On Friday, April 15th after the market close, Natural Alternatives International, Inc. (NASDAQ:NAII) issued a press release titled "Natural Alternatives International Issued New U.S. Beta-alanine Patent." Including the title, the press release describes patent RE45,947 as a "new patent" three times (to be fair, they do describe it as "newly reissued" once in the press release). Truly new patents have a term of between 14-20 years depending on the type of patent (design vs. utility). While technically new, the RE45,947 patent does not appear to extend the term of NAII's patent portfolio and therefore we find it misleading to describe it as new. This new patent simply replaces an old patent, specifically patent 6,426,361 ('361).
What's going on here? The "RE" of patent RE45,947 stands for REISSUED. According to the USPTO, patents are reissued "whenever any patent is, through error, deemed wholly or partly inoperative or invalid, by reason of a defective specification or drawing." The USPTO further states that "no new matter shall be introduced in the application for reissue," "no reissued patent shall be granted enlarging the scope of the claims of the original patent," and that the reissued patent term is only for "the unexpired part of the original patent." It appears NAII may have discovered a problem with patent '361 and decided to have it reissued as a fix. However, the fix appears to be very short term.
Patent '361 was originally issued on July 30th, 2002. Additionally, patent '361 is a continuation patent. Continuation patents do not automatically receive a 20-year term. A continuation patent is a patent that relies on a parent patent. The continuation patent expires when the parent patent expires. The parent patent in this case appears to be patent 5,965,596 filed on August 12, 1997. This makes sense because in NAII's recent 10-K, they have stated that 25 of their 34 patents expire in 2017 (20 years after '97). Therefore, we conclude the reissued patent, patent RE45,947 that NAII describes as "new" will expire next year, along with most of their other patents.
Additionally, correcting a patent that was assumed by the investment community to be valid does not improve one's patent portfolio. This is important to recognize. The reissue corrected the '361 patent, a patent that investors didn't realize needed any correcting to begin with. NAII then puts out a strangely timed press release lauding the "new" patent as an improvement of their patent portfolio when in reality, they were simply fixing something that originally had been screwed up.
The timing of the press release is of note because this wasn't exactly new news. It came 17 days after the initial reissuance of the patent on March 29th. NAII should have known this news for over two weeks (we were well aware of it before the press release) but strangely, they release it one day after the 6.4 magnitude earthquake and the day of the 7.0 magnitude "aftershock" that followed.
In 2011, the Sendai earthquake, which caused a devastating tsunami impacted their ability to secure beta-alanine supply, the key ingredient to CarnoSyn. CarnoSyn is 20% of sales for NAII and has been a large part of their earnings improvement over the past year. It is unclear if recent events have impacted their ability to secure beta-alanine supplies but we take note of the odd timing of this press release.
Perhaps it's all just a big coincidence. We feel the press release was nothing more than "fluff." This strengthens our conviction that NAII's patent portfolio may actually be much weaker than they would like it to be.
Disclosure: I am/we are short NAII.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
Editor's Note: This article covers one or more stocks trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.