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Advancing Health Innovation by SMEs through Intangible Asset Finance

February 20, 2024

Small- and Medium-sized Enterprises (SMEs) are vital drivers of economic and social development. Constituting approximately 90% of businesses worldwide and contributing over 50% of employment, SMEs hold a significant position in the global economic landscape.  They play a crucial role in driving innovation across various industries, including healthcare. For instance, academic research groups and SMEs are a driving force in early-stage antimicrobial research and development (R&D). These firms are responsible for the development of 75% of the antibacterial and antifungal R&D pipeline, focusing on pathogens on the World Health Organization's (WHO) priority list.

Barriers faced by SMEs

For SMEs to expand and thrive, access to capital is crucial. Many SMEs lack tangible physical assets, such as office buildings or machinery, that could serve as security for obtaining a loan. This can make traditional financing channels unattainable. Access to finance is the second most cited barrier that SMEs in developing countries face when growing their businesses.

Health-focused SMEs serve as innovation engines, often pioneering breakthroughs crucial for addressing global health challenges such as antimicrobial resistance (AMR). Enabling access to funding not only promotes innovation and access to essential medical products but also contributes to economic growth by generating employment opportunities.

The concept of intangible asset finance may have potential as an innovative financing model, especially in Low- and Middle-Income Countries (LMICs), where research funding is often limited. Funding for R&D in African countries, for instance, remains below the committed 1% of GDP by each member state, and falls short of the allocated 2% of the national health budget for health research.

What is intangible asset finance?

Intangible asset finance refers to the practice of leveraging intangible assets, which lack physical form but hold substantial value to secure funding. Reports indicate that the global value of intangibles has increased tenfold over the last 25 years and amounted to USD 74 trillion in 2021. These assets encompass intellectual property (IP) in its different forms, such patents, trademarks, design rights, copyright, trade secrets and technological knowledge.

Businesses secure funding primarily through borrowing money, i.e., debt, or selling parts of their ownership, i.e., equity. IP can be leveraged in both funding methods. In equity financing, patents, trademarks, or proprietary technology can act as valuable assets that attract investors, by showing how unique a company is and its future revenue potential.

For debt financing, lenders use IP as collateral. This has the effect of reducing risk by claiming rights to such assets if a situation were to arise where a company defaults. This use of IP as security can also lead to more favorable borrowing terms. Strategic use of IP assets could provide a solution to bridge the funding gap faced by SMEs.

BrainScope, for example, is a MedTech company that developed the first FDA-cleared system that assesses brain bleeds and concussions in hospital emergency departments. It recently partnered with Aon, a global professional services firm, to secure US$35 million based on its IP.  With this capital, BrainScope seeks to fund the full expansion of its commercial activities as well as to develop new clinical applications on its platform.  This example demonstrates that IP assets can bridge the funding gap for SMEs and, equally importantly, foster innovation of medical technologies.

(Image: Andrii Yalanskyi/iStock/Getty Images Plus/Getty Images)

Intangible asset financing: a catalyst for global health equity

Drawing from the successful BrainScope example, the application of intangible asset financing holds immense promise for health-focused SMEs in LMICs.  Additionally, funders, whether governments or private lenders, seeking to promote access to vital medical products in LMICs can attach IP-related conditionalities to their funding. For instance, to address AMR, these funders could stipulate that SMEs establish technology transfer and licensing agreements incorporating provisions for affordability, environmentally responsible manufacturing, and stewardship practices. By leveraging intangible asset financing in this manner, funders not only spur economic growth but also play a pivotal role in addressing global health challenges such as AMR, one of the top global public health threats facing humanity.

What are the challenges to intangible asset finance?

Despite its high potential, intangible asset financing can be difficult for SMEs to secure for some of the following reasons:

  • Valuing intangible assets is complex. There is no standard valuation framework for intangible assets. In addition, reported book value, which is the value of an asset, often differs significantly from their actual market worth. This makes it difficult for SMEs to highlight the true value of their intangible assets to potential investors or lenders.
  • Many lenders and investors lack a solid understanding of intangible assets due to legal intricacies and practical difficulties. Identifying relevant intangible assets, conducting due diligence, and establishing ownership rights takes time and effort.
  • Banks and other financial institutions are required to hold significant capital for lending against IP and intangible assets as collateral. In particular, banking regulators have not taken steps to ease capital requirements, the banks’ safety cushion required for lending, in the case of these assets. This lack of acknowledgment restricts the availability of bank loans at attractive rates for intangible-intense businesses.
  • Intangible asset finance incurs high costs because of valuation, due diligence, and administrative procedures. These additional costs burden IP owners, hindering their access to essential capital for growth.
  • Intangible assets can be hard to liquidate. Lenders need confidence that they can monetize their securities in case of default. However, without transparent secondary markets, the recovery value of intangible assets can be difficult to gauge.

Solving the highlighted challenges would help intangible asset financing to become more widely accepted. This shift could potentially empower health-focused SMEs to utilize their IP to obtain the necessary funding to launch their innovations and help combat global health challenges.

As the UN specialized agency dedicated to developing a balanced and effective international IP system, the World Intellectual Property Organization (WIPO) holds a unique position in bringing together governments, innovators, and financial stakeholders to address these concerns. To this end, the IP Commercialization Section in WIPO’s IP and Innovation Ecosystems Sector (IES) has developed a comprehensive Action Plan aimed at helping intangible asset financing to become more widely accepted and practiced.

WIPO’s Action Plan on Intangible Asset Finance

The Action plan has three streams, as shown below:

(Image: WIPO and Intangible Asset Finance Moving Intangible Asset Finance from the Margins to the Mainstream)

In the first element, WIPO aims to raise awareness about the potential of intangible asset finance by convening a series of conversations with leaders in the fields of finance, business and IP.  Two sessions have already been conducted—one in November 2022 and the second in November 2023. To enhance the impact of these conversations, WIPO complements them with expert consultative groups (ECGs) to examine the challenges associated with accessing intangible asset finance. These ECG sessions will provide platforms for open discussions with the aim to produce potential solutions. The inaugural ECG convened in October 2023 to examine how to value IP to acquire financing.

The second element of the WIPO Action Plan aims to examine how IP is currently being used to increase access to capital. WIPO launched a new report series, ‘Unlocking IP-backed Financing, Country Perspectives’, which tracks the measures countries such as China, Jamaica, Singapore, Switzerland and the United Kingdom are taking to enable/facilitate IP-backed finance. These reports not only build the knowledge base but also encourage other countries to get involved in this field.

The final element of the WIPO Action Plan supports stakeholders and participants within the intangible asset finance ecosystem. IP owners need practical tools to improve their chances to secure debt and equity financing. Investors who are unfamiliar with IP need a better understanding of the potential value of these assets and how they can be liquidated in the case of default. As a start, WIPO will build a practical finance toolkit to help borrowers and lenders communicate more effectively. WIPO is also launching an IP finance pilot, which centers around supporting financial institutions interested in offering IP-backed financing solutions.

As the world evolves, so too must our methods of financing and supporting health innovation. Empowering health-focused SMEs, including those in LMICs, through intangible asset finance is more than just economic growth; it is a pathway to addressing global health challenges. WIPO's proactive approach in championing the recognition and utilization of intangible assets to secure financing, alongside fostering a supportive ecosystem, can help SMEs to innovate and provide accessible healthcare solutions where they are needed most, ensuring improved health outcomes for all.

Find out more:

Learn  more about WIPO’s work on Intangible Asset Finance and the IP Finance Dialogue, held on November 21, 2023.