If you think about it, a large proportion of the value of any company lies, not with its tangible assets, but with its intellectual property (IP). That is particularly true of pharmaceutical, technology, and consumer goods firms. A recent article distributed by Ocean Tomo makes the case that IP represents an asset class in itself--and an underappreciated one at that.
Ocean Tomo has developed a proprietary method for evaluating patents held by companies and their value. With this method, they can then rank firms (and their stocks) based upon the quality of their patent portfolios. The Innovation Ratio for each firm represents the value of its patents divided by its book value. The Ocean Tomo 300 Index (OTP) is a diversified index of stocks that score highest in their Innovation Ratios. The idea is that, over time, such an index should outperform standard market averages, as companies profit from their intellectual property.
If you scroll down on the Ocean Tomo Index page, you'll see menus that enable you to enter the names of companies and see their specific patents and their Average IPQ score. The companies are identified by sector, so that you can use the information for stock picking within industry groups. At an even more sophisticated level, you could use the information to help pick stocks for pairs trades, buying shares of high IPQ firms and selling those with inferior innovation ratios.
We tend to think of emerging markets by nationality and geography. It may be, however, that the most promising emerging markets are those based on new ideas and technologies.
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1 comments:
Brett ~
Your post addresses an important area of investment research. I hope it receives the attention it deserves.
While I am not overly sanguine about the trading of intellectual property on a short-term basis, the validity of analyzing the quality and duration of patent portfolios is a proven component of long-term investment strategy. It is, in fact, part of the data my wife and I use when designing our family’s long-term holdings.
Here is one example of examining patent portfolios applied to an investment strategy:
For decades major pharmaceutical companies have been thought of as a defensive play against market downturns. Beginning approximately two years ago this ceased being the case. Why?
It turns out that examining their patent portfolios shows a decline in the filing of or acquisition of near-term applicable patents, and thus a thinning of development pipelines. Further, it shows that as blockbuster drugs age and are not replaced by patent-protected ones, company cash flows are reduced by generic competition.
Analysis of threat to cash flow created by reduced patent portfolios and generic competition reveals the following exposure to generic competition between 2008-2012, given as a percent of 2008 pharmaceutical revenues:
MRK: 40%
PFE: 39%
AZN: 38%
BMY: 33%
LLY: 25%
GSK: 23%
WYE: 21%
NVS: 17%
JNJ: 10%*
* JNJ is shown as against total revenues.
My wife, who is the MD of healthcare investment banking at a NYC boutique, developed the data.
I hope this example helps my fellow TraderFeed readers see the importance of the topic you have raised in this post, if not to immediate short-term trading strategies then certainly to their long-term investment planning.
Adam.
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