IP Key For Financing Innovation, Speakers Say At WTO

Intellectual property protection is vital to finance innovation and in particular for start-ups, according to speakers at an event co-organised this week by the European Union, Switzerland, and the United States at the World Trade Organization.

The event was organised on the side of the WTO Council for Trade-Related Aspects of Intellectual Property Rights (TRIPS) and focused on the role of intellectual property in financing innovation.

The panel discussion today convened industry representatives/entrepreneurs, venture capitalists, and academics. The event echoed an item on IP and innovation on the TRIPS Council agenda. The Council is scheduled to meet on 9-10 June (IPW, WTO/TRIPS, 8 June 2015).

Gaétan de Rassenfosse, assistant professor and holder of the Chair of Innovation and IP Policy at the Swiss Federal Institute of Technology, Lausanne (EPFL), said intangible assets, such as innovation, is much more difficult to finance than tangible assets, such as a factory. However, patents can alleviate the issue of innovation financing, he said.

The first issue in financing innovation is asymmetric information in which the innovator knows much more about the potential success of the project than the funder, such as a banker. The funder has difficulties differentiating good projects from bad ones, de Rassenfosse said.

The second key issue is the “moral hazard,” which reflects the fact that the incentive for the providers of funds is not aligned with that of the innovator, he said. An innovator who is successful will reap the benefit of his or her invention. In the case where the invention is not successful, the innovator is likely to lose a lot less than the banking institution, which will lose its investment. The banking institution usually then asks for an extra premium to cover for the risk, he said.

External innovation is more costly than internal capital, he said, but small companies have limited access to internal capital. Patents can provide a solution to increase internal capital by increasing profits from commercial exploitation, and licensing out technologies. They can also choose to sell their patents, in particular if the technology is not core to the business, he said.

Patents act as a signal of quality to the provider of funds, can reduce moral hazard, and can be offered as collateral to increase the value of the company, said Rassenfosse.

Business Angels Attentive to IP

Another speaker was Frank Gerritzen, partner at Careerplus and president, Suisse romande, at Business Angels Switzerland (BAS), an association providing seed financing and advice for start-ups. He said business angels, who are private individuals investing their own money in early-stage start-ups are “notorious for losing money.”

Among the basis of the decision to invest in a start-up are the “people who will be leading the ship,” the kind of product or service the start-up is proposing to provide, the intellectual property and the potential return on investment.

Not all projects can benefit from easy IP protection, he said, mentioning start-ups offering services relying on the competency and experience of the team. However, about 50 percent of all projects presented to BAS can be covered by patent rights. IP is a very important aspect as it is something tangible that can be recovered even if the project fails, he said.

According to Roman Vuille, co-founder and senior partner of Schneiter & Vuille – intellectual property advisors, and also a member of BAS, there are several intellectual property considerations before an investment. These include familiarity of the start-up with IP rights, whether an IP rights request has been filed, and the awareness of the start-up team about costs involved in IP protection and enforcement.

Vuille recommended that entrepreneurs set aside the necessary funds for an international patent request through the World Intellectual Property Organization Patent Cooperation Treaty, and that they file a patent request before looking for investors.

IP matters when the project contains an innovation that is recognised as such in its own industry, Gerritzen said, adding that IP does not matter when execution is the only value-added of the project.

IP, a Must for Pharma Biotech

For Giampiero De Luca, life science advisor and board member of the innovative medicines for tuberculosis project (iM4TB), a non-profit Swiss foundation, the paradigm of the pharmaceutical biotechnology industry is that IP is not only associated with patent rights but also with data exclusivity. Data exclusivity however, does not exist until the drug is approved, he said.

Comparing patent protection and data exclusivity, he said patents prevent the copying of the claimed matter, such as drug substance and formulation, during the life of the patent, and allow for legal action in case of infringement. However, data exclusivity does not legally prevent third parties from generating their own registration data. Only administrative actions are possible to protect data exclusivity, he said.

De Luca remarked on the high and increasing cost of drug development and said biotech companies need to “dramatically improve their ability to bring products to the market,” and underlined their reliance on patent protection to “reduce the risk of copycats.”

He described the development of a new drug candidate to treat tuberculosis (PBTZ 169), which is an ongoing collaboration at iM4TB between the EPFL and the A.N. Bach Institute for Biochemistry of the Russian Academy of Science, Moscow.

He said that IP “is a mast for innovation.” IP is critical for biotech investment, he added, and repeated a quote that “since patents have definite lifetimes, 20 years or less of exclusive and then an infinite time in the public domain…. this is a small price for us to pay for innovation.”

He said tuberculosis is a neglected disease, which faces a financial gap of US$1.6 billion a year, according to the World Health Organization, although it kills more than HIV or malaria.

In the meantime, the WHO is working on ways to finance research on diseases afflicting poor populations for which there is little market incentive for the private sector. In particular, the WHO is exploring ways to manage a voluntary pooled fund that would focus on the development of effective and affordable health technologies for such neglected diseases (IPW, WHO, 24 May 2015).

One of the avenues being explored at the WHO is a delinkage between research and development costs and the production cost.

A number of developing countries and civil society groups are calling for innovative approaches to financing research and development for new drugs, not relying on IP protection, viewed by some as increasing prices and rendering them inaccessible for population, in particular in middle-income countries.

 

Image Credits: Catherine Saez