Intellectual property lending is a financing transaction in which a borrower receives funds secured against the value of their intellectual property. Usually, intellectual property pledged as collateral (re-registered in the name of the lender) is granted patents. Due to the low density of biotechnology / medical technology patents (a direct, often 1: 1 relationship exists between patents and revenues), royalty funding is actually an intellectual property loan and there is a market of several billion dollars for such loans.
Biotechnology is a perfect industry for intellectual property lending as it is capital-hungry and valuations / access to capital are determined by events. A good drug trial (or a pandemic) can act as a catalyst for promising companies to easily raise funds. A failed trial or an underprivileged therapeutic area can destroy value overnight in a way rarely seen in other industries; and with that the ability to finance growth or repositioning is lost. Often times, companies can have strong IP, but for various reasons, low commercial traction, these are the companies that are best suited for IP financing.
In most situations (apart from royalty financing), intellectual property is not the only collateral for the lender. This is for three main reasons, depending on the character of the lender:
- Capital weighting: Intellectual property has zero value in terms of regulatory capital weighting for banks. As such, it can provide a convenient liquidation value, but has no value for risk-weighted loans. As a result, banking unions generally do not place any direct lending value on intellectual property in their collateral pools.
- Valuation: intellectual property is difficult to value and even more difficult to monetize if necessary. This means that very few lenders can assign an LTV to a patent portfolio or reassess it by recognizing when it has depreciated. Plus, very few advisors can either, as valuations are often idiosyncratic and event-driven.
- LTV / First Loss Cushion: Given the low cash flow profile of borrowers in this market, lenders prefer a first loss cushion. In this regard, they prefer an IP loan to be a component of a larger financing where it serves as a “top-up” for LTV purposes. When intellectual property is the primary funded asset, a PE / VC capital cushion is a useful safety net and often a prerequisite. In this case, the lender is betting that the equity wants to keep its value and that as such, it will not allow a default.
Two frameworks for outright intellectual property lending
Intellectual property loans against patent portfolios in the absence of a capital buffer or other assets are rare these days. Typically, these are only provided by a handful of expert private financiers, such as hedge funds or specialist lenders. In these cases, the LTV, cost, and covenants of the loan are determined by an analysis of the quality of the patents and, ideally, evidence of infringement that would allow the defaulting lender to challenge the patents against third parties or sell to them to recover their principal and interest.
Counterfeit-based valuation analysis works well for mature borrowers with older deployed technologies, but not so well for growing companies that innovate. For this reason, the market for intellectual property loans is divided into loans based on intellectual property litigation and loans focused on financing venture capital.
Counterfeit-based funding is more common in technology than in life sciences where, for FDA / EMA approved innovations, there is an active licensing and pre-launch funding ecosystem. Additionally, for mature companies with disappointing commercial traction, public markets offer a variety of options, including rights issues and structured private equity deals (like PIPES).
Despite this, there are pockets of great value for litigation-oriented financiers, especially where life sciences converge with technology. In this context, interesting growth areas exist in the application of AI to drug development. One example was the spin-out (and subsequent buyout) of the AIM-listed e-therapeutics patent portfolio of a special-purpose EAP called Searchbolt whose mission was to monetize the value of licenses to technology companies by using the network analysis search functionality.
Venture capital finance focuses on emerging innovations and can be seen as analogous to the venture capital loan market, as it largely serves the same customer base and offers similar ‘medium / high warrants’ prices. .
Against this background, a study by the British Private Equity & Venture Capital Association showed that around $ 1 billion of venture finance was executed in Europe during the period 1999-2009 with 538 deals concluded and average loans included. between 1 and 3 million pounds. Lenders have focused on companies that could either become profitable quickly or those with favorable risk capital.
Biotechnology was a big slice of the pie, although the number of deals was low, as biotech companies typically seek larger loans (around £ 5million) and this poses a concentration risk for lenders.
Most of these deals benefited from venture capital sponsors and therefore were not outright IP financing. Plain and straightforward IP financing secured from future license revenues does exist, but often in the context of enterprise (with shared IP rights) and property loan arrangements provided by specialist property groups intellectual property in a handful of hedge funds and specialist funds.
Significant transactions: Theranos and Patient Capital
One of the most prominent intellectual property loans in the biotechnology sector was Fortress Investment Group’s $ 100 million loan to Theranos in December 2017. The loan guarantee was a portfolio of 726 high quality patents granted. that post-bankruptcy seems to prove. be a very valuable asset from a litigation and licensing perspective.
In the UK, meanwhile, the dramatic collapse of Neil Woodford’s Patient Capital appears to have delivered the 19 life sciences holdings that included the cream of UK biotech into the hands of Acacia Research, possibly the world’s most successful patent monetization entity. It was a deal funded by Starboard, one of the world’s most successful activist investors.
Beyond Woodford, the biotech sector’s asynchronous funding cycle, the tsunami of public funding unleashed by governments keen to spur healthcare innovation, and an impending global recession are laying the groundwork for a decade of financing of intellectual property. In this environment, struggling biotechnology companies will seek to support themselves by monetizing their patents and growing companies will try to feed themselves by making the most of their intellectual capital.
This article first appeared in I AM. For more information please visit https://www.iam-media.com/corporate/subscribe
Subscribe here for related information, the latest industry news, and cutting-edge market analysis from global experts.
I AM is universally recognized as the world’s leading intelligence platform for practicing lawyers working in the field of intellectual property and patent law.