A Few Thoughts About IP and Company Value

As the value of intellectual property (IP) becomes an important part of many company’s valuation, interest grows in how IP can affect a company’s share price or ability to attract financing.

If a company’s value is connected to its IP, its loss can result in stock price changes. For example, shares for drug companies Moderna and Pfizer dropped after US President Joe Biden voiced support for waiving patent protections on Covid-19 vaccines. Another example of IP impacting a company’s value is when a firm acquires another for its IP, as when Amazon bought MGM Studios for US$8.45 billion to gain access to its movie catalog.

A Convoluted Connection

However, establishing a connection between IP and valuation is not straightforward given the myriad legal, business, environmental and technical factors influencing the value of IP and thus the value of the whole company.

Businesses and academics have studied prosecution data and other statistics to better understand the connection between valuations and patents. A growing number are questioning the common wisdom that patent volume is a good proxy of a company’s innovation. Not surprisingly, a cottage industry of service providers are now analyzing company patents and following patent grants to predict technology or product trends. But patent-focused analysis tends to be relevant only to those involved in technical industries who rely on patents to protect their IP, such as IT, biotechnology and the like.

Is It The Combination That Counts?

A small number of academics, and even two legally-trained professionals in Hong Kong, note that gross figures (the total numbers of patents owned by a company) offers an incomplete picture about whether management can effectively use IP rights to grow a company’s value. They note that focusing on a particular innovation area can be far more successful than taking a scattershot approach, dabbling in many technological areas but mastering none.

They believe that watching how a company supplements its technological focus in patents with other IP rights, notably trademarks, is a better clue to its internal coordination and the management team’s ability to grow the business. These academics are building an index on technology companies to monitor these activities.

If you require advice on any of the issues raised in this briefing, please contact the authors below.

Ron Yu Ron Yu teaches or taught intellectual property law and Fintech at the Chinese University of Hong Kong (where he also does research), the University of Hong Kong, and the Hong Kong University of Science and Technology.

*This article is the IHC Magazine’s off-shore update for July 2021 issue. Click here to read the full magazine