A few clicks below the radar, firms are making progress in the monetization of intellectual property, through pooled patent sale/license-back structures, a quasi-securitization technique that has been developing over the past two years - though only one or two known trades have actually closed.

Principals at Colorado-based boutique TAEUS, which specializes in intellectual property "engineering" and litigation, say that interest in sale/license-back structures has increased substantially over the last year. TAEUS currently has five deals in its pipeline, ranging from $100 million to $500 million in size.

The transactions are similar to real estate sale/lease-back deals, in that the investors (or investor) are essentially taking on the corporate risk of the entity selling-and-licensing back the patents. For this reason, the sale/license-back deals will tend to involve larger, rated credits, generally in the double-B and up category, said Ray Throckmorton, a managing director at TAEUS, adding that his firm is seeing between 25 and 30 companies seriously looking at this structure. Unlike straight debt, however, the payments are accounted for as royalty payments, and there can be various tax benefits associated with the transactions as well.

As for pricing, "We're looking at rates right now that are within 50 basis points of their commercial borrowing rate," Throckmorton said.

Patent sale/license trades imminent

TAEUS is near closing a $500 million, 10-year deal for a high growth, technology firm with products and services in the fields of consumer electronics, domestic appliances, personal care, semiconductors, medical products. The transaction is expected to pool 900 of the company's 60,000 portfolio of patents.

Other clients with pending deals include a semi-conductor company one of the top-five globally, Throckmorton said a paper, pulp and chemical company, and a global telecommunications company, looking at a 10-year, $250 million to $300 million deal. That company owns 6,200 patents, though the portion to be pooled has yet to be determined.

According to Throckmorton, part of the process is sorting through a portfolio of patents to find the ones most suitable for the sale/license-back trade, theoretically a combination of patents already generating license revenue and patents expected to generate revenue in time. Like securitizations, the transactions are structured so that the expected cashflow from the collateral is greater than the license royalties due the trust. The seller, however, makes up any shortfall in cashflow, and pockets any excess.

"If a company wants to put up all of their patents, say 60,000, for, say, $10 million, we know it's going to be enough patents to cover the $10 million plus the override that we build in," Throckmorton said. "We will go ahead and do the sale/license-back with the cash up front, and then after the fact, value the individual patents."

Also, these deal models incorporate a special purpose entity to lift the assets off balance sheet. According to Throckmorton, the SPE would satisfy the potential 10% equity rule.

"If you think about it, companies spend millions of dollars on their R&D, and right now show nothing on their books for it," Throckmorton said. "If you monetize your assets, or securitize your program, you'll have millions of dollars on your financial statement, which you don't show to shareholders today."

One of TAEUS'competitors working in this field is a firm called TEQ Development, based in St. Louis, which has closed at least one sale/license-back.

Building a licensing portfolio

"The recognition that patents are assets, and can be valued like bricks and mortar, is really something that has developed in the last few years," said Patricia Martone, of Fish & Neave, a law firm specializing in intellectual property. "And more and more companies recognize that they can be getting more value out of their patents."

At the core of the patent monetization is licensing strategy, which often involves continual litigation. According to Martone, it was not until the mid 1980s that companies began to recognize patent licensing as a source of substantive revenue.

"The traditional purpose of getting a patent is to have market exclusivity, sort of building a fence around the product," Martone said. "For these companies, their revenue generation is from selling products."

Texas Instruments was one of the first companies to incorporate patent licensing into its business model, as it had developed a large portfolio of patents that it wasn't necessarily using anymore. TI began actively searching for companies infringing on its patents, then litigating a license agreement from them.

"They were the first major company to generate large amounts of revenue from their patents," said Bruce Berman, an IP specialist/analyst at consulting firm Brody Berman Associates, and editor of From Ideas to Assets, a collection of essays and research on IP. "The idea of creating high margin revenue from patents is not totally new, but enforcement is key. The TI program began in the mid 1980s, when the company decided it could make more money from licensing its patents than selling products. It was considered to be pretty controversial."

Since then companies such as International Business Machines (IBM) have been building substantial portfolios of patents and reaped revenue through licensing, enforcement and infringement litigation.

Pharmaceutical patent securitizations less likely

Securitizations of IP assets, however, have been few and far between. To date, one of the only visible patent securitizations was BioPharma Royalty Trust. In BioPharma, Yale University securitized the revenue stream associated with D4T, brand name Zerit, for approximately $60 million in proceeds, managed by West LB.

Zerit is an HIV medication which Bristol-Myers Squibb Co. licensed from Yale in the late 1980s, paying the university a cash stream as a function of the overall revenue that the drug brings in annually.

Interestingly, according to Martone, pharmaceutical companies, which often hold valuable patents, seem to be more interested in selling drugs than generating licensing revenue from their patents. "They're interested in revenue generation from sales and not licensing," Martone said.

On the other hand, there's a growing trend of research companies that base their business models on patent licensing.

"Those companies develop their own patents or buy patents from other companies, usually to complement their own technology," Martone said. "They exist solely to do licensing and research and development. That's their business: licensing."

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