In a joint webinar held on the 9 October, 2024, BDO’s and Aon’s UK based tax and insurance experts explored the importance of intangible assets to the life sciences sector and the risks and opportunities that arise at each stage of intellectual property (IP) development, commercialisation, and maturity.
“If you have not revisited your intangible asset strategy recently, it is likely that something will have shifted from a legal, tax or commercial perspective that needs to be considered and baked back in, otherwise your strategy will rapidly become detached from the reality of the business or the wider world,” cautioned Ross Robertson, Partner – Corporate Tax – BDO LLP, who opened the webinar by stressing the need for life sciences businesses to focus on their intangible asset strategy.
This focus, Robertson explained, should be made through three different lenses: legal and risk; tax; and commercial. “New intangibles can be created at pace and it's important to ensure that the right consideration is given to legal and risk matters [particularly] in respect of some of the new areas of development such as around AI and related data privacy matters,” said Robertson.
From a tax perspective, Robertson added, intangible assets have, given their role as a key driver of value, been a key focus of changes to tax policy in different geographical territories with “a constant change in what…reliefs and incentives look like”. Additionally, a commercial lens means it’s vital to ensure that risks are managed appropriately, and opportunities are maximised to support delivery of the optimal return on investment on any spend on intangibles.
Consider the Intangible Assets Lifecycle
When applying the three lenses it’s useful, Robertson said, to “reflect on the intangible assets lifecycle from development through exploitation and potentially exit” – i.e. the full intangible assets lifecycle. “Having clarity on the intended outcome from any development activity and setting up the right structures, frameworks and governance at the outset is often key, as it can be very costly to change structure or approach once IP has been developed and a structure has been established around it,” said Robertson.
That means at the development phase considering areas like funding sources and strategies, establishing the right legal holding structure from day one, as well as wider legal matters relating to the protection of IP. In the exploitation phase of the lifecycle, there needs to be clarity on what the assets of the business actually are. “Registered assets are easy to identify, and it's often the unregistered assets where the focus is required,” said Robertson. Value chain analysis, operating model design, governance and tax strategy are also critical at this stage.
Importantly, however, addressing any of those single areas in a silo is likely to result in a sub-optimal outcome said Robertson. “We sometimes see businesses trying to set their IP strategy through a tax lens only, or through a legal lens, or just thinking about it from the perspective of what is most natural for the business. The right answer needs to be all the stakeholders from those different functions coming together to get that truly holistic view.”
Building an Intangible Assets Strategy
When it comes to building an intangible assets strategy, there is a defined process that businesses can follow. It begins with the most important step which is asset identification where “we find very few businesses that are actually able to clearly articulate their full inventory of intangible assets, but it really is a critical foundation stone in developing your IP strategy,” said Robertson.
Next is an assessment of the value chain and how those identified assets drive value. Understanding the current and planned business model is important, as is knowing what funding and incentives are available, as well as what the disruption and costs might be for a transition to a new intangible assets strategy. “Maybe we're changing the ownership location of IP or there's movement in functions and responsibilities across the group; we really need to think about the impact of that change from a legal, tax, accounting and operational standpoint, and assess what costs, risks, and opportunities there may be that are associated with that change, and how we best manage that,” said Robertson.
The key thing, however, is to continuously review the strategy. “We always talk about an IP strategy as being a live strategy,” said Robertson. “You need to set a strategy, but then constantly monitor it and evolve it in response to the external forces that are impacting on the business,” advised Robertson.
Accounting for Intangibles
From an accounting perspective, Samantha George, Director – Business Services & Outsourcing – BDO LLP, identified intangible assets as those arising under business combinations, held for sale under the ordinary course of business, or internally generated intangibles, but not including areas like goodwill or heritage assets.
Once identified, however, when should you recognise an intangible asset in the financials? “Financial Reporting Standard (FRS) 102 says you should recognise an intangible asset if you are developing something where it's probable that future economic benefits will flow to the entity and you can measure its cost or its value,” said George. Separately acquired intangible assets must meet the probability question to be recognised, while intangible assets acquired via a business combination must meet the probability question and have arisen from legal or contractual rights and/or are separable (and an example here could be licences). “For internally generated intangibles, the research phase is not included which means those costs will need to be expensed to the profit and loss account,” advised George.
Once measured, and the intangible asset is on the balance sheet, what next for subsequent financials? “It's very similar to things you have to think about with fixed assets. What is the measurement of its useful life, and how is it going to actually give you revenue? You'll then effectively write down its cost over the number of years in question,” said George, adding that there is also a need to consider any impairment to the asset. But, when it comes to tax, warned George, businesses should beware of any deferred tax implications, particularly for research and development (R&D) spend where the accounting and tax recognition might differ.
Tax Opportunities
Turning back to the development phase, what sort of tax opportunities and risks should businesses be thinking about? “We need to be really clear at the start on where the IP is actually owned. I come across many businesses where a business is developing an intangible asset through contributions from different parties around the group, but there may be limited, if any, documentation in place to provide clarity on the relationships between those parties,” said Robertson. “Where we come across situations where there's a lack of clarity of the ownership of the IP, it gets really complicated in terms of whether we're trying to build a tax strategy, or on a future exit, of trying to bundle and package that up in an appropriate way.” Once ownership has been clarified, consideration can then be made on the routes towards increasing the return on investment in areas like grants and incentives.
Leveraging IP to Help Cashflow
A big advantage of developing and identifying IP assets is the subsequent ability to leverage that IP to help financing activities. IP backed lending is an innovative lending method that helps companies access additional pools of capital by leveraging their IP as collateral for debt financing transactions with lenders who are given an enhanced ability to operate in this space given the existence of an insurance policy.
For the life sciences sector, said Aon’s Sam Schofield, an Associate Director in Aon’s Structured Solutions business, this is an option for businesses who are already commercialised. “Our lending and insurance partners are focused on taking the growth and scale up risk, but they want to see some evidence of good market traction that typically comes in around the US$15 million revenue mark. There's not necessarily a need to be profitable and a lot of the companies that we work with are still 12 to 18 months from break even.” Typical loan sizes for growth companies under an IP backed lending structure can be from US$15 million up to US$75 million, depending on the need and serviceability. Schofield commented that the structures were designed to be as flexible as possible and individually tailored in the most suitable manner for the company and their planned growth journey.
Insurance Protection for Intangible Assets
Given the value that IP creates, it follows that businesses should also be looking at ways to protect their IP through insurance. “Insurance coverages like IP infringement defence are designed to cover the legal costs and expenses of a company looking to defend a claim that's been made against them, for example, because one of their products or services has infringed on a third party's IP right, such as a patent or a trademark,” said Rebecca Ding, Associate – IP Risk and Structured Solutions – Aon. “The insurance is also designed to cover damages or settlements that result from a claim.” Other coverages can protect the value in the IP itself such as IP Rights Protection which is designed to cover the legal cost of defending the IP assets, while coverages such as IP Indemnities Defence can also “protect the balance sheet from high or uncapped IP indemnities related to a business licensing out a patent or technology to third party licensees or customers,” said Ding.
Additional Considerations
Wrapping up the webinar, the panel looked at additional areas of consideration for businesses well into the commercialisation phase, which include how a business needs to change the way it thinks about tax. “What we see tending to be the real challenges for companies once they're profitable, is this tension between the business wanting to get on and grow and make money, but the tax rules often come and provide counter pressure against that,” said Robertson. “It might make business sense just to hire someone who's the right person for the job without thinking too much about their geographical location. But unfortunately, tax does have the concept of geographical boundaries. So, the act of hiring someone out of market can expose you to new taxes in terms of employment taxes. It's about finding that balance of the commercial requirements of the business with a tax reality as the business grows.”
From an accounting perspective, said George, it goes back to the need to identify where the IP actually sits within a company, while understanding whether that IP is commercially viable and over which period is it viable. “Companies can really help themselves by spending time thinking about their revenue recognition policies. Long gone are the days where we said turnover is sale of goods or services exclusive of sales tax. Regulators are pushing companies now to be very explicit about their revenue recognition policies in relation to areas like intellectual property.”
Where a maturing business may look to undertake an M&A transaction, trade sale or IPO, it can also be a time of greater exposure to IP infringement allegations which makes it “prudent to consider your IP risk at this time, especially when undergoing an insurance due diligence,” said Ding. “It's also prudent for companies to make sure that all their insurances are in order to ensure that they are in good shape ahead of these transactions, and also to potentially help them attract the right buyers for a trade sale.”
For more information contact [email protected] [email protected] [email protected]
This publication has been written in general terms and should be seen as containing broad statements only. This publication should not be used or relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained in this publication without obtaining specific professional advice. Please contact BDO LLP to discuss these matters in the context of your particular circumstances. BDO LLP, its partners, employees and agents do not accept or assume any responsibility or duty of care in respect of any use of or reliance on this publication, and will deny any liability for any loss arising from any action taken or not taken or decision made by anyone in reliance on this publication or any part of it. Any use of this publication or reliance on it for any purpose or in any context is therefore at your own risk, without any right of recourse against BDO LLP or any of its partners, employees or agents. BDO LLP, a UK limited liability partnership registered in England and Wales under number OC305127, is a member of BDO International Limited, a UK company limited by guarantee, and forms part of the international BDO network of independent member firms. A list of members' names is open to inspection at our registered office, 55 Baker Street, London W1U 7EU. BDO LLP is authorised and regulated by the Financial Conduct Authority to conduct investment business. BDO is the brand name of the BDO network and for each of the BDO member firms. BDO Northern Ireland, a partnership formed in and under the laws of Northern Ireland, is licensed to operate within the international BDO network of independent member firms. Copyright © October 2024 BDO LLP. All rights reserved. Published in the UK. www.bdo.co.uk
While care has been taken in the production of this document, Aon does not warrant, represent or guarantee the accuracy, adequacy, completeness or fitness for any purpose of the document or any part of it and can accept no liability for any loss incurred in any way by any person who may rely on it. Any recipient shall be responsible for the use to which it puts this document. This document has been compiled using information available to us up to its date of publication and is subject to any qualifications made in the document.
This article has been compiled using information available to us up to 2024. Aon UK Limited is authorised and regulated by the Financial Conduct Authority. Registered in England and Wales. Registered number: 00210725. Registered Office: The Aon Centre, The Leadenhall Building, 122 Leadenhall Street, London EC3V 4AN. Tel: 020 7623 5500.