Patexia Insight 82: Most Expensive Patent Portfolios
A few weeks ago, for the first time, we compared the cost of patent prosecution for Apple’s top firms (Patexia Insight 77). One of our readers asked if we could find any correlation between the cost of development of a portfolio and the actual value of that portfolio. His point was, if a company on average invests more capital on developing a portfolio, that may be an indication of a potential higher value for that portfolio.
For example, if we consider a pharmaceutical company that is working on a COVID-19 vaccine, we can associate the financial variables related to its innovative vaccine development as follows:
Investment: Research & Development Investment
Investment: Patent Filing Expenses
Investment: Patent Maintenance Expenses
Return: The actual market size captured by the vaccine and protected by the patent
While the first three items (initial investments) are easy to calculate and to show on a company’s balance sheet (categorized under R&D and/or IP expenses), the return on those investments or the real value is opaque in the beginning. It is an item that corporate finance or audit committees have been unable to come to an agreement on how to standardize or measure properly to reflect on the corporate balance sheet.
The challenge is figuring out the potential market penetration and growth rate for the product that a patent protects, once the product (e.g., COVID-19 vaccine) that the patent covers is ready to enter the market.
The difficulty is not only related to estimating the market size, but also the risk associated with design arounds (e.g., other vaccines developed in parallel by other pharmaceutical companies for COVID-19), or the possible invalidity of the patent, which all can reduce the market size overnight.
Every patent designed to protect a revolutionary product is similar to a startup. It is hard to value it at the time of invention, because the market size is zero, many unknowns exist and the risk is high.
But as time goes by, some of those uncertainties become clearer as the product penetrates the market. As competition tries to catch up to capture the rest of the market, it becomes easier to value the patent based on known accounting methods, such as the discounted cash flow model.
Correlation Between the Value and Cost of a Patent Portfolio
Our goal is to determine if there is any correlation between the value of a patent portfolio and its cost of filing. We think visionary companies know ahead of time which idea or product has a higher potential or is more promising. More resources usually will be allocated to such ideas, because the management believes they are worth the additional R&D investment and a better level of IP protection.
To verify our hypothesis, we can reverse look up the patent portfolios with the highest cost of prosecution. We then can examine the company, investors, or product lines to determine if there was any justification or insight behind the higher investment.
Identifying Patent Portfolios with the Highest Cost of Prosecution
To identify the portfolios with the highest cost of prosecution, we need to compare the average cost of prosecution for each patent portfolio. We decided to use the list of the top 1,000 most active companies that we published in our 2nd annual Patent Prosecution Intelligence Report in early March. We chose to sort them by the average cost of prosecution per patent portfolio, using the model we developed at Patexia.
We used Patexia Patent Prosecution Analyzer to find the cost of prosecution for each patent. Then, we calculated the average cost per portfolio for the top 1,000 companies with the most number of patents between 2014 to 2019.
Because design patents do not necessarily require the same amount of R&D investment as utility patents, and they often are not the core value drivers in patent transactions, we decided to exclude them from this study. As a result, we ended up with a total of about 1.6 million US patents issued to the 1,000 most active companies from 2014 to 2019.
To measure the total cost of portfolio development and maintenance, we use three different variables: law firm fees, USPTO fees, and maintenance fees. The law firm and USPTO fees usually represent the upfront cost for portfolio development. They serve as a metric to measure the importance of a particular portfolio from the perspective of the patent owner at the time of filing.
Comparing these costs between companies, or between different portfolios of the same company, covering different business units or products (e.g., a histogram of prosecution costs), can reveal important information about different products and how management perceives their values.
In rare cases, this prosecution cost comparison and analysis may also show lack of control or mismanagement of an IP department. It may reveal poor performance on the part of the company’s outside patent counsel.
Comparison of law firm and USPTO fees for different portfolios usually reflects the value and importance of a patent portfolio and associated products from the perspective of the management at the time of filing, while the maintenance fees reflect the value and importance of them throughout the life of the products and patents.
For example, if a patent owner decides to abandon a patent by not paying its maintenance fee, it may indicate that the owner does not see any value in further maintaining its IP right. In other words, it may show the market penetration for the idea or product is very limited, perhaps insignificant.
Law firm and USPTO fees have a connection. For example, if additional USPTO fees exist for a particular action, such as RCE, appeal, extra claims (above 20) or more independent claims (more than three), et cetera, it means the patent attorney has to do more work on the application, which drives the law firm fees higher as well.
The law firm fees will increase, more or less, with the same pace as the USPTO fees. So to compare the relative cost of prosecution, it is enough to only compare the USPTO fees. That should provide us with clues about the cost of portfolio development for different companies.
We ignored the maintenance fees for this study, because the subset of patents we were looking at were very young (issued between 2014 and 2019). In addition, at the time of filing, the patent owner cannot have enough knowledge about the market penetration of the product.
The following bar chart shows the top five companies with the highest cost of patent prosecution, based on the average USPTO fees per portfolio for the top 1,000 most active companies.
Intellectual ventures (IV) is first on the list with average USPTO fees of $10,688 per patent. This only covers patents where IV was the original assignee. It does not include any portfolios the company acquired.
Aside from aggressive patent purchase programs the company had in early 2000 to 2010, IV also formed many entities and funds involved in organic invention and idea development. Looking inside those entities, we noticed that Elwha LLC had the highest cost of prosecution, based on our model. The entity seems to hold a wide range of inventions, spanning from a high-tech football helmet by Bill Gates and some other inventors to ideas around CRISPR gene editing.
The second company on the list is another holding company, formed to hold Yahoo’s patents after it was sold to Verizon. Excalibur IP served as a vehicle to hold 4,000 Yahoo patents. The prosecution and portfolio development for some of those patents and applications continued after Verizon acquired Yahoo under Excalibur. The entity later looked into ways to monetize its IP assets.
The next three companies on the list are all pharmaceutical and biotech companies. Vertex Pharmaceuticals, Ionis Pharmaceuticals, and Genentech paid around $7K per application on average for the USPTO fees.
We expected to see pharmaceutical companies among the companies with the highest cost of prosecution, as the nature of high-tech and bio-tech inventions are fundamentally different. A single pharmaceutical patent can be behind a blockbuster drug with a multi-billion dollar market, while, at the same time, it may take thousands of patents to protect a feature-rich high-tech
We can prepare the data for this study and the above table for any group of companies, and we can slice and dice the data from different angles. For example, by looking at the histogram chart for the cost of a portfolio (instead of average), we can find out if a few outliers in the portfolio were super costly, or if, on average, the portfolio cost was higher than usual for each application.
To gain competitive intelligence, companies can look into cost analysis of their competitors to better understand how they allocate their R&D and IP budget to different business units or product lines. For example, we can do the study across all art units or IPC codes to understand the most important technology areas inside a large patent portfolio.
In the coming weeks, we plan to expand this study and determine if any correlation exists between the cost of building these portfolios and the value of the underlying assets. For value assessment, we will use the Quality Metric we have developed at Patexia and available through Patent Prosecution Analyzer to measure the quality of patent portfolios for companies in our latest version of the Patent Prosecution Intelligence Report.
As Warren Buffett says: “Price is what you pay. Value is what you get.”
Disclaimer: The raw data for this study was obtained from public sources such as USPTO, PTAB, and PACER. Patexia has gone to great lengths to provide valid and accurate analysis based on this data. However, Patexia does not guarantee 100 percent accuracy nor take any responsibility for possible losses caused by the use of information provided in this study.