Samsung employees launched Palm Ventures and licensed the Palm name from a Chinese manufacturer that now owns the brand (and also owns the BlackBerry brand). For Palm, there are 2 main obstacles to its revitalization efforts: 1) it must reintroduce itself as a player in the mobile device and/or wearable market, and 2) the brand managers need to sufficiently differentiate Palm from the immovable incumbents, such as Apple and Samsung. To make a splash with its relaunch, Palm has secured an endorsement deal with NBA icon (and Palm investor)… Stephen Curry. The Steph Curry endorsement is a great move towards achieving the brand reintroduction, particularly given his positioning in the Bay Area. His marketing efforts have the potential of creating brand awareness among one of the top target markets for mobile devices.

Palm originally found success as a mobile device for the business traveler, one of the first to offer reliable email service on the road. With Apple and Samsung now controlling most of the personal mobile device market, the new Palm phone is being marketed as a “companion device” to your existing smartphone. The tiny device is being positioned as a replacement for smartphones in certain situations where carrying a large device might be cumbersome – going to the gym or going out to dinner for example. Through this repositioning, the company is attempting to leverage its original brand equity as a mobile device pioneer, while laying the groundwork for new sources of brand equity as a companion device.

The revival of a brand shares many strategies and tactics with the accumulation of Brand Equity for an entirely new brand; however, certain nuances exist that can supplement the efforts for a once iconic brand. As someone with a vivid recollection of the desire to own a Palm Pilot (and someone who appreciates the art of the 3-pointer), I am rooting for the success of Palm. To this point, Palm has not been able to leverage its Curry endorsement quite like Under Armour, but a 4^th NBA championship might just turn the tides. Only time will tell if I’ll be checking my iPhone or my Palm underneath the table at future dinners.