Real business value
It is essential chief executives and their senior management get to grips with intellectual property (IP) and that investors are savvy enough about it. Companies are good at creating valuable ideas, but they sometimes lack the understanding on how to formally protect and further monetise them.
Great IP is born from excellent research and development. In the pharmaceutical industry, where my firm operates, the difference between the market capitalisation and the book value of many businesses is immense. In the last decade, large companies such as Johnson & Johnson, Pfizer and Merck have frequently seen their capitalisation stand at two or three times book value.
Many industries witness the same effect. Last summer, real recognition was given to the maturing nature of this issue, when the US government changed how it records gross domestic product, to include spending on entertainment and artistic items. This change significantly increased the financial impact of the creative industry on the American economy.
The GDP change was introduced only months after the US Patent and Trademark Office recognised that IP-intensive industries support at least 14 million jobs and contribute more than $5 trillion (£3 trillion) to the US economy – more than a third of its GDP. That economy, like many others, has long been transforming from one based on industry to one based on knowledge, ideas and information.
As the return on investment of physical assets has declined, the return on ideas has soared. By aggregating, analysing and sharing information from R&D, organisations can make much quicker and more informed decisions that will lead to direct financial improvements. On average, for every dollar spent on research and development, around eight times more is returned (up to $32) than from the same spending on new machinery, according to a Columbia University study.
In the pharmaceutical sector, large businesses remain committed to maximising their research through IP licensing. The number of such deals in recent years has remained high, at around 800 a year.
As the return on investment of physical assets has declined, the return on ideas has soared
Innovative ideas must be patented or be under trade secret in order to protect them and to avoid the loss of a market in which a business has been built.
In essence, IP is quickly becoming the new global currency. At Phoenix IP Ventures, the company I founded with my two partners, we fully understand and work with this reality daily, primarily in the life sciences sector. We have developed a private equity business model that enables us to monetise the inherent value of IP and its arbitrage opportunities.
The only methodology for operating successfully in maximising and selling IP investments is this: to have a deep knowledge of and deep contacts in the industry, to focus on discovering assets that have been neglected or not fully exploited, to manage risk, and to exit successfully.
The companies that do the best, in terms of trading IP-protected assets, will succeed and prosper. Maximising IP is a complex area that requires real skill, but it is also an area of fantastic opportunity.
Find out more about the approach, team and portfolio of Phoenix IP Ventures at www.phoenixipv.com