The Molecule Vision: Why Securitise Pharmaceutical IP?

Why we need a marketplace for pharmaceutical patents

Liesl Eichholz
Jun 6 · 8 min read

Introduction

The Molecule Protocol is an open platform for the fractionalisation, securitisation, and distribution of pharmaceutical intellectual property (IP). This distribution is achieved by providing the infrastructure for individual markets to be set up around a piece (or pieces) of IP such as a patent, similar to the way markets exist for shares in specific companies.

Under this model, IP owners relinquish partial ownership stake in their intellectual property to an open market, where other participants can acquire fractional stakes. Just as startups sell equity to VCs in exchange for funds to inject back into the business, through Molecule, owners of pharmaceutical patents can trade a partial stake in a specific piece of IP for the funds needed to further develop that IP.

A prototype of a hypothetical market for a piece of IP on Molecule

Why Securitise IP?

What is IP Securitisation?

A securitisation is “a type of structured financing in which a pool of assets is transferred to a SPV [Special Purpose Vehicle] that issues debt backed securities collateralised solely by the assets transferred and the payments derived from those assets.” In other words, it allows owners to sell an interest in their IP asset(s) and potential future returns derived from those assets in exchange for upfront investment.

1997 advertisement for “Bowie Bonds”, asset-backed securities of current and future revenues of the 25 albums that David Bowie recorded before 1990 (source)

IP securitisation is generally becoming more accepted within financial markets, having been pioneered only in the late 1990s.

Older examples include celebrity bonds (securitised rights to receive a portion of royalties from music sales, such as the now-infamous “Bowie Bonds”) and securitised patent portfolios (securitised rights to revenue from a specific company’s use of their patents).

But while securitisation is beneficial in and of itself, a core innovation that Molecule provides is moving away from the “portfolio” model, and into an asset-specific model. Instead of buying into a range of different pharmaceutical assets (say, a company’s entire portfolio), investors on the Molecule platform can buy into individual compounds (for example, the patent or patents related only to a specific therapeutic).

Why Securitise IP?

The main reason for securitising IP is to generate funds for the further development and commercialisation of the IP in question. Of course, other forms of financing exist; in the pharmaceutical industry these funds generally come from:

  • Acquisition by larger pharmaceutical companies.
  • Sale of the underlying company via an IPO.
  • Equity investment from pharma VCs.
  • Debt financing (an increasingly common occurrence).
  • Government funding (in the case of universities).
  • Grant funding and donations (in the case of public goods).
The demand for financing options for ETCs (emerging therapeutics companies) is growing (source a, source b)

However, there are a number of reasons why securitising IP could be more favourable than these other forms of financing, both for the IP owners and for the market as a whole:

  • Access to a wider range of investors in an open marketplace.
  • Ownership in the underlying company can be retained by IP owner.
  • Less expensive and risky source of finance than debt financing.
  • Reduced disclosure requirements as opposed to IPO.
  • Accurate price discovery through market forces.

Elizabeth Ferrill explains these benefits succinctly:

“Under a market-based system, inventors would have the option of approaching many investors in an open marketplace before selling their patents. In addition, inventors would have the option of retaining some equity in their patent, allowing them to share in the proceeds if the invention proves to be a commercial success. While some patents would be considered useful and probably fetch a high price, other patents would be deemed less useful and thus sell for a much lower price. Nonetheless, this is the nature of a market-based system, and hopefully those patents with intrinsic value will be recognized and not ‘significantly mispriced’ or undervalued.”

With advances in blockchain technology, the means now exist to enable such open markets for patents and other forms of intellectual property rights. Molecule aims to leverage these technological advances to provide this much-needed market solution for the pharmaceutical industry, ushering in a new era of innovation in drug development.

Barriers to IP Securitisation

While IP securitisation is in theory beneficial, there have been significant challenges to actually implementing a meaningful market for this asset class. These challenges arise predominantly from the administrative burden caused by regulations and compliance requirements.

The primary suggested downside of IP securitisation transactions is that “these deals are relatively slow, expensive on fees from banks and lawyers and on the costs of the physical transfer of the registered IP rights.”

Coming up with a means to distribute patent ownership within existing legal frameworks could be somewhat straightforward if Molecule was willing to tolerate the constraints of legacy legal and financial systems (high latency, high transaction costs, high compliance obligations and costs, high centralisation and custodianship).

The real challenge for Molecule in this context is to connect with existing legal frameworks and structures to develop a system that overcomes these challenges, allowing IP securitisation and fractionalisation at scale (low latency, low transaction costs, low compliance obligations and costs, low centralisation and custodianship).

Molecule aims to leverage the benefits of IP securitisation while routing around the downsides (slow, expensive transactions) by standardising the securitisation process and using a blockchain architecture to enable rapid, inexpensive, and secure asset transfer and management. We are developing a number of products and services to facilitate this:

  • A unique Special Purpose Vehicle which will standardise the IP securitisation process and reduce compliance obligations and costs.
  • A series of standardised legal contracts and processes to streamline the process of making an offering.
  • A fully on-chain transfer framework to eliminate the costs of the physical transfer of the registered IP rights.
  • A world class marketplace and user interface for listing, viewing, buying, and selling pharmaceutical IP.
Markets on Molecule — overcoming barriers to IP securitisation through standardised processes and economies of scale

Why Pharmaceutical IP?

Above, we have seen how the securitisation of any form of IP can be economically beneficial for all parties involved. But due to the unique nature of the pharmaceutical industry and the way drugs are brought to market, the effect that these benefits could have on pharma IP is particularly impactful.

Novel Funding Mechanism

As alluded to above, Molecule provides a new mechanism through which developers of pharmaceutical IP can raise the capital required to bring their innovations to market. It reduces the barriers to IP owners monetising and commercialising their IP assets while allowing them to retain a meaningful portion of the IP.

Flexibility in Ownership

There are many reasons why an organisation developing pharmaceutical IP would want to retain control and ownership in their own organisation. With Molecule, unlike with many other funding mechanisms, organisations with valuable IP now have a mechanism of monetising it without selling it in its entirety or selling stake in their parent business.

Some organisations are incapable of being acquired or selling shares (e.g. universities) or simply don’t want to be acquired in full (e.g. a biotech startup with multiple projects in the pipeline). Using Molecule, they can sell partial stake in specific pieces of IP without selling their entire business or the entire piece of IP.

The market for R&D-stage biotech acquisitions has reached tens of billions — but is this the best way forward for biotechs and small pharma companies looking for financing? (source)

Access to Investors

One of the most challenging parts of receiving funding to develop pharmaceutical IP, along with all the legal and administrative burdens, is finding the right investors and partners who are both interested in your invention and equipped to help you develop it. Likewise, there are those with significant capital who are ready to invest in these types of endeavours, but never hear of them.

In other words, the pharmaceutical industry (especially in relation to funding) has a problem with access to useful information.

Molecule solves this problem by providing a single marketplace which connects buyers and sellers of pharmaceutical IP. Sellers (those with valuable IP) can find investors who see the potential in their compound, and buyers (those with capital) can find and invest in the therapeutics they believe to hold the most promise for the future.

A prototype of Molecule’s marketplace interface

Price Discovery

Molecule enables price discovery on early-stage assets. Pharmaceutical IP is notoriously difficult to value, especially in the early stages — but by creating open markets, Molecule can leverage the “wisdom of the crowd” to arrive at more accurate valuations based on market sentiment and guided by open information.

Further, because Molecule does not by default bundle assets into portfolios (as is common when other forms of IP are securitised), due diligence only needs to be done on one compound at a time, reducing the barrier to investment and increasing the quality of price assessment for each market.

Collaboration Incentives

The future of drug development is open. “The direction of travel of Pharma/Biotech R&D is towards cross-organisational collaboration: The sharing of resources and insights across the borders of companies, government agencies and research institutes is central to the development of therapies.”

Molecule is bringing open source methods to traditional industries, enabling industry cross-collaboration. We are achieving this by leveraging new technology and innovative legal structures to enable IP securitisation on a massive scale in the pharma industry. This will fundamentally reinvent pharmaceutical IP as an asset class, making it more accessible to a wider range of stakeholders, and creating incentives for a level of collaboration and data sharing that hasn’t been possible until now.

Patient Participation

Another reason securitisation can be so beneficial for pharmaceutical IP is that it makes the research and development of therapeutics more transparent and open to participation from a wider audience. Not only can a far wider range of investors now access this IP as a previously unavailable asset class, but those who wish to participate for reasons other than investment also have a much deeper level of access.

By securitising pharma IP, Molecule enables patients and advocates for disease cures to participate directly in promoting the development of the treatments they want to see come to market.

Conclusion

Not only do marketplaces for securitised pharmaceutical IP have clear advantages over other funding models in the pharma industry, but they are also posed to provide opportunities to commercialise treatments that would previously have been unable to make it to market.

By leveraging new technology, creative legal frameworks, and economies of scale, Molecule aims to overcome the historical barriers to IP securitisation, making it a low-cost and low-friction alternative to other forms of financing, and establishing fractionalised pharmaceutical IP as a fundamentally new asset class.


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Liesl Eichholz

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Molecule Blog

An open source ecosystem to fund discovery of molecules and accelerate innovation.