Patent Protection

The stock market is accustomed to complaints about piracy in China and India. It seems to be a major concern for top corporations in music and healthcare. The matter is also the subject of intense negotiation and lobbying at the World Trade Organization, and when Executive Heads of State meet each other. Most stock market investors are content when told that business is flagging because patents are not honored. However, a question does come to mind - what about consumer goods, commodities, and generics? Companies without any workable patent do make consistent profits. All major airlines fly either Boeing or Airbus products, or have a mix of both. Hotel exteriors sometimes vary a bit, but the rooms and restaurants are not patentable! Is the patent story overdone?

Patents are welcome achievements for stock market investors with shares in a company, but it does not make sense for a business to be reliant on them for performance. The best innovation is that which cannot be copied, because it leads to sustained profits and growth. Pharmaceutical prices typically drop by some 90% on expiration of a patent. What will happen to stock market investments if a company’s R&D pipeline runs dry? This is not a theoretical scenario - Schering Plough is a stark example of such a phenomenon in real life. The very nature of cutting-edge technology in fields such as the biological sciences, and new materials, has taken directions in which obsolescence even before expiration of a patent is eminently possible. A majority of patents do not ever make it to market anyhow.

Stock market advocates of patent protection for profits should also reflect on the Merck story with Vioxx. No generic producer of Rofecoxib, which is the culprit active ingredient, has ever been sued for the alleged side-effects of the drug. The prestige of an industrial inventor carries a huge and on-going product liability. So watch out if your portfolio is patent rich because you never know when a maelstrom of class action suits will hit your net worth!

It is great if you can locate companies with patents and marketing excellence at the same time, but if you have to make a trade-off, then opt for branding skills, consumer intimacy, and spit-polish logistics! These competencies will last your entire stock market career!

 

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