Regulatory risk has big effect on patent valuations.
Medical devices and pharmaceutical inventions are a special case of intellectual property and are an interesting case study in the valuation of IP. They are an example of the influence of regulatory risk into a valuation analysis.
When an invention requires regulatory approval, a patent is only a secondary element of intellectual property protection.
When government regulation is involved, the primary intellectual property protection is the regulatory approval – not the patent.
A patent on a medical device or pharmaceutical has zero value until FDA approval. Once regulatory approval is obtained, competitors will enter the market and that is when the patent has value.
The patent has value to keep other companies out of the market, but the primary moat against competitors is the regulatory approval, not the patent. The patent only comes into play *after* regulatory approval.
If the product fails to get through regulatory approval, the patent will never be infringed and the patent is worthless.
After regulatory approval, a patent keeps a competitor from riding on your coattails.
Patents only matter *after* regulatory approval.
Nobody can compete with you because the FDA (or other regulatory body) prevents them. This is your first line of defense. The second line of defense is your IP portfolio.
If you are the first one to market with a unique medical device, you have to go through the laborious de novo review at the FDA. This hurdle can be painful and expensive. However, once you accomplish the approval process, a competitor can ride on your coattails, citing your product as a predicate device and showing how similar their product is to yours.
This is when your patents start to matter.
Medical device patents matter – its just that the valuation is different.
Patents have value when they are put to use. Until patented products are being sold, patents merely have speculative or potential value.
For many patents, such as consumer devices or maybe a construction tool found in Home Depot, there is a very low bar to bring the product to market. An entrepreneur can just make the product and sell it.
For medical devices, the bar is much higher.
Nothing happens until there is approval from FDA, so the complexity, time, and money required to get to market is much higher. And there is substantially more risk.
The whole point of a clinical trial for a medical device is to make sure there are no problems.
A single patient who is adversely affected by a medical device during clinical trials can set you back or even kill a product.
This means there is a substantial, non-zero risk that must be overcome before the IP has any value whatsoever.
Valuing medical device patents for IP-backed loans.
Medical device patents are impossible to collateralize for IP-backed loans prior to regulatory approval. After regulatory approval, yes, the patents can have value for an IP-backed loan. But before approval, it is a different bet.
Any investment in a medical device company or a loan done prior to approval by the FDA has to factor the regulatory risk.
If we do an IP-backed loan prior to clinical trials, we are not betting on the value/strength of the IP. We are betting purely on the success/failure of the clinical trial.
This is why lenders never put a value on a patent prior to clinical trials.
Pharmaceutical patents are especially binary
Pharmaceutical patents are an even more extreme example of the same effect as medical device patents.
Pharma patents are typically a patent on a specific molecule or groups of molecules. If these molecules – for whatever reason – fail to get through all of the clinical studies, they are utterly worthless.
For some medical device patents, the technology may be repurposed or used in a modified way. These patents may find additional value over their 20 year lifespan, and therefore they can have some residual value.
Pharma patents are especially binary: they are either utterly worthless (because they failed clinical trials for some reason) or they can be worth billions (once they passed clinicals).
Regulatory approval for new drugs represent an enormous amount of investment and an enormous risk. A failure to pass one of the trials, such as unintended side effects or less than optimal efficacy, would doom the entire project. However, when the stars align and all those hurdles are successfully passed, the drug (and its patent) has enormous value.
For our business of providing loans using patents as collateral, we typically do not put any value on patents for products before regulatory approval. Once FDA clearance is achieved, that approval is often considered more valuable than the patent from an intellectual property standpoint.
Because of this, we consider FDA clearance as an intellectual property asset we can loan against.