Ownership of intellectual property (IP) is a clear sign a business boasts the ‘economic moat’ popularised by the world’s greater investor Warren Buffett, especially in industries that rely on innovation.

A company’s ability to continually develop and protect its IP assets helps to defend its market share and profits from competitors, and the presence of a moat is reflected in the high profitability metrics such as gross margin and ROIC (return on invested capital) beloved by quality-focused investors.

In this article we explore the benefits of having patented IP, look at big global names which enjoy this advantage and identify two UK stocks which benefit from this dynamic.

One of the ways a company can create a wide economic moat is through intangible assets like patents, trademarks and regulatory licenses, which can prevent rivals from duplicating products and allow a company to charge premium pricing. In the realm of innovation, patents are the gold standard for measuring a company’s inventive prowess and are often highly prized by investors as a result.

As the table shows, planet Earth’s patenting powerhouses are predominantly companies headquartered in China, Korea, Japan and the US and tend to emanate from sectors such as technology, automotive and energy. Another global industry where patents are pivotal to success is pharmaceuticals, since drug manufacturers rely heavily on patent protection to maintain competitive advantage.

The patent acts as a legal moat, preventing competitors from producing the same drug for a set period, and this exclusivity allows the company to recoup its research and development costs and rake in substantial profits before generic alternatives can enter the market.

The global pharmaceutical industry is heading toward a near-$236 billion ‘patent cliff’ between 2025 and 2030 as patents on blockbuster drugs expire, exposing high-revenue products to generic competition and threatening major revenue losses for ‘big pharma’. 

INVEST IN INNOVATION

Eric Burns, lead manager of the CFP SDL Free Spirit (BYYQC27) fund, informs Shares that a good way to look at a patent is that for a set period, it is a monopoly, and ‘a monopoly is the best moat you can get. You can’t have legal monopolies, but a patent is perhaps the closest thing that you come to achieving that.

‘But the quid pro quo is at the end of that period everybody gets to benefit from the discovery, albeit you’ll find patents are being constantly evolved and added to, to keep them relevant and refresh their authority.’

This is certainly an exciting time to invest in innovation, judging by the stunning growth in the number of patents per year being registered in the US, the world’s biggest economy. Why does this matter to investors? Well, what follows patents with around a seven-year lag are new products, and after that, a stream of sales and profits.

Liontrust Global Innovation team members Storm Uru and Clare Pleydell-Bouverie manage the Liontrust Global Innovation (B8DLY47), Liontrust Global Dividend (B9225P6) and Liontrust Global Technology (BYXZ5N7) funds alongside James O’Connor, and believe that innovation is the single most important driver of stock returns - Liontrust Global Innovation’s top 10 holdings include patent-filing powerhouses such as Nvidia (NVDA:NASDAQ) and Eli Lilly (LLY:NYSE).

‘For us, patents really form the innovation pipeline of companies over the next decade,’ explains Pleydell-Bouverie, ‘that’s why we pay particular attention to this, because not every great innovation is a great investment. You need to build a moat around that innovation in order to capture value as a company and pass that on to shareholders. It is one of the key moats we look for in companies and mostly we find that this form of barrier to competition, IP and patents in particular, centres around three sectors – technology, healthcare and consumer.’

When analysing patent data, sometimes it is a question of the magnitude of patents that attracts the Liontrust Global Innovation team. Pleydell-Bouverie highlights Nike (NKE:NYSE) as a classic example of a company that has ‘built up a fortress of IP, a library of patents. It has 35,000 active patents worldwide, which is around eight times that of Adidas (ADS:ETR). For context, Nike’s patent count is a third the size of Apple’s (AAPL:NASDAQ), and Apple is a technology company, whereas Nike is stitching together pieces of leather and material.’

But what does Nike’s patent edge mean for investors? ‘It means Nike has pricing power, because its product is superior quality, so we see that in gross margins of 45% and this just reinforces its second key advantage which is brand power across the world. Nike has clung onto that number one market share across all major markets and we are excited right now because Nike’s new management team are starting to really lean into Nike’s innovation machine again and get some of those new products out to consumers.’

In other instances, it is an uptick in the rate of patenting by a company which offers the first early warning sign that an accelerated product innovation cycle is underway. ‘AI agents is a good example of something that is going to transform enterprises over the next five to 10 years,’ says Pleydell-Bouverie, who highlights recent Liontrust Technology Fund addition C3.ai (AI:NYSE), recently awarded a patent on its ‘AI Orchestrator’ for generative AI agents. C3.ai is ‘the only company we have come across that can compete with Palantir (PLTR:NASDAQ) in becoming the platform for enterprise AI – this is owing to their ontology, which solves the problem of data ingestion and persistence at massive scale required for enterprise AI,’ says Pleydell-Bouverie.

‘C3 owns a relatively young portfolio of patents, but of growing importance – the company owns 38 patents globally, with 130 applications pending. A significant rise came between 2019 and 2022, during which C3 AI filed double-digit patent applications each year. And we are already seeing some of the enterprise software companies’ innovations being rejected because of C3.ai’s patents – SAP (SAP:ETR) and IBM (IBM:NYSE) – are the two companies that have most frequently already stumbled across this hurdle.’

Two healthcare giants held across Liontrust Global Innovation and Liontrust Global Dividend are Eli Lilly and Novo Nordisk (NOVOB-B:CPH), whose patent-protected drugs carry strong pricing power and enable these firms to generate returns on invested capital in excess of their cost of capital.

Storm Uru says Eli Lilly is ‘extraordinary in terms of the number of patents it has achieved over its lifetime, a bit over 9,000. But what we really track is the acceleration or the growth in those patent filings’. This has ramped up massively over the last five or six years as the company forms an increasingly wide moat around its weight-loss drugs.

How Volution has benefited from patents

Group technical director at ventilation specialist Volution (FAN), Martin Goodfellow, says: ‘Patents are one of various ways in which we can protect our intellectual property to ensure we retain a competitive advantage and increase barriers to entry in our markets.

‘It is advantageous, and the best use of our skilled resources, to seek to “platform” technology, where we can use one patent across multiple products.

‘Patents can also bring the advantage of financial incentives (e.g. through tax credits) from certain Governments, such as is the case in the UK. ‘

‘For these reasons, patents (and intellectual property in general) are also an important consideration when we make acquisitions.

‘An example is our patented delay timer. We invented a key component to use across multiple product ranges. It protects our position, increases economies of scale and attracts tax credit incentives.’

KEEPING THE SAUCE SECRET

Also, deputy manager of CFP SDL UK Buffettology (BF0LDZ3), Eric Burns stresses that patent protection is more relevant for businesses in certain sectors than it is for others. ‘Croda International (CRDA) is a speciality chemicals business doing all sorts of things in beauty care, fragrances and the like, and patents are clearly quite important. I think Croda has 1,700 patents around process, know-how, formulation and if you are in that sort of business, you need to protect you moat and keep the longevity of your monopoly. That would be an example of an industry where patents are particularly relevant and important.’ Croda’s Investor Relations team tells Shares the company holds roughly 1,650 patents spanning some 280 patent families, though it has many ingredients that are unique in the market that it has deliberately chosen not to patent, so that competitors cannot see IP that remains protected.

More generally however, Burns stresses that patents are in a much wider bucket of IP. ‘If you look at our holdings, IP is very important to most of them, but it’s not necessarily through a patent per se - it might be more through a trademark, licence or other IP protection. One example is Rightmove (RMV), where all the intangible value is in the brand. There will be a small number of patents, but Rightmove is not a business that’s built around patents in the same way as Croda is.’

FRONT & CENTRE FOR PHARMA

Schroders’ Ailsa Craig and Marek Poszepczynski, managers of International Biotechnology Trust (IBT), invest in companies with ‘strong IP, which means they have a composition-of-matter patent on the drug they are developing or selling’ according to Craig. ‘And pharma will be asking exactly the same questions as us. Ultimately, strong IP is up front and centre when it comes to our investment process and also why companies get acquired.’

A cracking recent example is Intra-Cellular Therapies, a company advancing treatments for schizophrenia and bipolar depression that was snapped up by Johnson & Johnson (JNJ:NYSE) for $132 per share, a 40% premium to the share price, in January 2025. The trust’s biggest holding at the time, Intra-Cellular was acquired almost immediately after confirming its patent status. ‘It is absolutely paramount and front and centre of pharma’s minds to make sure that’s a secure piece of information before they make an acquisition,’ insists Craig.

But there is a balancing act to struck when filing patents, as Poszepczynski points out: ‘Big pharma don’t want to file too many patents because then they expose themselves for others to see what they are doing. And also, if you file a patent too early, you might actually ruin your chances to be more specific. The more vague a patent is, the easier it is to challenge it later on.’ He also points out it is quite costly for a small company to file patents. ‘Once you file you have one year to feed additional information to your patent application, and then the ball is rolling and you need to pay for patents wherever you want to file, be it the US, Europe, China etc.’ [JC]

UK PATENT PICKS

Genus (GNS) £19.46

Market cap: £1.3 billion

Animal genetics specialist Genus (GNS) helps farmers select the best animals for breeding by identifying and selecting desirable animal traits for animal wellbeing, productivity and resilience to diseases.

The company has patents on its breeding stocks and related technologies like Sexcel which allows farmers to control the sex of their cow’s offspring.

Genus stepped-up the number of patent filings in recent times in relation to a regulatory application for its groundbreaking gene editing technology to breed piglets which are resistant to the devastating PRRS (Porcine Reproductive and Respiratory Syndrome) virus.

A recent study from Iowa State University reported that PRRS costs $1.2 billion per year, in the US alone.

The US FDA (Food and Drug Administration) approved the use of Genus’ technology for use in the food supply on 30 April 2025, which means the company can commercialise the invention.

Analysts estimate the full commercial benefits will take time to appear but have the potential to double pre-tax profit for Genus from 2027 onwards.

Genus’ expanding intellectual property portfolio generates increasing royalty revenue, which is almost pure profit, although it does take around four years for the royalty model to reach maturity.

At the first-half results (27 February), the company revealed royalty revenue of around £90 million, just under a third of group revenue. [MG] 

Judges Scientific (JDG:AIM) £82.55

Market cap: £555.1 million

It’s been an ugly past year or so for Judges Scientific (JDG:AIM), a one-time high quality technology equipment manufacturing business that has built a long tail following among retail investors. It’s been a spell of intense volatility for stock market valuations and markets have understandably fretted over economic stability during president Trump’s tumultuous first six months in office.

Inflationary pressures have eased considerably yet they and interest rates remain stubborn obstacles to corporate investment, and Judges’ own soggy growth illustrates these points. Last year, for example, headline sales declined 2%, versus a 10% compound growth average since 2019. That profits fell far more sharply is symptomatic of any relatively high fixed cost business seeing soft sales.

But the wheels are not coming off this exceptional growth story, in our view, and a valuable library of patents is among the many reasons why. Take its Luciol Instruments business, for example, a fibre optic kit maker acquired in February 2024. Judges paid just £1.8 million, so it is a tiny business, yet its equipment is relied on by giants like Airbus (AIR:EPA), Boeing (BA:NYSE), and ASML (ASML:AMS) to monitor and discover fibre optic faults while capping disruption and downtime.

That’s exactly the kind of small, patent-rich, and profitable operator Judges has been pulling off for years, broadening its technology and science kit exposure and expertise for minimal risk.

As Judges itself admits, this is an international business that generally thrives on peace and free trade, and there’s seemingly less of both right now. But Judges has seen geopolitical turmoil before, just as it has experienced weak growth and market volatility in the past, and it has managed through the troughs to prosper again, all while paying investors a steady a not unattractive income while they wait from highly robust cash flows.

Dividends per share has growth from 22.8p to 97.7p over the past decade, helping shareholders benefit from compounded total returns of 17.8% since 2015. That the 12-months rolling PE (price to earnings) multiple still stands at 21 (according to Stockopedia data) shows how far earnings underlying estimates have come back, yet that also implies a high ceiling when end markets improve. [SF]

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