Research and Development (R&D) is the critical foundation and driver for innovation and the new product growth regime of many organisations, specifically in knowledge-intensive industries like pharmaceuticals and deep technology-enabled businesses.
R&D is where new ideas, technologies, and products are born, and it's closely tied to intellectual property (IP), as the outcomes of R&D are often patented or protected by other IP rights. If R&D is the heart of an innovation-driven organisation, the intellectual property it generates is its soul that boosts the company's growth and expands and strengthens its competitive position in the marketplace.
In the 20th century, IP capital/assets gained a top place in the company's balance sheet, eclipsing tangible assets like plant and machinery. Illustrating examples of leading blockbuster drug patents like Celebrex (for arthritis) of Pfizer, Gilead Sciences' patents on Sovaldi (for Hepatitis C) and Truvada (for HIV prevention) have generated billions of dollars in revenue, demonstrating the immense value of IP in the pharmaceutical industry.
Similarly, Tesla's Patents for Electric Vehicles are the foundation for its success in the electric vehicle (EV) market. Amazon's success in e-commerce and cloud computing can be attributed to its robust patent portfolio. It holds patents related to its unique logistics systems, customer recommendation algorithms, and cloud infrastructure (AWS). These patents protect Amazon's innovation and ensure it remains a dominant player in e-commerce, while AWS has become a massive revenue generator, contributing heavily to Amazon's bottom line.
Therefore, it is only fair to conclude that patents serve as signals of the company's technological competence, its potential for growth, and its ability to protect and commercialise its innovations.
Apart from its patenting strategy, the success of a profit-oriented organisation is often measured by its ability to raise capital through the public offering of equity. This process is typically achieved through an Initial Public Offering (IPO), where a company offers its shares to the public for the first time. By doing so, the company expands its shareholder base, raises funds for growth and development, and increases its market capitalisation. IPO launch marks a milestone in the company's growth, providing the financial resources to expand and strengthen its competitive market position.
Currently, 34 companies have SEBI approval to raise Rs 41,462 crore, while 55 others await clearance for Rs 98,672 crore. In 2024, 143 DRHPs were filed, significantly higher than 84 in 2023 and 89 in 2022. With more IPO filings anticipated in the coming year, India's IPO performance is expected to surpass this year's figures. (India's IPO storm to continue through 2025 with fundraising expected to cross Rs 2 lakh crore - The Economic Times)
Towards this journey of IPO launch, the Draft Red Herring Prospectus (DRHP) and Red Herring Prospectus (RHP) are critical documents, as they outline the company's plans and financial details in preparation for the public launch of equity for a company. The companies intending to go public must convince investors that it is worth investing in them. If the influence of executives and boards of directors helps to reduce uncertainty surrounding the IPO process, the disclosure of patents speaks about innovativeness and competencies and helps high-tech companies attract investors.
According to one study, an additional patent application prior to IPO increases IPO proceeds by about 0.507% and 1.13% for US and European companies, respectively. A study by Hossen & Ali (2020) found that innovation-driven firms with strong patent portfolios see better IPO outcomes, including higher post-IPO stock prices, longer IPO windows, and more analyst coverage. However, the exact timing and requirements can vary depending on the type of company, the nature of its IP, and the regulations governing public offerings.
It means patenting by high-tech firms increases their market credibility and value for IPO investors. Therefore, the patent behaviour of the companies seeking investment impacts the amount of cash collected at IPOs.
When is IP disclosure required during IPO?
Intellectual Property (IP) disclosure is generally required during the first Initial Public Offering (IPO) and may also be needed for subsequent public offerings under certain circumstances.
Let's break this down:
- First IPO (Initial Public Offering):
- When a high-tech or technology-driven company goes public for the first time, it typically must disclose all material information that could affect its valuation or the decision-making of potential investors, including its Intellectual Property (IP) assets, such as patents, trademarks, copyrights, trade secrets, and other proprietary technology. For high-tech or any technically innovative start-up, its IP might be one of the most valuable assets. Disclosing this helps establish the company's competitive edge and assures investors of the value of its innovations. It can also highlight any risks related to IP ownership, licensing agreements, or disputes.
- Subsequent Public Offerings: For follow-on or
secondary public offerings, IP disclosure may not be as extensive
as in the first IPO. However, it could still be required if there
are material changes to the company's IP portfolio. This can
include:
- Acquisition of new IP.
- Settling or initiating IP-related lawsuits.
- Licensing deals that could affect the company's value.
- New developments in IP that significantly impact the business (e.g., groundbreaking patent grants).
- Disclosure requirements: As with the initial IPO, the company will need to file updates with the SEBI or relevant disclosing body, disclosing any material developments related to IP that could affect the company's valuation or business operations.
Intellectual Property When a Company is Going Public
Interestingly, intellectual property disclosures have gained significant attention in recent years because of their increasingly vital role in a company's value proposition. IP can be a key asset that gives the company a competitive edge in the market. Therefore, financial stakeholders and investors are now keen to understand the company's IP portfolio, its protection strategy, and the impact of IP on future revenue generation and business growth.
Why Intellectual Property Disclosure in DRHP and RHP Matters:
- Company Valuation: Investors are now looking closely at the company's intellectual property portfolio when valuing the business. A strong portfolio of patents, trademarks, designs or other IPs can significantly boost a company's market value.
- Revenue Generation: Many businesses derive significant income from licensing their IP or through products/services protected by IP rights. Understanding the company's IP strategy can provide insight into its future growth potential.
- Competitive Advantage: A robust IP portfolio can provide a company with a competitive advantage, which is crucial in highly competitive industries. By detailing the company's IP in the DRHP, potential investors can evaluate how effectively the company leverages its intellectual assets.
- Risk Mitigation: IP disclosures help assess whether the company has clear ownership and protection over its intellectual property, reducing the risk of litigation or IP disputes that could affect future profitability.
Impact on the Role of IP Professionals in Value Addition to the DRHP and RHP Filings
For Intellectual Property professionals, the DRHP and RHP documents have become critical documents (both preparation and evaluation) as they outline how companies are using their intellectual assets to enhance their value proposition. IP disclosures in the DRHP reflect how businesses value their intangible assets, which is particularly interesting to patent attorneys, trademark experts, and other IP specialists.
- IP Due Diligence: IP professionals are involved in the due diligence process of reviewing the company's IP portfolio to ensure that all assets are properly protected and that there are no pending IP-related legal issues.
- IP Management: Ensuring that IP management practices are well-documented and effective can be crucial for companies in the IPO process, and IP professionals help companies navigate these complex issues.
- Patents in the innovation-driven economy: For companies, more specifically technology-driven, pharmaceuticals and chemicals, patents play a crucial role in establishing market leadership and innovation. Companies with a robust patent portfolio often command higher valuations.
Both DRHP and RHP filings contain detailed information regarding a company's intellectual property because of its significant impact on valuation, risk, and future growth potential. These filings ensure transparency and allow investors to make more informed decisions based on the company's ability to leverage and protect its intellectual assets. If you are a business preparing for an IPO, it's essential to thoroughly disclose all IP-related information, as it could be a key driver of your company's market success.
In conclusion, the increasing emphasis on intellectual property in DRHPs marks a shift in how companies going public position their intangible assets to attract inventors. It reflects a broader recognition of the value of Intellectual property as a company's Intangible asset for attracting investors. In a knowledge-driven economy, the inclusion of intellectual property disclosure in key documents like the DRHP to showcase the company's potential growth factor would increase its market credibility and its value for IPO investors.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
