Inside: - UW-Milwaukee

Faculty Research
Managing Intellectual Property as
Discretionary Investment Opportunities
Biopharmaceutical fi rms can achieve
the greatest success by managing
their intellectual property as
dis cre tionary investment opportunities
or real options, according to research
being con ducted by Edward Levitas,
Asso ciate Professor of Organiza tions and
Strategic Management. Levitas is working
on a stream of research related to fi rms’
inven tive activities, particularly in the con -
text of biotechnology-based pharmaceutical
fi rms.
Contrary to many popular opinions, a
patent does not guarantee the owner/
assignee a certain product or immediate
cash fl ows. In fact, evidence suggests that
about 90% of all patented technologies are
never even transformed into marketable
products.
Rather, a patent only provides the owner
with the right to exclude others from
using the technology for a limited period.
Upon patent granting, therefore, managers
16 OUTLOOK
Edward Levitas
do not obtain immediate clearance to
commercialize a technology, but only
obtain exclusive options on ways in which
to attempt to exploit the technology.
Patents as Real Options
Many academics and practitioners now
accept the idea that a fi rm’s value can be
“decomposed” into two basic components,
says Levitas — the value of cash fl ows from
its current operations and the value of
discretionary investment opportunities, or
options, embedded in the fi rm’s resources.
These embedded options provide the
fi rm with fl exibility to alter operations in
the face of environmental change.
For example, upon being granted a patent,
the fi rm is essentially given a number of
exclusive options — such as the ability to
attempt to manufacture a product based
on the underlying technology, the ability
to license the technology to another
entity, the ability to further develop the
technology into something more
potentially valuable, the right to defer
decision on the technology, and even the
right to abandon the technology.
Important Implications for
Management Practice
The distinction between current cash fl ows
and future options may seem pedestrian,
says Levitas, but it does have important
implications for management practice.
Most investments suffer from a degree of
irreversibility — such as building or
expanding research facilities — or the
inability to fully recover the investment if
plans change — which could occur during
the marketing or promotion of a new
pharmaceutical product.
When future conditions are highly
uncer tain, Levitas’ research indicates
that it is advisable to make a series of
incremental investments, when feasible,
rather than commit unconditionally at
the outset to a project. Assuming that a
project can be terminated after each
stage, incremental investing allows the
fi rm to avoid committing the whole cost
of the project upfront, and permits the
gathering of information over time to
assess whether the next investment (and
the entire project) remains feasible.
In short, he says, incremental investing
allows for the cultivation of options.
Options and
Biopharmaceuticals
Within the biopharmaceutical industry,
companies face a host of uncertainties
during product development. A company
may discover mid-stream that there are
low probabilities that the technology will
be safe and effective in humans. Or a
therapeutically effective treatment may not
meet the standards of societal acceptability.
Given such uncertainties, Levitas says that
managers of these organizations should
pay careful attention to managing their
fi rms’ portfolios of technology options.
Mismanagement of these options, such as
over-committing to a project in times of
uncertainty, can have drastic consequences.
For example, committing to the building
of a pilot plant to manufacture a drug for
FDA clinical trials before assessing the
effi cacy of the drug in animal models, or
before assessing the degree to which the
drug will be socially accepted, subjects
the company to considerable risk of
investment loss.