As Fiona Stevens and I explained in our recent presentation at the Angels in MedCity Investor Workshop, IP due diligence should never be a tick-box exercise. A company’s decision as to whether (or not) to file a patent application should be carefully reasoned in view of their business plan and exit strategy. Here are some of the main pros and cons that come into play when deciding…
Maintain or create a monopoly
This is the primary function of a patent; it allows innovators to exclude others from the market. Investment in R&D can be protected from copycats and, in some circumstances, even from competitors who developed the same idea independently.
Protect market share
Subject to payment of renewal fees, patents can provide protection for up to 20 years. This can allow innovative companies to hold on to their first mover advantage for much longer than they otherwise might. Neurofen® still commands a premium price thanks to the brand awareness built up during the lifetime of the original ibuprofen patent, decades after it expired.
Generate a return
Companies which don’t have the resources or inclination to commercialise all their innovations, or perhaps to do so internationally, can still obtain value from patents on their ideas through licensing. Patent rights can also be sold, and can in fact constitute a large part of the value of some companies; the purchase of Motorola by Lenovo, for example, was all about the patent portfolio.
While the purchase value of patent rights can contribute to a healthy valuation, in some industries lack of patent protection on key products can decimate valuation. Pharmaceuticals and medical devices for example must be disclosed in detail to gain regulatory approval, leaving the door wide open to copycats if robust patent protection isn’t put in place beforehand.
Attract collaborators and/or investors
If a company has a patent that enables them to offer something truly unique, others in the field will inevitably want to get on board.
Patents represent a long-term financial investment. Obtaining a granted patent in one jurisdiction alone typically costs of order ten thousand pounds, over a pendency period of roughly one to five years. Renewal fees must then be paid annually to keep the patent in force. Budgeting in advance is therefore crucial.
To obtain a quality patent, of relevance to the company’s business plan, someone needs to take responsibility for ensuring the patent attorney drafting and prosecuting the patent application is kept up to speed as ideas develop and the business adjusts its direction.
Reveal trade secrets
This can be a deal-breaker. The bargain innovators make with government to obtain their patent involves allowing publication of their idea, in sufficient detail that others in the field could implement it. Publication occurs before the patent office have made their final decision on whether to grant a patent application, so there aren’t even any guarantees that value will result from the disclosure. If it’s possible to keep an innovation secret, i.e. if it can’t be reverse-engineered, then it’s worth considering whether trade secrets could be more valuable than patents. After all, if it’s not possible to figure out how something’s done from the end result, how could infringers be caught? In addition, if an innovation could potentially stay on the market long-term then the limited term monopoly provided by patents might not be enough – the CocaCola® recipe’s been kept secret for a lot longer than twenty years!
There’s no one size fits all approach to patent strategy. Technology companies need to have a clear understanding of why they have invested in their patent rights, or alternatively why they decided that they can do without them. At GJE we help investors to ask the right questions, and growing companies to give the right answers.
If you would like to discuss any of the points raised in this article, please contact Ruth Wright via firstname.lastname@example.org.