Patents provide a secondary market that encourages investment in new useful ideas

What’s similar about shares and patents?  They are both legally recognised and tradeable forms of property in an abstract concept (a company, a new useful idea) that encourage investment in that abstract concept by providing a secondary market.  Without them, investment in companies and in new innovations, would be curtailed.

Let’s spell this out.  Have you ever wondered about the share market(s), the stock exchange(s)?  Like really thought about them.  What on earth are they there for?  You pay money for a company, but you don’t pay it to the company, you pay it to somebody else who bought shares from somebody else.  Doesn’t it seem like a useless merry-go-round?   And the share price goes up and down like a yo-yo.  “Billions of dollars of shareholder value wiped from the ASX (or Dow Jones, or Nasdaq)”.   But is it really?  That loss of billions of dollars is extrapolated from a few trades made on a few shares, not on the sale of the whole company.

You’ll be glad to hear I have an explanation (smiley face emote).  The reason they exist (or at least one reason) is to provide an incentive for investors to invest directly in a company in the first place.  If a company needs to raise capital, then having their shares on a stock exchange means that the original investor (who has given money directly to the company) can get money back from their original investment down the track (on what is called a secondary market as the next investor isn’t buying the shares from the company).  It might be less than their original investment, or hopefully more, but at least they know they can sell them if they need money.  The stock market provides liquidity.  The same applies to private companies too, although it is not as straightforward to convert that interest in the company to money (to liquidate it).  If this framework did not exist, life would get a whole lot harder for investors to get a return on their investment, and it would be a disincentive for them to invest.

And investment is a good thing!

Now, let’s think about patents.  A patent encapsulates a new (useful) idea as a legally recognised piece of property.  That piece of property can be licensed or sold.  It can be liquidated by the original owner by selling it to somebody else.  If you want to invest in a new idea, the fact that you can sell the (patented) form of the new idea is an incentive to invest.  It provides liquidity for your investment.

That’s the way it works in early stage life sciences, a new idea for a life saving drug can be developed then patented and sold to a larger company who has the resources to take it further (perhaps to market).  The larger company can’t just poach the staff of your company to continue development because the patent is a separate discrete right.

Of course, it is often more messy than this.  The larger company may want to have access to the inventors as part of any deal, for example.  But that’s the essence of it.

So, patents facilitate an “ecosystem” where early stage investor can invest in a promising new treatment without the need to be able to raise capital to take a drug all the way to market, or to stay in it for the long haul.  They can exit at various stages along the path to drug development as the patent changes hands in the secondary market.

Next time you think about patents, perhaps how they are egregious monopolies that prevent the sale of cheap life saving drugs, or perhaps how they are demonstrations of the intelligence of their inventors, think about this.  They provide a secondary liquid market for those brave people who invest in risky new ideas which might otherwise never get off the ground.

 

 

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