V13: Patents & Intellectual Property Rights — how to analyze it

A patent = a monopoly on a solution for 20 years. It is the strongest moat there is. Pharmaceutical companies live on this. Without patents, competitors can copy overnight.

This is V13 — Patents & Intellectual property rights in the AKM1 model: one of the 20 variables that together determine whether a company is an institutional quality stock or a company of stories. In this article you get the variable explained, how to calculate it yourself, and how three of history's greatest investors would have interpreted it.

Why the variable exists

The origins of patents can be traced to Venice in 1474, when the first patent law was enacted — the 'Parte Veneziana'. The purpose was to attract craftsmen to the city by giving them a 10-year monopoly on their inventions. England followed with the Statute of Monopolies in 1624, the USA with the Patent Act of 1790 (Thomas Jefferson was the first patent examiner), and Sweden in 1834. The modern patent system was formalized in the Patent Cooperation Treaty (PCT) in 1970, which enables international patent applications. The European patent office (EPO) was founded in 1977. Brands have an even longer history — Roman bakers marked their bread with unique symbols as early as around the year 100 AD.

What is a moat — and why patents are its sharpest form

The concept of the economic moat Warren Buffett coined the term 'economic moat' in the 1990s as a metaphor for the structural advantages that protect a company's profits from competitors. Just as a medieval castle had a water-filled moat to keep enemies from storming the keep, some companies are surrounded by the competitive moat that stops competitors from eroding their profitability. Buffett's point is subtle but critical: it is not enough for a company to be profitable today — there must be a reason the profitability will persist. Without a moat, competition will drive returns down to the industry average, no matter how good the company is right now. The moat is what separates a 'good company' from a 'good business'. A good company can have 20% ROE today; a good business will have 20% ROE in 10 years because no one can copy it. Patents & intellectual property rights are the most concrete and measurable form of moat — it is written down in law, time-limited, and geographically defined.

Valuing a patent portfolio in practice

Finding IP information in the annual report Patents and brands appear in three places in the annual report. First: the balance sheet under 'Intangible non-current assets' — here, capitalized development costs are booked (IFRS rule: may be capitalized if technical and commercial feasibility is demonstrated), acquired patents, brands, goodwill. Note that INTERNALLY developed patents are rarely allowed to be capitalized — R&D is normally expensed directly. This means the balance sheet UNDERSTATES the IP value for companies that develop their own patents. Second: the note on 'Intangible non-current assets' — shows costs, depreciation, and remaining value by category. Here you can see 'patents and similar rights' as a specific line. Third: the CEO statement and investor presentation — here the number of patents, geographic coverage, pipeline status, and license revenue are often reported in running text.

IP traps — illusions and misleading

Patent applications ≠ granted patents A common rhetorical trick among smaller tech companies is to count patent applications as patents. This is gravely misleading. Of all patents applied for, 30-60% are granted after examination. Of those granted, 30-50% are invalidated if challenged in court. A company that says 'we have 500 patents applied for' may in reality have 200 granted and 100 that would hold up in court. The right way to measure: 'granted patents' divided by 'applied patents' = grant rate. Ericsson has a grant rate ~70%; a typical startup ~40%. Always ask the company: 'How many of your patents are granted, not just applied for?' If they do not want to answer — warning. Another trick: counting 'pending applications' as granted patents in marketing.

Three perspectives on patents & intellectual property rights

Peter Lynch: Lynch saw patents as a moat but warned against relying on them alone. 'Patents expire — moats should be eternal.' He preferred brands and network effects over patents. Lynch argued that patents are valuable in pharma (7-year exclusivity) but less valuable in tech (fast innovation).

Benjamin Graham: Graham saw patents as an asset but adjusted the value down due to the time limit. He argued that a patent expiring in 3 years is worth less than a brand lasting 30 years. Graham preferred 'goodwill' and brands over patents.

AK1's interpretation: AKM1 weight 6%. Patents are assessed in three ways: (1) number of active patents, (2) remaining patent life, (3) patent breadth — broad patents (blocking competitors) > narrow ones (specific products). AKM1 warns of the 'patent moat illusion' — companies with many patents expiring within 3 years. We combine V13 with V14 (brand) — patent + brand = the double moat.

Go deeper

From patent counting to moat architecture

Want to practice with worked examples, chapter by chapter? The course Patents & Intellectual property rights (V13) contains 6 chapters, the Lynch and Graham perspectives, and how AK1 uses the variable in the wave matrix. See also the complete guide to Swedish stock analysis for how all 20 variables fit together.

FAQ

What makes a patent a competitive advantage — a moat?

A patent gives the company exclusive legal rights to a solution for up to 20 years, making it the most concrete form of economic moat — the protection that stops competitors from eroding the company's profitability. Pharmaceutical companies build entire business models on patent protection. The difference from brands is that a patent is written into law and time-limited, while a brand can last for decades but lacks the same legal protection.

Where do I find information about a company's patents in the annual report?

Look in three places. The balance sheet shows intangible non-current assets — but note that internally developed patents are rarely capitalised, so the balance sheet often understates the value of intellectual property. The note on intangible assets shows depreciation and remaining values by category. The CEO statement and investor presentations often report patent counts, geographic coverage and pipeline status in running text.

What is the difference between patent applications and granted patents?

A big difference — and a common rhetorical trick is to count applications as patents. Of all applications, 30–60 percent are granted, and of those granted, 30–50 percent are invalidated if challenged in court. A company talking about 500 patent applications may in reality have 200 granted, of which 100 would hold up in court. Always ask for granted patents and the grant rate — the share of applications that are granted.

How long does patent protection last — and what happens when it expires?

Patent protection lasts in principle 20 years from filing, but the effective life is often shorter because approval processes, such as drug approvals, take several years. When the patent expires, competitors can launch copies — in pharmaceuticals this leads to sharp price falls when generics arrive. AKM1 therefore assesses patents by remaining lifespan and breadth, and warns of the patent-moat illusion: companies with many patents expiring within just a few years. The course Patents & Intangible Rights (V13) explores the reasoning further.

This is educational financial analysis, not investment advice.