In China, it has always been a major problem to work and commercialize the patent technologies, and particularly so for universities and research institutions. The problem is worse, when a military college is involved.
A breakthrough, however, is achieved in the operation of a project named “New Cerebral Electrical Impedance Tomography” (EIT), through the joint efforts of China Technology Exchange (CTEX), the Fourth Military Medical University (FMMU) and Beijing Yibuke Science and Technology Co., Ltd. (Yibuke). This is a classic relay race for the commercialization of research results from higher education institutions.
Project Background Replay On November 12th, 2009, at the opening ceremony of the Beijing Technical Patent Exchange Fair, FMMU, Yibuke and CTEX reached an agreement with respect to the industrialization of the Craniocerebral Real-Time Dynamic Continuous Imaging and Monitoring Device developed by FMMU in a common patent licensing transaction.
According to Professor Fu Feng, from the Biomedical Engineering Department, FMMU, the EIT project has been formed with the support of the surface programs and major projects of the National Natural Science Foundation of China, the key national scientific and technological projects and international cooperation in the 9th Five Year Plan of the Ministry of Science and Technology, and the key bolster projects in the 11th Five Year Plan of China. With the completion of related fundamental researches, major breakthroughs have been achieved in key biomedical engineering aspects. The world’s first prototype electrical impedance imaging and monitoring device has been successfully developed, and a series of researches done on the animal model imaging and the preliminary clinical application. On this, there derived eight patents and software copyrights, including “a method and apparatus of electrical impedance tomography for bedside imaging and monitoring”—an invention patent granted in 2008 (Patent No. ZL03134598.0).
To commercialize and meet the clinical demand as soon as possible, CTEX, together with FMMU, main researchers of the project and related institutional investors, have carefully designed a special technical transfer mode, where FMMU licenses the technical patent to Yibuke and Yibuke pays FMMU, as a consideration, royalties, including the initial down payment, the milestone payments, and a certain percentage of the sales income from the launching of the product into the market. In the process, CTEX plays the role of a third-party supervisor and settlement institution for FMMU, and of a financial service provider for Yibuke for any financial demand that the latter may develop at any stage of the industrialization of the project.
One-Stop Services of CTEX In the implementation of the EIT project, in addition to the evaluation of intangible assets, the capital contribution of such assets and the third-party settlement, CTEX provides Yibuke with the staged financial service and other onestop services for the purpose of the EIT commercialization.
During our interview, Li Zhonghua, Presidential Assistant of CTEX, told China IP that these one-stop services are centered on the following: a. The licensing helps avoid the issue with the under-defined ownership of scientific and technological achievements made by employees of higher education institutions with the support of public finance. Transfer or capital contribution of employee research results changes the ownership of such research results, involving the handling of the state-owned assets. In the existing case, however, the ownership of the employee invention is separated from its user right through patent licensing. By entering into a licensing agreement, Yibuke obtains a license from FMMU, with no change to the ownership of the patent. This is an effective solution to the ownership ambiguity of employee research results of higher education institutions.
b. The market value of the EIT project is determined through intangible assets evaluation. The project is evaluated by a CTEX member that specializes in intangible assets evaluation. Its market value, as evaluated by the third party, is used as the basis to determine its technical contribution.
c. CTEX, as a third party supervisor and settlement institution with public credibility, solves the problem with the lack of credit in the transfer of the technology. During their mutual communication, Yibuke and FMMU have taken full advantage of CTEX as a public credible platform. The thirdparty supervision and settlement offers an effective solution to the often lack of credit in the technical exchange market of China.
The EIT project is classic in that CTEX has created the new technical exchange mode and introduced the special institutional investor to incubate the technical patent. From the dimensions of technology, ownership and finance, it has creatively enhanced the weak links of technical exchange by integrating the owner of the technology, the investor of technical transformation and the transaction service provider. Hailed as the “valuable first of China” in national news media, it leaves an example of research results transfer from a higher education institution.
The Ongoing Relay Race According to Chen Cong, General Manager of Yibuke, in the integration of the owner of the technology, the investor of the technical transformation and the transaction service provider, Yibuke organizes related human resources, material resources and financial resources to transform the technology into a product. It does not target the final commercialization, but incubates and transforms the technology before exiting the process.
The project is a relay race on the industrial chain and the value chain with respects to technical investment and exchange. The first leg runner is the higher education or research institution which patents the technology; the second leg runner is Yibuke which transforms the technology; and the third leg runner is an industrial capital or enterprise through multiple financial or investing actions or acquisitions or mergers, to marketize and industrialize the product.
“Specifically speaking, creatively Yibuke plays the role of an angel investor other than an industrial capital,” Chen Cong told our journalist. “First, different from a usual angel investor who focuses on financial investment, Yibuke not only makes a monetary investment, but uses its long-term experience in business operation. It knows well how to transform a technology into a product. In other words, it is an investor who knows the ropes, and who is more certain of the success. This angel investor with Chinese characteristics is similar to many VC/PE funds which focus on and invest in early projects. To be a good second runner in the relay race, it must receive the baton from the first runner—the higher education or research institution—at the exchange zone. Second, more importantly, the product transformation must be based on the technology, driven by a market demand and done independently from the market perspective, for an effectively link to be built between product and market. Third, the product transformation should be followed by multiple financial or investing actions or acquisitions or mergers, so that it can be commercialized by industrial capitals or enterprises.”
As Chen Cong understands it, the so-called “exchange zone” is to identify and select technical achievements, clarify their ownership, and form a technical team.
Reportedly, in accordance with related state regulations on the registration and approval of medical appliances, Yibuke has set up a wholly-owned subsidiary—Nanjing Yi’ai Medical Equipment Co., Ltd. (Yi’ai) for the transformation of the technology in the EIT project. The latter specially deals with the digestion and absorption of the technology, rounds of prototype preparation, the determination of medical appliance standards and the application for registration and testing. Now, it has entered the clinical trial stage, and is expected to obtain the medical appliance registration certificate in Category II by the end of this year.
“As a technical institutional investor, Yibuke will develop new patents in the implementation of the EIT license.
The future investment with both cash and intangible assets will help break the funding bottleneck, and maximize our human resources and technology. Now, as the product transformation process is to end soon, we have set up a subsidiary to marketize and industrialize the EIT project,” Chen Cong explained.
Patent Strengthening Strategy In most cases, exclusive licensing is preferred by enterprises, but the EIT project is implemented through nonexclusive licensing.
For this, Chen Cong has his points.
He said that nonexclusive licensing has its advantages and disadvantages. The advantages are as follows: First, it is an international usage. Nonexclusive licensing does not change the patentee. In the case that a patent is owned by a state-owned research institution, as with the current case, nonexclusive licensing is compliant with the requirement to retain and increase state owned assets. It is easier to strike a deal than exclusive licensing. Second, the patentee will have more than one buyer, receive more royalties on the patent, and have a higher opportunity to transform the patent into a product. It will be less possible that the patent is bought and iced up. Third, the licensee will pay much less in nonexclusive licensing than in patent buyout or exclusive licensing. He will incur a low opportunity cost in the transformation of the patent.
“The main disadvantage is that compared with buyout or exclusive licensing, nonexclusive licensing will lead to more than one licensee. The first licensee, as the pioneer, who operates improperly, may die at the last mile to success, or receive less than expected earnings on his investment due to the rapid entry of other investors shortly after the product is launched into the market, in particular, when high-tech products are involved,” said Chen Cong.
Moreover, reportedly Yibuke has carried out a strategy to strengthen its patent protection.
a. It develops high awareness of IP protection among its employees, and sets up a patent pool in the company. In the past three years, it has applied for a number of patents, received three invention patents and four utility model patents, and some more are pending.
b. It perfects the IP protection strategy in the technology-to-product process. On the basis of the nonexclusive licensing by FMMU, it tries to apply for patent extensions in the exploitation of the technology, and to establish an intellectual property protection system.
c. It keeps a close eye on industrial dynamics, and perfects and improves the competitiveness of the product.
“More importantly, in the patent strengthening strategy, Yibuke closely follows the development of the mobile Internet and cloud computing. It takes the lead to integrate these technologies into EIT-related products. It has submitted applications for a few EIT-related invention patents on the basis of the intelligent interface of the Mobile Internet and cloud computing. This is advantageous for any future upgrades of the products, creating an effective barrier to the entry of future competitors. For the nonexclusive licensing, it can and should pay a royalty to the Fourth Military Medical University. Against any future peer competitors, it may take such actions as cross licensing or others to overcome the shortcomings or defects of nonexclusive licensing. With the patent strengthening strategy, assuredly investors will start to assess their expected earnings on the investment and join the EIT project,” Chen Cong said.
Talent Development and Incentives During the interview, our journalist noticed Chen Cong’s particular emphasis on the importance of talents.
He said that today, VC/PE, which ever had very strict requirements on the financial and educational background, begins to favor industrial talents with operational or management experiences. In addition to investment managers, many venture capitals need professionals to deal with industrial research, project development, investment operation, after-investment management and investor relationship management.
In their implementation of the EIT project, Yibuke and Yi’ai have deliberately developed technicians with compound skills.
Confidently, they are the future talent pool, as they are no longer limited to technology due to lack of a financial background.
“It should be stressed that a technical patent cannot be without talents as the vehicle, and is not restricted to how precise the language is. To retain a stable and motivated technical team in the longer run, since its inception, Yibuke has provided stock option incentives to technical members, so that technicians may receive an income from being a stockholder of the company. We have had technical teams from higher education or research institutions, or built our own. The members are interested parties other than simple employees. Fundamentally, their enthusiasm and creativity are motivated, with an opportunity to start a new career.
In comparison, it is not terrifying to have more than one licensee under nonexclusive licensing, because, after all, talents are the core competency,” Chen Cong said. “The stock option incentive helps overcome the talent weakness—the essential short board of the company. It greatly motivates technical and operational personnel, and attracts people with compound background skills and strong social connections for the industrialization of the technical patent. It effectively improves our core competency.”
Chen Cong noted, “CTEX provides onestop services with respects to stock option incentive, stock option administration, and the coordination between employee inventions and non-employee inventions.
The services are very effective, particularly when the licensor is a state-owned entity.”
The Third Leg Runner While promoting the advantages of the EIT project, Chen Cong faced up to the existing problems. Frankly, he told our journalist that the project has two main issues. One is the imbalance between fund demand and input. Yi’ai has built up a platform for the research and development of the project, with respects to the certification of the medical appliance manufacturer qualification, the construction of a production line, the organization of R&D and engineering staff, and the registration and declaration of medical appliance products. Also, it has invested a huge amount of money in the R&D work.
The sufficient fund is indispensable to the processes from technology to product and from commercialization to industrialization, and to the development of any new generation medical appliance. It is impossible for Yibuke alone, which has limited abilities, to complete the industrialization of the EIT project. With the introduction of strategic investors, the project can be made a subject matter of public offering, merger, acquisition, reorganization or private placement, so that the target will be well defined, and the investment plan be implemented. The other issue is concerned with the insufficient demand. The project is searching for its next receiver, as it will be completed finally by an industrial capital or enterprise. It hopes to establish with potential investors a new “demand-driving mode,” that is, it becomes “driven by demand other than supply, or by the combination of market and supply other than supply alone, with more emphasis on the driving of demand.”
“The past three years have witnessed from the initial setup of the EIT project to the current clinical trial and certification. Now, we have gone half of the way. We hope to obtain the registration of medical appliances in Category II in the near future, so that related manufacturers can go on with the project. Also, we wish for more attention from strategic investors to this product and industry in which China owns intellectual property rights and which are leading in the world. The maximization of the industry cannot be without the investment of farsighted strategic investors,” Chen Cong said. “A technical patent is commercialized through the stages from technology to product, from product to commodity, and to commercialization. It runs over a long period, and risks are involved at each of the links. Thus, the total supervision and services of an exchange service provider are necessary, including the evaluation, reforming and financial services regarding the processes from product to commodity and to commercialization, to build a complete chain of service for patent industrialization.”
(Translated by Ren Qingtao)
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