In the pharmaceutical and biotechnology sectors, industry consolidation has reached an all time high as a result of intensifying competition from generic drugs entering the market in view of off patent brand drugs, the ever increasing R&D costs and growing pressure from regulators to reduce drug prices. 2019 saw more than 25 acquisitions being executed with a majority of those involved developing cancer drugs or gene therapies, and the most expensive being Bristol Myers Squibb acquiring Celgene for USD74 billion.

However, whether you are a startup or a multibillion dollar pharma company, intellectual property (IP) is often one of the company’s most important assets. Whilst the strength of that IP can determine the value of a corporate transaction, third party IP rights may also significantly impact on a company’s freedom to operate (FTO), and consequently its value. Given the importance of IP rights in some corporate transactions, IP due diligence is often one of the last factors considered and is often assessed in a rush. This article will outline the role IP due diligence plays in corporate transactions, from reviewing a company’s assets through to FTO analyses.

Why IP due diligence matters

IP due diligence is the assessment of the IP owned, used and/or licensed by a company and how it protects their products and/or services. It also often involves an assessment of third party IP rights which may impact on the company’s business and/or ability to operate.

The need to undertake IP due diligence can occur in many different circumstances, including:

  • company takeover
  • sale of a company and/or assets
  • Initial Public Offering (IPO)
  • raising external investment capital
  • mergers and acquisitions
  • in-licensing a technology.

Whilst the extent and scope of due diligence will differ depending on the circumstances, it is critical to understand the importance of due diligence to every transaction.

Reviewing the IP portfolio

Before undertaking any IP due diligence process, it is important that the objectives of the parties involved and the role of the IP are clearly understood. Furthermore, a clear understanding of the company’s key products and/or processes are critical to the assessment of whether the IP is commercially relevant. This information will also inform the extent of the FTO analysis.

Typically, a review of the IP portfolio will involve one or more of the following:

  • examination of the existence, validity and enforceability of the IP rights and how it relates to a company’s business
  • assessment of ownership or chain of title of the IP, including any agreements in place (e.g. license/sublicense, research/collaboration, merger/acquisition, divestiture agreements) and whether those rights are free of third-party claims
  • assessment of the scope of protection and geographical extent and length of the IP rights and commercial relevance
  • assessment of all threatened, pending, ongoing or concluded third party disputes and litigation (e.g. oppositions, PGR/IPR, interferences) and risks of infringement of third party rights.

It is worth noting that a review of the company’s IP portfolio can be conducted at any time and does not necessarily need to be done as part of a corporate transaction.

Having the Freedom to Operate

In addition to a review of the company’s IP portfolio, IP due diligence typically involves performing a FTO analysis on the company’s products and/or services to assess any potential infringement of third party rights.

Depending on the extent of FTO analysis required, FTO searching typically entails:

  • review of third party IP rights
  • identification of potential IP roadblocks (i.e. granted patent claims)
  • analysis of the scope, validity and enforceability of any potential blocking patents
  • monitoring of published relevant applications and regularly updating the FTO searching/analysis.

Given that third party IP rights may block commercialisation of a product or service, it is important that before going to market a well designed FTO analysis is conducted to understand the risks of infringement.

The value of IP due diligence

Conducting a thorough IP due diligence on a target company will allow a prospective purchaser/investor to:

  • understand the strengths, weaknesses and value of the company’s IP, including identification of issues or gaps in the IP
  • strategically develop a plan for leveraging the IP in the future, including geographical and regulatory strategies to ensure broader FTO
  • identify any potential IP roadblocks and design around opportunities.

Ultimately thoroughly conducted IP due diligence allows a prospective purchaser/investor to make more informed decisions in any corporate transaction.

Take home message

IP due diligence is a complex process where understanding the strengths and weaknesses of each IP right is required to evaluate the IP portfolio as a whole. Failing to properly do so can not only result in significant costs as a result of lost transactions, it can also result in the acquisition of IP assets that do not protect the target products and/or services or technologies that are encumbered by third party liabilities.