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TRENDSPOTTER: Why the Markets Love a Patent

IF I CAN be so presumptuous, you have read my previous column and have taken my advice to stick to your knitting and develop products. “Now what?” you may ask.   Protection – no, not from nasty STDs, but from competitors and poachers. While protecting intellectual property might cost you money in the short term, it could save you big bucks in the long term and make your enterprise more attractive to potential investors.

So, you meet with your intellectual property counsel and you begin the arduous process of obtaining patent protection for your product. After writing, waiting, and negotiating with the examiner at the Patent and Trademark Office you are awarded the patent with the sought after claims. What does this give you other than an impressive wall hanging?

Patents are important because they give you some claim of ownership to a particular product or invention. Thus, they give you some form of market exclusivity. For the most part, these are correct assumptions. But remember the courts may ultimately have the last say over the validity of a patent (or the claims contained therein). What I mean is, if your patent is challenged, a judge and/or jury will determine the strength (or validity) of a patent.   If you are fortunate enough to emerge victorious after the time and expense of defending your patent in court, then consider yourself protected. But what is that protection worth?

Well, it gives you a product that you can sell exclusively for a period of time. Sometimes this can give you a lot of value. If your claims are strong and broad then you might also be able to stop competitors from getting around your patents, as Amgen has done to Transkaryotic and Affymetrix is attempting to do to in the microarray arena.

Since time immemorial (or at least for our industry sector, since the first genes were patented) Wall Street has attempted to value a patent. In the days of old, a news release of an allowed patent was sure to lift a stock. Today, these announcements are so common (and expected) they do not even warrant a yawn.   Though there are those on Wall Street (myself included) who do look at issued patents before writing a check.

I examine the breadth and depth of patents (most times with the assistance of outside intellectual property counsel) and closely examine the claims, particularly when there is much competition in a given space. Too few patents in my analysis of a company are bad; the construction of an intellectual property fortress is good!    Though the dollars spent in building this fortress are not necessarily reflected in determining a company’s valuation.

Court battles also attract investor attention. Market prognosticators (many with the help of patent and litigation attorneys) attempt to guess the outcome of court cases. Sometimes these predictions are as accurate as tarot cards or a coin toss. But, investors have been known to place large bets on the outcome of these cases, sometimes with very negative results. This is just one of the many games of chance in that great casino called Wall Street.

What else does Wall Street like about patents? Broad coverage. When you get to the stage of filing your application internationally, file for as many countries as you can afford and then add some more to the list. Learn from the makers of anti-HIV therapies. They did not file for protection in many developing countries mistakenly thinking who would make knock-offs in those markets? Surprise!   Many of these countries have the highest rates of HIV infection but do not have the money to buy many of the drugs manufactured in the US and EC.

Since many of these drugs are not covered by patents in those developing countries, local drug companies have copied the compounds and have commenced manufacturing these drugs. How long will it be until they find their way back to the US and EC through black market channels? In time, this will have an impact on the patent holders bottom line, both in lost sales and increased price pressure. This will equate to a negative impact on their stock price.

So what is the take home message? Even though obtaining strong patent protection will not have an immediate impact on stock price, over time it will, so spend the money. Seek out intellectual property counsel that has a track record in your space, and, if they have successful litigation experience, even better. But to paraphrase Jack Welch, you do not want to be in a market where you are not first or second.   No matter how much you spend, patents will not buy you market share if your product is late to market.

Ira Leiderman is managing director of the Palladin Group, a New Jersey-based investment management firm. He was previously a senior healthcare banker at Gerard Klauer Mattison. You can e-mail Ira at [email protected] .

TrendSpotter is a weekly column that focuses on how trends in politics, patent law, and the US and European markets affects the genomics industry. The column appears every Friday. Next week Robert Goldberg, a senior fellow at the National Center for Policy Analysis, will write about how public policy will affect the genomics sector during the Bush administration.

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