Newly Issued Patents & Picking Stocks

[EDCGadgetGeek]

I was just curious if anyone has tried buying stocks based on a company's newly published patent application or a newly issued patent.  Has anyone tried this, had success with this approach to picking stocks?  If it was your own client, it would probably be a type of insider training, but as a general strategy.  Just curious...

[Robert K S]

In order for that strategy to work to realize any long-term gains you'd have to have (a) advance or very early awareness of an allowance of a patent that would either (b1) permit the owner to own an existing or emerging market or otherwise (b2) become a dominant player in that market with significant competitive advantage which means (c) fully understanding the market, and sales trends in that market, (d) understanding the competitive advantages of the patented product or process, (e) having relative certainty that the patent could not be designed-around, (f) having relative certainty that the patent would not be found invalid, (g) having relative certainty that competitor IP would not preclude the patentholder's freedom to operate, and (h) having relative certainty that the patentholder would be able to bear cost of any litigation over the patent brought by competitors.  Any maybe other factors.

Because some of the factors I've outlined above deal with long-term effects, the strategy may be able to realize short-term gains even without being a sound long-term strategy.  But my feeling is that by the time any patent information is public, it's too late.    By the time the company puts out a press release (often before issuance) and you happen to read said release, it's fairly certain that the patent value has been priced into the value of the company's shares, making it too late to buy stock on hopes of gains in view of the patent.  The same is probably true as soon as the patent is published in the Federal Register or even earlier.  The likeliest scenario, in my opinion, is the stock value may rise slightly on press-release puffery, you invest, and once the market impact of the patent is more fully understood to be disappointing, the value goes down.

I'll also note that in the cases of most publicly traded technology companies, expected profitability and therefore share price does not ride on the issuance or denial/invalidity of any one future patent.  If it did, investing would be pretty risky anyway.

On the whole it doesn't seem like a sound strategy, even if it does, in theory, involve potentially more objective criteria than most stock pick strategies.

[lazyexaminer]

I recall reexam office actions, involving patents already having clearly established values, having a clear impact on stock prices. I've never seen anything about brand new patents having any significant immediate effect. I say immediate because there are so many variables, if not immediate it would be impossible to isolate the patent as the important variable.

[abc123]

I remember when one of Lilly's patents on Prozac was invalidated for double patenting, and the stock got "depressed" more than 30 percent the next day.

[Tobmapsatonmi]

I recall reexam office actions, involving patents already having clearly established values, having a clear impact on stock prices. I've never seen anything about brand new patents having any significant immediate effect. I say immediate because there are so many variables, if not immediate it would be impossible to isolate the patent as the important variable.

I remember Hricik at patentlyo predicting that equity firms might file reexams or IPRs to patents that had just won bigly in district court, having shorted the stock shortly before doing so.

I don't think his prediction bore fruit, but there were at least suspicions that the first case linked below was about that.
http://interpartesreviewblog.com/curious-case-new-bay-capital-llc-virnetx-inc/

There have been other shenanigans predicted or imagined.

https://www.patentspostgrant.com/the-rise-of-the-patent-damage-troll/

http://interpartesreviewblog.com/iron-dome-launches-ipr-missiles-drama-intrigue-ipr-world/

[abc123]

There was a hedge fund manager who shorted stocks while instituting IPR's against pharmaceutical patents a few years ago. From what I understand, the strategy appeared to work at first.

One problem with these types of cases is that a patent challenger may not be able to establish standing to appeal a decision they lost at the board.

[EDCGadgetGeek]

In order for that strategy to work to realize any long-term gains you'd have to have (a) advance or very early awareness of an allowance of a patent that would either (b1) permit the owner to own an existing or emerging market or otherwise (b2) become a dominant player in that market with significant competitive advantage which means (c) fully understanding the market, and sales trends in that market, (d) understanding the competitive advantages of the patented product or process, (e) having relative certainty that the patent could not be designed-around, (f) having relative certainty that the patent would not be found invalid, (g) having relative certainty that competitor IP would not preclude the patentholder's freedom to operate, and (h) having relative certainty that the patentholder would be able to bear cost of any litigation over the patent brought by competitors.  Any maybe other factors.

Because some of the factors I've outlined above deal with long-term effects, the strategy may be able to realize short-term gains even without being a sound long-term strategy.  But my feeling is that by the time any patent information is public, it's too late.    By the time the company puts out a press release (often before issuance) and you happen to read said release, it's fairly certain that the patent value has been priced into the value of the company's shares, making it too late to buy stock on hopes of gains in view of the patent.  The same is probably true as soon as the patent is published in the Federal Register or even earlier.  The likeliest scenario, in my opinion, is the stock value may rise slightly on press-release puffery, you invest, and once the market impact of the patent is more fully understood to be disappointing, the value goes down.

I'll also note that in the cases of most publicly traded technology companies, expected profitability and therefore share price does not ride on the issuance or denial/invalidity of any one future patent.  If it did, investing would be pretty risky anyway.

On the whole it doesn't seem like a sound strategy, even if it does, in theory, involve potentially more objective criteria than most stock pick strategies.

Robert, what do you think about once the patent nears expiration, or post-expiration?  This seems to make the most sense in biotech & pharma, like deciding whether to invest in a generics pharma company (e.g., Novartis' drug DIOVAN expiring this month...seems like a good time to invest in their competitors who produce generics...)

[Tobmapsatonmi]

Your question wasn't directed at me, but I don't see it as a sound investment strategy unless you had a "planets align" situation where a whole bunch of blockbusters were going off-patent at about the same time.  Otherwise, you just have a steady flow of blockbusters going off patent over time and generics picking them up.

The Diovan patent, by the way, I'm pretty sure expired many years ago - 2012.

Edit to add: Here's an article about it.  Looks like generics outside the US entered the market several years ago, but in the US there was a generic entry delay for at least a couple of years (article is dated 2014) because the generic maker was having trouble getting its act together on its regulatory filings here.

https://www.fiercepharma.com/sales-and-marketing/novartis-expects-a-generic-of-diovan-to-finally-arrive-april

[Tobmapsatonmi]

Another P.S. on this, while digging around on that "Fierce Pharma" website and others - looks like Sandoz Pharma is the 2nd biggest generic maker in the world by sales, only $300 million behind # 1 (Teva) and over $1 billion ahead of #3 (Mylan).  Sandoz is owned by Novartis.

http://www.pharmaceutical-technology.com/features/featurethe-worlds-biggest-generic-pharmaceutical-companies-4853429/

[Robert K S]

Robert, what do you think about once the patent nears expiration, or post-expiration?  This seems to make the most sense in biotech & pharma, like deciding whether to invest in a generics pharma company (e.g., Novartis' drug DIOVAN expiring this month...seems like a good time to invest in their competitors who produce generics...)

In theory, at least, a stock price is a measure of expected future returns.  If you know that a patent is about to expire and who will be producing its generic, that means the rest of the market does, too, and the stock price of the generics producer will reflect any expected future returns.  If the public information is already priced into the stock, it's not clear how you would expect to benefit by buying the stock.  The original patentholder could introduce their new-and-improved version, protected by patent, use their marketing muscle to get all the prescribers to switch over to that, and the generics maker could end up in a worse position than you thought.

[EDCGadgetGeek]

Robert, what do you think about once the patent nears expiration, or post-expiration?  This seems to make the most sense in biotech & pharma, like deciding whether to invest in a generics pharma company (e.g., Novartis' drug DIOVAN expiring this month...seems like a good time to invest in their competitors who produce generics...)

In theory, at least, a stock price is a measure of expected future returns.  If you know that a patent is about to expire and who will be producing its generic, that means the rest of the market does, too, and the stock price of the generics producer will reflect any expected future returns.  If the public information is already priced into the stock, it's not clear how you would expect to benefit by buying the stock.  The original patentholder could introduce their new-and-improved version, protected by patent, use their marketing muscle to get all the prescribers to switch over to that, and the generics maker could end up in a worse position than you thought.

I would be surprised if your average investor thinks about patents granting/expiring as an influence on a stock...

[Robert K S]

Stock prices aren't driven by "average investors".  Average investors are like average poker players in the casinos up against the sharps.  They sit down and get their shirts taken from them.

[abc123]

Aside from the nit-wits who pick stocks by throwing darts at a dartboard, of which there are sadly many, I think some investors in the pharmaceutical industry are aware of a companies' patent position, at the very least indirectly.

[EDCGadgetGeek]

Stock prices aren't driven by "average investors".  Average investors are like average poker players in the casinos up against the sharps.  They sit down and get their shirts taken from them.

Touché!