Beyond Asbestos and Patent Thickets: The Path to Successfully Commercializing Nanotechnology IP
By: Luca Escoffier, CEO, Usque Ad Sidera LLC; Efrat Kasznik, President, Foresight Valuation Group LLC
Is Nanotechnology an Industry or a Technology? How do investors perform due diligence of nanotechnology patent portfolios? What is the difference between the valuation and evaluation of IP in this emerging field? These, and many other questions, were discussed at the High-Tech Sector's Nanotechnology mini-plenary session at the LES Winter Meeting in Anaheim (March 13, 2012). This dynamic session was moderated by Luca Escoffier, CEO of Usque Ad Sidera LLC, entrepreneur, author, and international technology transfer expert. The multi-disciplinary panel included: Sarah Rouse, patent attorney with Katten Muchin Rosenman, LLP, whose legal practice is focused on nanotechnology and materials engineering; Ken Epstein, Principal of NewCap Partners, Inc., specializing in advanced materials and cleantech investment, and formerly Dow Chemical's corporate ventures manager for nanotechnology products; Lance Criscuolo, President of Zyvex Technologies, one of the first companies to successfully commercialize materials that take advantage of carbon nanotubes; and Efrat Kasznik, President of Foresight Valuation Group LLC, an expert in intellectual property valuation and strategy, and a lecturer at the Stanford Graduate School of Business.
Luca Escoffier kicked the panel off by asking each speaker to share a successful nanotechnology commercialization example. Ken Epstein started off by telling how he sold a company making composites that are used in cars. With new standards coming for cars he actually expects to see their product used in large volumes. Lance Criscuolo continued with his own personal experience with some of his early successes at Zyvex, using carbon nanotubes composites in sporting gear, such as baseball bats. Sarah Rouse was involved in launching a company, Keystone Nano, which started from her graduate research in quantum dots. Started at the incubator system at Penn State, the company now has 15 employees and is producing a universal platform for drug delivery and industrial pollution management.
Next, Efrat Kasznik provided an industry outlook supported bysome interesting data. According to a recent report by Global Industry Analysts, the global nanotechnology market is predicted to exceed US$30 Billion by 2015. While the US and Europe continue to remain the major geographic markets for nanotechnology industry until 2015, their respective market shares are expected to decline over the following years, as the share of Asia Pacific markets is expected to grow substantially. Governments of the Asia-Pacific region have embraced nanotechnology with much enthusiasm and have been more favorable to its development.
The panel continued with Escoffier interviewing each speaker as to their unique perspective on the issues. Sarah Rouse opened by providing some legal overview of the current IP landscape for nanotechnology-based inventions. She started by pointing out that "Nano" refers to scale, not a specific technology descriptor. She then described the current patent landscape as a "Patent thicket", where broad, overlapping claims are awarded to various inventors. That creates barriers to commercialization and can give rise to a very litigious environment - Claim drafting needs to be creative and have clear definitions. When asked by Escoffier about the potential implications of the AIA in the nanotechnology industry, Rouse pointed to the elimination of "best mode defense" in patent infringement cases as a change that is expected to have a significant impact on defendants in nanotechnology cases. The "best mode defense" in a patent infringement case maintains the patent is invalid because the patentee failed to disclose the best mode of practicing the invention. The conversation concluded with a question from Escoffier regarding best practices for patent portfolio due diligence. Rouse provided a list of guidelines, including:
- Complete verification of title
- Strength and scope of IP assets
- Foreign filing strategy
- Validity of IP assets
- What is in the public domain
- Existing license agreements: are rights exclusive?
- Aspects of joint ventures or sponsored research activities
- Regulatory issues
Rouse was followed by Ken Epstein, who provided his unique, large-company perspective at Dow, and current experience as a global investor. Escoffier started by posing the question of whether nanotechnology is an "industry", or just another technology. Epstein responded that, while nanotechnology is often perceived as a "technology", it can definitely qualify as a new industry based on his experience at Dow, and as an investor. It is sometimes hard to track nano-products because the word "nano" is not always mentioned due to some negative perceptions about nano-materials in the marketplace. From a commercial standpoint, Epstein finds that nanotechnology often has negative connotations and is left out of the product description and is therefore not highlighted as part of a product's success. Epstein then continued by describing his experience at Dow, where, at the highest point, there were about 150 nanotechnology people. The problem was that the company was science-oriented, not application-oriented. Nanotechnology was largely kept as internal research, with big challenges in figuring out successful business models. That being said, he believes that, once the model becomes application-driven, there will be some real solutions created. In response to Escoffier's next question on the real potential of the nanotechnology industry, Epstein estimated that many large companies are working on nanotechnology. However, he thinks that we are still at a very early stage and that scaling up could probably take about 30 years. He further predicts that there will be some really great advances made in the field of medical devices, and that VCs will only fund nanotechnology if there are applications in medical devices.
Next was Lance Criscuolo, talking about his experience at Zyvex, comparing it to a large company, like Dow. While addressing Escoffier's question about Zyvex's key to success, Criscuolo named the combination of luck, timing and a working product. Criscuolo explained that, as opposed to Dow - which has the resources and channels to commercialize a product - Zyvex has speed and agility. That being said, as a small company it can afford far fewer mistakes. In his view, nanotechnology seems to take a very long time to materialize commercially due to the qualification process. As an example, it takes 10 years to qualify a new material for use on an aircraft. Escoffier continued with a question on how difficult it is to comply with national and international regulations for a nanotechnology company. Criscuolo commented that perception makes it difficult, as regulation focuses on negative aspects of nanotechnology (carbon nanotubes, as an example, as still associated with asbestos). There are also no good guidelines for international regulations, which makes it even harder to get to market.
Efrat Kasznik, the final speaker, discussed the challenges associated with the valuation and evaluation of intellectual property in nanotechnology. Escoffier's first question related to the approach to valuing intellectual property in an emerging field. Kasznik pointed out that, when dealing with products that are years away, there is no easy way to model cash flows and so a lot of assumptions need to be made on future events. She identified the main challenges as: lack of reliable data (especially projections) and dealing with modeling of the risk associated with technology development. Escoffier continued with a question about the difference between the valuation and evaluation of intellectual property. According to Kasznik, an "evaluation" involves a non-quantitative assessment of factors that are specific to the technology (development, market, regulatory) or the IP (quality of patents). A "valuation" involves the assignment of a precise dollar value to an IP portfolio. In situations involving financial reporting, tax reporting, litigation and other compliance reporting situations, there has to be a dollar value assigned to the IP. In emerging industries like nanotechnology, the need for an evaluation is becoming a critical part of the process of assigning a value to a patent portfolio, because any dollar value is subject to all the risk factors involved in the commercialization, regulation and market adoption. It is therefore recommended to apply novel techniques in which a quantitative assessment (the valuation) is coupled with a qualitative one (the evaluation) in order to achieve a valuation that can take into consideration all the variables that characterize the development and commercialization of nanotechnology products and processes. When a precise dollar valuation of IP assets is required in the above mentioned compliance situations, a thorough evaluation process can be the key to improving the accuracy of that number.
Finally, Kasznik addressed Escoffier's question on the role that IP valuation plays in supporting technology transfer in emerging industries. She listed the following transactions as some of the key mechanisms for monetizing IP assets: IP licensing, patent sales, contribution of IP into joint ventures, technology spinoffs into new companies, IP litigation and IP asset liquidation. Companies operating in mature industries, like telecom, have the entire spectrum of these transactions available . for monetizing their IP assets. Patent sales and litigation are usually the signs of a mature industry and are part of the litigation/enforcement cycle. Licensing and spin offs are more common in nascent industries, like nanotechnology, where the valuation is based on a manufacturing model and not on an enforcement model.
In conclusion, the main takeaways from this very interesting and dynamic session were the following: (i) while nanotechnology is often perceived as a "technology", it can definitely qualify as anew industry based on the examples of product developments from the panel (ii) the current "Patent thicket", where broad, overlapping claims are awarded to various inventors creates barriers to commercialization and a host of legal challenges: (iii) nano products and processes have actually been developed and commercialized by large (Dow) and small (Zyvex) companies, without always mentioning the term "nano", as that term is often associated with negative connotations; (iv) Asian countries are leading the way – together with the U.S. - in nanotechnology research with huge investments and ambitious projects underway; (v) nanotechnology regulations are still emerging, especially at the international level, which creates lots of uncertainties regarding the commercialization of products in this space; and (vi) valuing nanotechnology IP may be challenging as the regulatory and market uncertainties make predictions very difficult. It is therefore recommended to apply novel techniques in which a quantitative assessment (the valuation) is coupled with a qualitative one (the evaluation) in order to achieve a valuation that can take into consideration all the variables that characterize the development and commercialization of nanotechnology products and processes.