Patents valuation in core innovation: case study of a Brazilian public university

Universities as sources of innovation

When it comes to innovation, the literature provides several conceptual models reporting techniques, practices and policies which should be considered in relation to the development of new products and services (Longanezi, de Andrade Coutinho, & Bomtempo, 2008). The Innovation Law, approved in December 2004 and regulated by the Decree number 5563 of October 2005, has encouraged the development of studies at the Brazilian universities aiming more professional management practices in their TICs. This is a landmark for the production and dissemination of knowledge from academic environments (Leite, 2007).

In this context, universities have gained importance in the innovation process as they generate essential knowledge for application to the market of technologies. The innovation process involves various types of knowledge and technology from several sectors, including research institutes (Hsu, 2005). Such knowledge can be beneficial to the productive sector and adopted in the production of services, which may become an innovation over time (Garcia, 2006). For Ferreira, Ghesti and Braga (2017), technology transfer is one of the ways to establish partnerships between universities and companies in an open innovation model for both actors, despite the challenges involved.

New technologies can be consolidated through scientific knowledge, provided that the research produced at the universities is an innovation to be used for development and improvement of products, services and processes (Leite, 2007). In this context, Wirtz (2012) presents the legitimacy of knowledge embedded in the university environment by stating that universities act as an effective scientific system with the purpose of sharing the knowledge produced. In the current scenario, the use of knowledge production and innovation produced by universities may be considered a relevant factor to fill the gap in the market (Wirtz, 2012), thus making the university an irrefutable source of knowledge and development (Barreto, 1994).

The relationship between university and company can bring benefits to both sides. Haase, de Araújo, and Dias (2009) point out that universities developing research processes and teaching new technologies through a partnership with companies gain access to a huge amount of information and acquire further knowledge in their research centers.

For the companies, the knowledge acquired from other sources (e.g. universities) is seen as a valuable and intangible benefit. To explain this benefit, Eun, Lee, and Wu (2006) point out that universities are considered major sources for creation of knowledge and their relationship with business becomes an important issue.

Technology transfer at the university versus company’s relationship

The Brazilian scenario nodded at this relationship in 2004 through the publication of the law number 10.973, the so-called Brazilian Innovation Law. The law allows the installation of a TTO in scientific and technological research centers in the Brazilian territory (Brasil, 2004). For Garnica and Torkomian (2009), TTOs play a role in contributing to the innovation management in research centers, as well as to preserve and commercialize the knowledge acquired and technologies produced from academic research, meaning a relationship between university and companies. According to Abreu Paiva and Shiki (2017), when technology transfer involves a patent application, royalties are usually generated or the technology is granted, showing that one should be aware of the value of the technology transferred.

In São Paulo, the project called Consolidation and Protection Methods of Standards and Technology Commercialization (Pro-NIT/SP) (Inova São Paulo, 2016) aimed to bring closer the relationship between universities and companies by establishing a partnership with seven universities and research institutes. They are the University of São Paulo (USP), the State University of Campinas (UNICAMP), São Paulo State University (UNESP), Institute for Technological Research (IPT), Department of Aerospace Science and Technology (DCTA), Federal University of São Carlos (UFSCar) and Federal University of São Paulo (Unifesp).

To confirm the importance of the universities in the process of negotiating industrial property rights, Grynszpan (1999) highlights that systemic competitiveness relies on a set of basic factors enabling the companies to maintain sustainable competitiveness, which requires an innovative environment in which universities set high standards.

Patent valuation

The use of patents as a means of technology transfer is still a restricted channel because researchers publish their studies more than perform patent applications (Agrawal & Henderson, 2002). In terms of technology in the patents, Ferreira, de Souza, Silvão, Marques, de Faria, and Ribeiro (2020) pointed that when registering an invention or utility model, the inventor or holder of the new technology can prevent any procedure related to the object of the patent in order to detail the technical content of the protected patent. Finally, the authors emphasize that the protection of the invention by means of the patent, in addition to the gains generated to the holder and society, also enriches itself with the knowledge of a technology that, if not protected, would remain confidential (Ferreira, de Souza, Silvão, Marques, de Faria, and Ribeiro, 2020; Silveira, Schnorrenberger, Gasparetto, & Lunkes, 2017; Loiola & Mascarenhas, 2013).

The valuation of technology through patents is a complex task because technology can be intrinsic to the intellectual capital or to assets valued based on a historical basis, thus making it difficult to establish the future value of a technology (Boer, 1999). For Adriano and Antunes (2017), patents are a type of industrial property and the economic justifications for patenting inventions are based on stimulating and disseminating the scientific and technological development.

To guide the process of valuation, Pitkethly (1997) presents the main methods to evaluate the degree of sophistication in every way to value a patent, namely:

• Cost: methods based on the patent’s development costs.

• Market: methods based on the comparison with similar technologies available in the market.

• Revenue: methods based on expected cash flows.

• Discounted Cash Flow (DCF) over time: methods based on DCF taking into account the value of money over time.

• DCF based on uncertainty: methods based on DCF according to the risks involved in the cash flows.

• DCF flexibly: methods based on DCF combined with Decision Tree Analysis.

• Theory of Real Options (TOR): based on the Binomial model (BM) or Black-Scholes model (B-S).

In accordance to the vision of Parr and Smith (1994), the valuation of intangible assets methods seeks to calculate the monetary value of a patent. The methods are based on cost approach, market, and income. Table 1 shows the evaluation methods used to valuate patents in the present study.

For Santos, Solleiro and Lahorgue (2004), the valuation of technologies is related to:

• interest in the purchase or sale of a technology;

• interest in a technology license;

• decision to invest in R & D projects;

• prioritization of projects in a portfolio of alternatives; and

• disclosure of financial results for intangible assets.

Given the above, this study is based on the following propositions:

Case study

This case study was carried out in a selected TTO of a public university in the state of São Paulo and which represents a regional university center with the second highest number of patents in the last 15 years. All the patents for inventions and utility models registered at the National Institute of Industrial Property (INPI), an agency responsible for registering and controlling patents in Brazil, were analysed.

The Figure 1 shows the number of patent applications from public universities in the state of São Paulo in the period between 2000 and 2015. The university object of this study is represented in the chart as University B, which was chosen because it has one of the highest amounts of TTO assets in relation to financial results (i.e. R$1,937,305 in 2015). These results come from their intense interaction with industry and entrepreneurship, as well as from royalty payments for patent licensing. Moreover, the university has great experience in patent valuation and technology transfer.

University C was the only one whose TTO manager had academic and professional experience, with five years in the private sector as coordinator of scientific intelligence, totalizing eight years in activities related to project management of technological innovation and technology transfer to industry. Another reason for choosing the University C is that it uses the largest number of patent valuation methods used in this study.

Data collection

Data collection was performed by means of observational procedures, document analysis and semi-structured interview (Creswell, 2013). Observation was employed in a direct way, that is, from the personal contact with the respondents working in the TTO. Descriptive reports of the invention and utility model patents were analysed, in addition to internal procedures for elaboration of categorization documents and technology pricing related to the patent and according to the patent valuation methods used in this study. The direct observation, as appointed by Quivy and Van Campenhoudt (1998), allows the researcher to collect data without intervention of those involved in the study.

Document analysis was carried out based on TTO contracts and market studies. This process was conducted from the perspective of patent valuation studies and from the results of quantitative studies on technology transfer. Document analysis, according to Godoy (1995), justifies the analysis of documents inserted into an unexplored environment as data can be analysed and re-analysed for new or complementary explanations about the study.

The in-depth interview is semi-structured and based on the construct proposed by Theóphilo and Martins (2009), being conducted with the manager of the TIC who was directly involved in TTO activities and lasting 1 h and 45 min. The objective was to identify in the literature the methods of patent valuation and their applicability to value academic technologies, as well as factors facilitating and hindering the valuation of patents. Figure 2 shows the connection between propositions of the study, research question and theoretical basis for each proposition.

One of the strengths of the data collection for preparation of a case study is the possibility of using the information triangulation generated by data collection instruments as a research validation strategy. According to Yin (2015), triangulation of data enables the researcher to present adequate evidence to justify the search. For de Souza and Zioni (2003), the analysis of data provided from the triangulation process allows the researcher to have a further insight into the study, including aspects of the facts and possible actions by those in the research setting.

Data analysis

From the process of observation and analysis of documents, it is possible to identify whether the individuals have knowledge and routinely use practices and patent valuation techniques in the technology transfer process for industry in their scientific and technological institutions. The purpose of the observation process was to analyze how the TTO of a public university in the state of São Paulo use patent valuation methods in the process of assigning value to developed technologies based on five main data sources, namely:

1. valuation approaches and methods used and known by the universities;

2. applicability of the patent valuation approaches and methods;

3. patent valuation process in the context of the TTO's activities (i.e. structuring of the activity, employee roles and responsibilities);

4. importance of patent valuation among the activities of TICs in support of the decision making process and perception of benefits; and

5. factors facilitating and hindering the valuation of patents. The techniques have been identified and were subsequently grouped (Gil, 2002).

For Rubin and Rubin (2011), the information resulting from interviews help to identify a process as a discovery factor occurring in the study setting. In the case of this study, this information describes the TTO performing a patent valuation, which is the object of study. The data obtained from the interviews were recorded, transcribed and their contents analysed by using the content analysis technique, as described by Bardin (1977).

Data analysis allowed the significance of the answers to be grouped and then categorized. Next, the resulting categories were crossed, showing the construct of study, such as the TTO’s validation of technologies. According to Pita (2010), these methods of patent valuation are effective to measure the transfer of technology to patents until its use by the companies.

Valuation approaches and methods used by technology transfer offices

To establish the value of the investment, the TTO considers the values regarding the use of laboratories, non-research personnel involved in the study, business sponsorship contracts, use of outsourced employees, input required for the study, and scholarships for master's and doctorate degrees from the beginning of the study to the filing of the patent application. The costs involved in the patent licensing process are transferred from the university to the licensees, including future costs. As a result of the interview, it was identified that investments in research involves a cost of BRL 500,000, on average.

TTO is also based on the market royalty rate approach, in which book royalty rates for licensing intellectual property (Parr, 2012) are used in the technology license. As a result, and considering the use of royalty rates, 90% of the cases analysed have fees charged by the TTO for licensing patents, varying between 3% and 5% per sector, on average. These fees are collected on sales turnover of the patented products developed by the university.

After the licensing, the patent is placed in a public offering at the Brazilian Intellectual Property Office (INPI). The TTO used the income method only once throughout the study period, whereas cash flow discount method was used during the patent licensing negotiation process. Valuation calculation was based on the development costs, without considering future revenue expectations.

In terms of cost approach, the sunk cost method is the most used by the TTO. One of the highlights is that this method provides inputs that serve as parameters for the process of valuation, thus helping the TTO to have greater assertiveness in the composition of the data. On the other hand, the complexity in drawing up a list of inputs for use of the method by the TTO was considered an obstacle. This drawback contradicts the study by Santos and Santiago (2008a, 2008b), who state that the sunk cost method requires few assumptions for their application and cannot clearly reflect the potential of the technology to be licensed.

Applicability of the methods to value patents

With regard to the market approaches, the TTO applies the royalty rate method to the process of technology valuation. As positive factors for the TTO, one can highlight that the method has a large, respected and reasoned bibliography. The partnership established between the TTO and relevant international institutions (i.e. University of Georgia and University of Oxford) contributes to benchmarking and pricing of its technologies due to the royalties charged. These partnerships allow the TTO learn about new valuation methods and become more assertive in the licensing negotiations of patents and technologies.

No relevant factor was found in the income approach during the interview. However, several negative factors were detected. The DCF method is still little used and does not support the negotiation of new patent licenses. Another negative factor was highlighted in the interview regarding trading values. For the TTO, the values invested by using the DCF method are less reliable than those by using the cost and market approaches. This scenario is supported by the TTO, which highlights that the use of the income method for technology valuation is not justifiable for the client partner and university, resulting in unreliable projections (Killen, Hunt, & Kleinschmidt, 2007).

Factors facilitating and hindering valuation of patents

In terms of valuation methods, Table 2 shows the positive and negative aspects of each approach and method used by the TTO.

Comparison of research constructs

From the presentation of the results, Table 3 shows a summary of the main topics of the case study in relation to the research constructs.

In view of the results, the following question arises: How is this theme currently being addressed in international literature? In the last two decades, an expansion of patent applications occurred and thus the patentability of the inventions increased, which is observable with the inclusion of new areas (INPI, 2020). However, one of the significant challenges for managers of organizations with intensive research and development is to identify and, mainly, measure the assets related to intellectual property.

The primary function of the valuation is to find a balance between risk mitigation and fair price to be applied to the asset. For doing so, quantitative, and qualitative methods are used for valuation calculation and financial return (Silveira, Schnorrenberger, Gasparetto, & Lunkes, 2017). Despite its relevance, the literature on patent valuation is still limited as this subject has just recently received special attention from researchers, companies, and universities.

According to Soares et. al., (2018), the USA leads the ranking of publications in the international literature on intellectual property valuation, followed by China and Slovakia. Finland, Italy, South Korea, Australia, Poland and Taiwan are among the top nine countries with more publications. With regard to research areas, administration and economics account for most of the publications. This result is probably because valuation methodologies originate from management and accounting theories and models based on the estimation of companies' economic value, such as intrinsic value (DCF model) and company's market value.

From the present study, it was found that the different methodologies for valuation, mainly of patents, are based on theories of real options and hierarchical process analysis – which is based on income and royalties. An important fact is that few studies have presented methodologies for patent valuation in universities, thus demonstrating a gap which should be studied in more depth.

With regard to the main studies on the theme already developed in Brazil, one can cite those conducted by Ferreira, de Souza, Silvão, Marques, de Faria, and Ribeiro (2020), Adriano and Antunes (2017), Loiola and Mascarenhas (2013), Abreu Paiva and Shiki (2017), Ferreira, Ghesti, and Braga (2017), Tukoff-Guimarães et al. (2014) and Pita (2010).