The Status Quo and Development Strategies for Patent Pledge Financing in the Biopharmaceutical Industry in China

Abstract

Patent pledge financing in China's biomedical industry is in its infancy. The established system is far from perfect, and there are many coexisting financing channels. Based on data from the Chinese patent publication database and the database of drug manufacturers, the authors conducted a comprehensive analysis of patent pledge financing using Chinese pharmaceutical companies as the sample and propose measures for the development of patent financing for the biopharmaceutical industry in China in view of the outstanding problems. In the future, the Chinese government needs to provide preferential policies and economic support to a patent value evaluation system, patent technology market trading platform, and diversified risk-sharing mechanism.

1. Introduction

As a representative of China's emerging strategic industries, the biopharmaceutical industry has gradually developed into a pillar industry in China because of its overall economic and social impact. Technological innovation is the key to the survival of biopharmaceutical enterprises. Due to the industry's large capital investment, long research and development (R&D) cycle, slow industrialization, and other restrictions, coupled with the fact that a good investment philosophy and environment in China have not yet formed, many biopharmaceutical companies have difficulty crossing the so-called “valley of death.” Drawing on the successful experience of developed countries and using patent pledge financing to gather funds for small- and medium-sized science and technology enterprises for independent technological innovation will greatly assist the development of biopharmaceutical enterprises.

Patent pledge financing in China's biopharmaceutical industry is still in the exploratory phase, and a comprehensive system has yet to be established. We attempt to analyze the field's status quo and propose solutions to the outstanding problems. Because the biopharmaceutical industry in China involves a wide range of industries at varying levels of development, in order to accurately describe the validity of patent pledge financing, we selected pharmaceutical companies for our sample according to Article 7 of the Drug Administration Law of the People's Republic of China and Article 227 of the Property Law of the People's Republic of China. We then conducted a comprehensive analysis of the relevant data based on information from the Chinese Patent Bulletin database and pharmaceutical production enterprise database to achieve the best possible comprehensive overview of the data.

2. The Status Quo of Patent Pledge Financing in Biopharmaceutical Industries in the U.S. and Japan

Since the 1980s, developed countries have begun to study and practice patent pledge financing. The practices of the United States and Japan provide valuable experience for us.

To realize patent pledge financing, taking into account the high risk of patent pledging, U.S. legislation has developed a number of mechanisms, such as litigation, judicial intervention, defense debtor disposal, and the redemption of patents. Simultaneously, to effectively solve the patent pledge financing difficulties of small enterprises, the United States facilitated efforts by the U.S. Small Business Administration, M·CAM, and various patent realization mechanisms, as well as Silicon Valley Bank and the DSI Technology Escrow Service Company, to render assistance to patent pledge financing. These initiatives have dispelled the concerns of financial institutions regarding the high risk and difficulty in making a profit through patent pledge financing. On this basis, there has been a large number of successful patent pledge financing stories for biopharmaceutical companies in the U.S.

To break away from the plight of the Asian financial crisis, Japan's Ministry of International Trade and Industry (MITI) introduced an intellectual property rights (IPR) research institute to conduct in-depth research on the issue of IP financing security during the period of economic recession. In practice, Japan's patent pledge financing model includes two main types—direct debt financing, mainly by Japanese policy investment banks, and indirect credit security, by the Japan Credit Security Association. The development of the patent pledge financing system in Japan is mainly based on the full support of the government, including policies and policy loan expenditures, thus encouraging more private financial institutions to jointly perform patent pledge financing.

3. Analysis of the Patent Pledge Financing Model in China's Biopharmaceutical Industry

Since 2008, China has officially launched a patent pledge financing pilot project. Between 2011 and 2015, the average annual growth rate of China's patent pledge financing was 58%, totaling approximately US$23 billion and involving more than 5,000 enterprises. On the whole, the number of patent pledge registrations and the amount of patent pledge financing are increasing, but there are still some problems, such as the small scale of loans and the narrow range of enterprises that have benefited.

The State Intellectual Property Office manages the data on patent pledging in China. Because China's legislation has not yet made special provisions regarding the pledge of patent rights, we use the patent pledge data as the basis for analysis and combine them with the Chinese Patent Bulletin database, as well as data from local food and drug supervision and administration bureaus, to summarize and categorize biopharmaceutical pledge financing cases in China. We categorize the more mature models and models that can serve as valuable references into three categories: the Beijing model, the Shanghai model, and the Hubei model (Fig. 1).

FIG. 1.

Models of patent pledge financing existing in the biopharmaceutical industry in China (M1, the Beijing model; M2, the Shanghai model; M3, the Hubei model).

3.1. The Beijing model: “Bank + patent security” direct pledge financing

Based on this model, enterprises use the patent right as the subject of the pledge and apply directly to banks and other financial institutions' patent pledge loan services to obtain financing. In this model, financial institutions bear all of the credit risk and accordingly make the determination as to whether to award the loan based on their evaluation of the application and the applying enterprise. Here, government departments do not bear any credit risk, but provide small- and medium-sized technology enterprises that apply for loans with interest subsidies for 50% of the loan. The financing model is a standard bank-led, market-oriented financing model that China vigorously promotes; it is mainly used in the Beijing area.

According to statistics from the Beijing Food and Drug Administration (www.bjda.gov.cn), only six pharmaceutical manufacturers have performed patent pledge financing (Table 1), accounting for 2.75% of the total number of pharmaceutical manufacturers in Beijing. Among them, three companies which adopted the direct pledge financing model performed patent pledge financing several times due to the short loan term (one year). This finding shows that financial institutions are still cautious about the risk of the direct pledge financing model and are not enthusiastic about offering such services. The reason for this phenomenon is that the existing patent market in China is far from perfect. If the debtor cannot repay the loan and the patent right is difficult to realize, then the bank will bear all losses. For this reason, most of the biopharmaceutical enterprises that adopt the direct collateral financing model are reputable enterprises, and they themselves are quality customers of financial institutions. In practice, most commercial banks still reject this model based on considerations of credit risk control.

Table 1.

Patent Pledge Financing in the Biopharmaceutical Industry in Beijing

Pledger	Pledgee	Effective date of pledge	Cancelling date of pledge	Patent number
Beijing Jianli Pharmaceutical Co., Ltd.	Beijing SMEs Credits Re‐guarantee Co., Ltd.	05/20/2010	05/25/2014	2005100721307
Beijing Sanroad Biological Products Co., Ltd.	Peng Mingxiang (individual)	11/30/2015		2004100086530
	Beijing Huairou Rongxing Village & Township Bank	09/02/2014	11/12/2015	2004100086530
	China Development Bank	N/A	08/21/2015	031311083
Beijing Yingu Century Pharmacy Co., Ltd.	Beijing Zhongguancun Sci‐tech Financing Guarantee Co., Ltd.	01/06/2015		2008101035252
	Beijing Capital Investment & Guarantee Co., Ltd.	06/28/2011	10/28/2014	2005101092923
Beijing Wondow Caps Biological Products Co., Ltd.	Ronghui Group (Beijing) Co., Ltd.	08/01/2014	04/08/2015	2005100798883, 2005100777726
Beijing BGI‐GBI Biotech Co., Ltd.	Industrial and Commercial Bank of China	06/20/2013	07/16/2015	998154245, 2006101677039, 031166571
Beijing Keyifeng Biotech Products Co., Ltd.	Beijing Haidian Sci‐tech Enterprises Financing Guarantee Co., Ltd.	01/07/2016		2010106236522, 2008102465949, 2007100975073
		11/05/2014	12/31/2015	2010106236522, 2008102465949, 2007100975073

Data from the State Intellectual Property Office of the People's Republic of China (PRC).

3.2. The Shanghai model: “Bank + government funds security + corporate patent counter-security” indirect pledge financing

This model is led by the government. Enterprises use a special government fund for science and technology as the security, and patents as the subject of the pledge as counter-security, in order to obtain loans from banks and other financial institutions. The model is mainly used in the Pudong New District in Shanghai, whereby the government in Pudong New District finances the establishment of corresponding intermediaries (such as assessment agencies and law firms) and promises banks that, in the event of losses, the government will bear more than 90% of the responsibility, with the banks assuming less than 10% of it. Thus, financial support and security are provided for the patent pledge financing of small- and medium-sized technology enterprises through securities, subsidies, incentives, and other measures.

According to statistics from the Shanghai Food and Drug Administration (www.shfda.gov.cn), four pharmaceutical manufacturers have performed patent pledge financing (Table 2) using the indirect pledge financing model, accounting for 2.28% of the total number of pharmaceutical manufacturing enterprises in Shanghai. In addition, most of them have used patent portfolio pledge financing—mainly because this type of financing is conducive to reducing the technical and market risks involved in patent pledge financing. The indirect financing model completely depends on the support of the government, since it bears the main risks. Therefore, one of the important reasons why financial institutions tend to accept this financing model is that the default risk can be maximally reduced because it is borne by the government. This model is suitable for patent pledge financing services in the early stages of development. However, as a market behavior, patent pledge financing needs a sound market mechanism. If it is led by the government over a long period of time, patent industrialization will not be truly realized.

Table 2.

Patent Pledge Financing in the Biopharmaceutical Industry in Shanghai

Pledger	Pledgee	Effective date of pledge	Cancelling date of pledge	Patent number
YSY (Shanghai) Pharmaceutical Co., Ltd.	Agricultural Bank of China	10/15/2009	04/29/2010	021510326, 021510318, 021510288
Desano Pharma Co. Ltd.	Shanghai Rural Commercial Bank	11/20/2013		2004100932197
Qingsong Pharmaceutical Co., Ltd.	China Minsheng Bank	05/12/2016		2011102282009, 2009100513177, 2008102013320, 2006100273470, 2005100257929
	China Merchants Bank	11/26/2014	04/15/2016	2011102282009, 2009100513177, 2008102013320, 2005100257929
		05/08/2013	11/15/2014	2005100257929, 2008102013320
Shanghai Celgen Biopharmaceutical Co., Ltd.	Shanghai Rural Commercial Bank	11/04/2014	08/10/2015	2011100519522

Data from the State Intellectual Property Office of the PRC.

3.3. The Hubei model: “Bank + third-party security companies + corporate patent counter-security” mixed pledge financing

Different from the first two models, the Hubei model is essentially a government subsidy–based financing model. The government provides special subsidy funds to small- and medium-sized technology enterprises while also providing security subsidies to the security institutions, which (to a certain extent) reduces the loan cost of small- and medium-sized technological enterprises. Simultaneously, by introducing the mechanism of risk sharing among intermediary institutions such as appraisal institutions, firms, and security companies, banks have reduced risks and are thus encouraged to participate in this service. Through active guidance, government agencies provide financial subsidies within limits; the corresponding risk of loans is shared among banks and intermediaries, such as security companies. Approximately 10% of the risk is borne by banks, 5% by intermediary agencies, and the remaining risk by security institutions.

According to statistics from the Hubei Provincial Food and Drug Administration (www.hubfda.gov.cn), only two pharmaceutical manufacturers have performed patent pledge financing (Table 3), accounting for 0.68% of the total number of pharmaceutical manufacturers in Hubei. Compared to the first two models, the number of companies adopting the mixed pledge financing model is the lowest because the majority of the risk is borne by security companies, whose abilities to assess assets and identify and control risks are weaker than those of banks. From the perspective of the prudent operating principle and debt risk control, security companies would necessarily adopt a higher audit standard and a lower loan quota for mixed patent pledge financing.

Table 3.

Patent Pledge Financing in the Biopharmaceutical Industry in Hubei

Pledger	Pledgee	Effective date of pledge	Cancelling date of pledge	Patent number
Hubei Fangtong Pharmaceutical Co., Ltd.	Huangshi Guarantee Group	10/20/2015		2011100895056
	Huangshi SMEs Guarantee Co., Ltd.^*	07/06/2012	10/16/2015	2011100895056
	Emori (China) Trading Co., Ltd.	12/27/2012	11/21/2014	2011100078981
Wuhan Diao Pharmaceutical Co., Ltd.	Ping An Bank Co., Ltd.	08/28/2013	12/16/2013	2010101602170, 2010101113206

Data from the State Intellectual Property Office of the PRC.

The official English name of this company was absent until November 1, 2016.

In summary, it is not difficult to find that the proportion of enterprises undertaking patent pledge financing among China's biopharmaceutical enterprises is very low, which indicates a lack of awareness of the value of intellectual property rights and its legal protection, as well as the low utilization of intellectual property rights compared to Western developed countries. On the other hand, the risk control behavior of financial institutions over the value of patent rights also causes shortcomings such as a small loan quota, a high interest rate, and a short loan term, resulting in the slow development of patent financing in China and the lack of a good market mechanism.

4. Development Strategies to Improve Patent Pledge Financing in China's Biopharmaceutical Industry

Analysis of the comparably well-established patent pledge financing practices in the American and Japanese systems finds that government support and guidance are important forces in the development of the patent pledge system. In the future, the further improvement of the patent pledge financing system in the biopharmaceutical industry in China will require government agencies to give preferential policies and economic support in establishing a patent value evaluation system, a patent technology market trading platform, and a diversified risk-sharing mechanism.

First, standardized patent value evaluation systems should be established. Professional assessment agencies can give objective and impartial judgments on the value of patient rights, as they fluctuate with the market environment, technology maturity, and other factors. At present, there are problems with evaluation agencies in China, such as the lack of professional valuation and the inaccuracy of patent valuation, causing financial institutions to be cautious with the evaluation results, leading to a generally low pledge rate. This situation has become a bottleneck that restricts the marketization of patent pledge financing services. China can learn from the experience of M·CAM, train professional assessment experts, and establish standardized patent value evaluation systems. By increasing the quality of patent writing, patent technology features, and the analysis of the scope of exclusive patents, the accuracy and applicability of patent valuations can be improved through the combined use of qualitative and quantitative analyses.

Second, a sound patent technology market trading platform should be established. At present, China's patent technology trading market has the problems of fuzzy positioning, regressive support services, and the lack of a variety of transaction formats, among others. However, the standardization of the patent technology trading market depends on the transparency of relevant information. Because of the small number of patents and low transparency, a considerable amount of information is difficult to collect and not conducive to the development of the patent financing business. We recommend that the State Intellectual Property Office of China should provide tracking data on patent pledges, patent applications, patent valuations, and transaction prices by improving the national intellectual property rights operations public service platform, so that enterprises can accurately know the specifics of the patents in which they are interested and, through this dynamic understanding, predict and respond to future risks to enhance the pledger's ability to cope with the risks.

Finally, a sound risk-sharing mechanism for patent pledge financing should be established. The key risk control measure of patent pledge financing services lies in establishing a sound risk-sharing mechanism to reduce the risk of financial institutions by diversifying and transferring the risk to other organizations, in order to enhance the enthusiasm of financial institutions to participate in this business. The Chinese national treasury can attempt to allocate funds to establish public security agencies in line with domestic circumstances and directly promote the advancement of the patent pledge financing system through favorable policies and government involvement. It is also necessary to accelerate the establishment of market-sharing mechanisms and explore the possibility of incorporating patent insurance into the patent pledge financing risk-sharing mechanism. At the same time, it is important to expedite the innovation of patent insurance products and the establishment, design, and development of a service mechanism for patent pledge financing security insurance to encourage more insurance institutions to participate in patent pledge financing.

Footnotes

Acknowledgments

This work is supported by the research grants from the National Natural Science Foundation of China (No. 31500418), the Natural Science Foundation of Jiangsu Province (No. BK20150773), and the Fundamental Research Funds for the Central Universities (No. 30915011101). The authors would like to thank these organizations for their financial support.