How Strategic Patents Propel Valuation of Digital Health Companies

A recurring question from digital health companies is, “How important are patents to achieving my business goals?  After all, there is a lot of internal competition for our employees’ time and our company’s financial resources.  Pursuing patents taxes both.  So how do I decide how much to invest in patents, and if I do invest, how do I make the investment worth the expense?” 

You don’t need a patent strategist to tell you that patents are important for growth.  Most sophisticated investors in digital health companies will tell you that a blocking patent position is a significant factor in assessing valuation and in deciding whether to invest.  While this is true in many technology areas, it is even more pronounced in digital health for two reasons.  First, successful healthcare solutions tend to be very profitable.  Therefore, like ants to honey, once potential competitors discover the sweetness of your technology, they will try to invade your honey from all angles.  Second, since digital health companies often provide new solutions for well-recognized problems, it is highly likely that before you are even aware of any competitor, there will be others already working toward a solution similar to yours.  And even if you believe your solution is better, if others gain early market acceptance fueled by strong investment, or if they patent ahead of you, your valuation will plummet.

There is one powerful tool at your disposal for slowing your competitors: a strategic patent portfolio.  If you have a patent portfolio that your competitors will need to infringe in order to compete, your competitors’ potential investors will learn of it, and will likely be discouraged from funding your competitors.  Therefore, just owning a strategic patenting portfolio is one way to inhibit your competitors from gaining traction.  But most patent portfolios are not strategic.  For example, a company that measures and transmits vital signs might patent a solution that includes an ECG monitor and transmitter.  While that patent might stop competitors from using precisely the same ECG solution, it might not stop competitors from monitoring and transmitting PPG-derived information.   This underscores a problem many companies face—they patent their specific solutions rather than patenting a higher, more generic class of solutions.  As a result, companies obtain non-strategic patents that competitors can easily avoid.

The more significant an investment round, the more intense the scrutiny will be on your patent portfolio.  Investors or potential acquirers are less interested in whether you have a patent portfolio, and more interested in whether you have a strategic patent portfolio that prevents others from offering a similarly solution.  It takes time to get good patents.  So if you want to have a strategic portfolio in place to drive your valuation, you should begin developing it at least 2 ½ years before a significant funding round. 

To make sure you do it right, there are two important things to keep in mind.

Digital Health Patents Should Follow the Money

Digital health technology is often hybrid, involving hardware, software, and disposables on the patient side and interactivity and data processing on the server side.  When evaluating what to patent, it is important to consider the relative revenue streams resulting from each component.  A company that has sophisticated back end data processing performed on results provided via a disposable test kit might make the mistake of simply patenting the back end, while ignoring the test kit.  Companies do this because the back end is often more interesting and easier to patent.  However, each time a competitor sells an infringing test kit, it results in a separate instance of collectable damages.   The goal of patenting isn’t to patent the coolest inventions, it is to patent the most profitable ones.

Digital Health Patents Should Align with the Marketing Message

Investor decks are often constructed to tell a story.   In one form or another, that story usually goes something like this: “The market is large, and we are uniquely positioned to capture a significant portion of it because we have features A, B, and C that customers need.”  Invariably however, when investors examine the company’s patent portfolio, A, B, and C are not protected.  This confuses investors who expect to see protection focusing on what the investor deck explained as valuable.  One goal of strategic patent planning is to align your patent message and your marketing message.  That way, after investors understand what makes you valuable, they will be excited to see that value protected.

There are many nuances to strategic patenting, all stemming from the importance of blocking competitors from offering solutions that undermine your company’s revenue streams.  Strategic patenting allows you opportunity to look into a crystal ball, envision how the market will evolve, and patent your innovations in a way that provides you with exclusivity into the future.  If you do it right, patents can be your most valuable asset.