Innovis Technology - Capturing the Value of Intellectual Property

Historically, American companies have really only had three options regarding patents: commercialise, licence, or do nothing. But starting in the late 90s, donation of IP rights, particularly to universities, became tax deductible. Associate Professor of Strategy and Management Maurizio Zollo, and Prof. Jeffrey Reuer of UNC-Chapel Hill use the example of Innovis Technology's Dental Products (DP) division to illustrate how such donations are hardly without risk.

by Maurizio Zollo, Jeffrey Reuer
Last Updated: 23 Jul 2013

Historically, American companies have really only had three options regarding patents: commercialise, licence, or do nothing. But starting in the late 90s, donation of IP rights, particularly to universities, became tax deductible. This meant that the donor could benefit both financially and in terms of community goodwill. The only stipulation US tax authorities impose was that such arrangements must have no strings attached, fiscal or otherwise. The donor must agree to forego all legal rights to the intellectual property forever.

Associate Professor of Strategy and Management Maurizio Zollo and Prof. Jeffrey Reuer of UNC-Chapel Hill use the example of Innovis Technology's Dental Products (DP) division to illustrate how such donations are hardly without risk. Innovis, a diversified technology firm sells a broad range of innovative products, from aerospace to medical devices. The patent in question, for an orthodontic brace, involved technology that had performed well in prototypes. But the capital that would be required for its commercialisation brought its net present value below zero. The DP division had chosen to divert resources to more immediately appealing projects.

Innovis's VP of Finance wanted to use the orthodontic patent as a test case for better appreciating the valuation process behind all future donation decisions. The case's authors describe the various factors that needed considering regarding the patents, including the great difficulty in predicting whether the DP division might want to develop this and several other patents further in future.

The Vice-President of R&D had offered a very scary worst-case scenario: "let's say we donate this to a university and two years later the thing becomes the next hot technology. Guess what? - We just lost a billion dollar revenue opportunity and even worse, our competitors have a chance to grab it."

The case illustrates how "strategic value" considerations come into play regarding R&D issues such as intellectual property commercialisation. In this instance, the head of R&D was highly sceptical that "strategic interests" might well be superseding sound financial interests. One problem, however, was that the real value of holding on to the orthodontic patent was hard to quantify.

The patent registration terms meant that a commercialisation decision would have to be made within the next four years. Yet the competitive scenario was far from clear. Innovation in orthodontic dentistry was generally high risk - quite similar to the success rates of some biotech firms - and the risk-free rate of return was only five percent per annum.

The Vice-President of R&D struggled to make sense of the financial information at his disposal regarding the long-term potential of the patent, and needed to reconcile this with Innovis's broader strategic interests and priorities in managing its IP.

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