“Freedom to operate is a concept that companies often confuse with their own patent protection. A patent does not grant the company an exclusive right to practice its invention.”
While part one of this two-part series on intellectual property (IP) due diligence focused on a life science company’s own IP portfolio, part two will address a company’s understanding of how it fits into the market by considering its freedom to operate, as well as its competitors’, and the interplay of patent and regulatory exclusivity as it relates to the company’s product.
Competitors and Freedom to Operate
It is vital for a company to analyze the clinical development progress and patent portfolios of potential competitors. In a company’s early stages, a landscape search to understand the technology area and the patent portfolios of potential competitors is important to gain an understanding of where the company’s potential product will fit into the market and what art it will have to avoid or distinguish from. This information can also be used at a later stage to inform a company about its freedom to operate once a product is more fully developed, as well as its ability to tailor some of its own patent portfolio to block competitors developing similar, competing products.
Freedom to operate, also known as clearance, is a concept that companies often confuse with their own patent protection. A patent does not grant the company an exclusive right to practice its invention. Freedom to operate is the company’s ability to make, use or sell its product without infringing the intellectual property rights, particularly patent rights, of a third party.
As a company nears completion of its clinical development, it is imperative for the company to confirm that it does, in fact, have the right to commercialize the product without infringing the rights of others. A company should have a search of the patent literature conducted to identify whether any third party has a patent right that could dominate or cover the use, manufacture or sale of its product or components thereof. Should the search yield some relevant patents, the company should consult with its IP counsel to determine whether an opinion (e.g., of non-infringement or invalidity) is required.
During due diligence, these opinions should not be shared as it may waive attorney-client privilege and attorney work product doctrines. Instead, the company should consider other ways to communicate the search results to the client, such as identifying the patents reviewed without discussing the contents of the opinion and letting the third party arrive at its own conclusions. When asked during due diligence whether there are any freedom-to-operate considerations, the company also should consider identifying patents it licenses (if applicable to the product in question) because, absent the license, the licensor would presumably be in a position to interfere with product development.
Understanding when a potential competitor could enter the market and the effect of such an entry on the sales of a company’s product is extremely important to third-party investors or collaborators. Scoping out barriers to entry for a generic entry often can illuminate strategies to erecting barriers to entry. This strategic effort has taken on a new and more complex life in the form of the recently enacted biosimilars legislation.
Working Together: Regulatory and Patent Exclusivity
Patent and regulatory exclusivity—two areas that can provide the most value and protection to a life science product—are very interrelated. Simply identifying when a key patent naturally expires is not sufficient, because regulatory exclusivity could possibly extend the company’s ability to keep competitors off the market or allow competitors to speed up entry in certain situations.
It is important to understand regulatory exclusivities available for the company’s small molecule, biologic or medical device products in the United States as well as in any relevant foreign commercial markets. Many foreign jurisdictions, including, for example, Europe, Japan and Canada, provide their own mechanisms for regulatory exclusivity for both small molecule and biologic drug products. Regulatory exclusivity, however, is not necessarily a foolproof way to ward off competition because the different types of regulatory exclusivity may have significant limitations that enable a third party to enter the market.
For drug products, the eligibility of marketing and data exclusivity can be critical. In fact, many products have had strong commercial success wholly independent of their patent position. Even if regulatory exclusivities are available, it is imperative that the company and its counsel understand the interplay between the regulatory exclusivity and the patent exclusivity. In the United States, drug products may be eligible for New Chemical Entity (NCE), Clinical Investigation (CI) or Orphan Drug exclusivity, and additional incentives can be provided in the form of Pediatric Exclusivity and GAIN exclusivity extensions. Additionally, listing patents in the Orange Book can significantly affect the timing of when a third party can file an abbreviated new drug application. For biologics, the Biologics Price Competition and Innovation Act provides an abbreviated pathway for approval of biosimilars and both data and market exclusivity for the branded biologic product. Mapping out the anticipated exclusivity for a product, inclusive of both patent term, patent term extension, Orange Book Listing, 30 month stays and marketing exclusivity, will help to inform the company of any potential weaknesses prior to third-party diligence.
Be Proactive and Prepared
Concerns with any one of the four categories discussed in this two-part series could inhibit a potential transaction. Once the audit has been completed, a company and its counsel should take time to address potential issues and align the patent portfolio with the company’s goals and refined patent strategy. Issues must be fixed not in a piecemeal manner but in view of the overall portfolio strategy so that each piece adds value to the overall picture of the product.
Certain issues, however, may not be adequately addressed before due diligence. In these situations, understanding the nature of the problem will ensure that the company is not blindsided and will allow the company to proactively prepare answers to questions regarding the issue and provide potential mitigating strategies.
An internal audit allows a company to prepare for a diligence on its intellectual property portfolio with a better understanding of its patent portfolio, a chance to fix any issues identified, and an opportunity to refresh and refine its intellectual property strategies. Understanding the interplay of regulatory and patent exclusivity as well as a company’s competitors will help the company better communicate how its product will fit into the market, including when generics or biosimilars will be able to come on to the market. Additionally, being aware of issues that cannot be fixed or where the law is still in flux, such as the ones identified above, will allow companies to better field questions regarding these issues.
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