The market value of many companies is decreasingly correlated to the value of their net tangible asset value. This is especially true of companies with strong brands. 2006 figures suggest that approximately 96% of the market value of The Coca Cola Company was attributable to its intangible assets. A similar observation can be made about companies absent strong brands, but that rely on patented innovation as their financial driver. On the Australian Stock Exchange the trend is particularly evident in the value of small technology start-ups seeking investment from the market to further develop early stage technology. At IPO, these companies often have a small portfolio of pending, and perhaps granted, patents that underpin plans to exclusively derive value in specific technology fields.
It is a requirement of a public company that it inform the Australian Stock Exchange (ASX) of any event that is likely to materially affect the share price of the company. When the value of such a company is largely found in its patent portfolio, compliance with the principles of good corporate governance suggest that a board should consider whether or not significant events in the intellectual property cycle should be disclosed to the ASX, and if so, when and how.
Are intellectual property milestones a significant event?
In early February 2010, the Australian biotech company Antisense Therapeutics after closing at 5c the previous day, announced prior to the opening of the bourse the next morning that it had been granted an Australian patent, and had published in a peer reviewed journal the previously known results of an early stage research project into potential uses of the patented product. Ten minutes after opening, the share price had soared to 20c. After movement of almost three times the total number of shares traded in the previous twelve months, the stock closed the day at 6.6c. The facts show that, at least for a short time, the share price of the company was materially affected.
Whether or not an event is significant arguably correlates to the maturity of a company and the size of its patent portfolio The volatility observed in the Antisense Therapeutics share price is more dramatic because of its relatively small share price per se – an increase of 15c is more material when the share price is 5c than when it is $5. Moreover, when a patent portfolio is in its infancy, or only very small, any patent grant is worthy of note as it is more likely to confirm that the company has the possibility of a viable future than when a company is already successfully in the marketplace.
Milestones in the patenting process
In most economically significant jurisdictions there are three important commercial milestones in the patenting lifecycle:
- a signal from a patent office that the subject matter of an application is patentable, and
- the expiry of the period during which third parties can use administrative procedures before the patent office to stymie the patentee.
In patenting strategy, often the hardest decision to make is if and when to actually file a patent application. This is because making a decision in the affirmative necessarily includes acceptance that there will be disclosure to competitors 18 months after patent filing for any innovative advance. Aside from the fact that the step of filing is merely the first on a very long legal road, announcing to the world that the countdown is on to competitors being able to understand, replicate or stymie the commercial direction of a business is not one that a company should make with any volume.
When a patent office concludes that the subject matter of a patent application is patentable, it will advise that the patent is granted (for example in Europe, Japan and the US) or accepted (Australia). However, this step often signals the commencement of a period in which third parties may oppose the acceptance or grant using administrative procedures. The period of opposition may be up to nine months long and any opposition that ensues can take many years to resolve. Albeit that the frequency of patent opposition is relatively low, premature announcement of patenting success may leave a Board embarrassed if that patent is then opposed.
There is no doubt that achieving patent grant is worth celebrating, particularly when it happens for the first time: the technology is worthy of the grant of an exclusive monopoly. On a global scale, whether or not the grant of an Australian patent is a significant event is questionable. This is mainly because holding an exclusive right in a territory with a relatively small market is not a surety of financial success. However, patent grant in a more commercially significant country, particularly if it coincides with market penetration or regulatory activity may be worthy of announcement.
Getting the disclosure right
If a decision is made to make an announcement, it is prudent to ensure that the content of the announcement is accurate, not least so that informed investors realise the significance of the disclosure, but also to prevent less experienced investors being misinformed.
Boards should understand the correlation between the patent claims granted and its company’s products as, inevitably, scope will have been ceded in the process of achieving patent grant. Some broad applications of the technology, for example, may no longer be covered by the patent claims. Boards must also take care to properly describe the right granted – one that excludes competitors but not one that provides a monopoly in the market. It must also consider the risk associated with disclosing less than full content about status as this may be misleading. Finally, a Board should ensure that the patent is properly identified since in a number of jurisdictions a granted patent is identified differently than when it is pending.
Intellectual property can be a powerful instrument. Recognition of this is long overdue in boardrooms. How to manage and leverage the accumulation of a portfolio takes careful consideration by senior management not least in order to ensure compliance with obligations that come with being listed on the stock market. Watermark can advise on all aspects of intellectual asset management in startup enterprises, and in listed businesses.