“While no portfolio is without issues, an ongoing audit and review practice provides certainty to potential partners that the estate has been thoughtfully crafted, cared for, and risk mitigation strategies have been contemplated.”
The trend is here to stay – large life science companies are basing their growth strategies on research and development happening at early-stage companies. It is easier, and less risky, for large companies simply to acquire these enterprises working on new and innovative therapeutic candidates that have advanced to a certain stage. For early stage life science companies (ESLSCs), intellectual property is the asset.
Although 2021 saw what appeared to be a slowdown in deal-making activity compared to 2020, the top M&A and licensing deals were valued at well over $50 billion dollars. Whether to attract the attention of one of the larger players in the space – for a potential license or acquisition, to entice investors, or to remain competitive – a methodical and focused IP review should ensure clear alignment with business objectives and maximum return on investment. Not only does the IP audit provide the ESLSC a chance to broadly inventory and strategically review their IP, it also prepares them for any potential third-party diligence.
Because an IP audit can mean different things to different parties, the purpose and scope can vary based on the stage of the company, business objectives and possible opportunities. For the ESLSC with limited budget and resources, or one that relies entirely on outside counsel, a carefully staged approach to an audit and review focused on both general and specific goals, provides the greatest value in a cost-effective manner.
Identify the Business Goals and Assets
No audit can begin without a clear and precise definition of the business goals of the ESLSC. Without this clarity, the potential for a meaningful audit diminishes and the likelihood of wasted resources increases. In order to focus on the business goals, the company should have a detailed understanding of the following:
- What is the product and what is the market value for the product?
- What is the potential return on investment and what costs are associated with developing the product?
- What is the ESLSC’s business strategy for achieving these goals?
- What is the commercial timeline?
- What is the exit strategy?
A close collaboration between the business development team and IP counsel is required to ensure a thorough and comprehensive approach to understanding core business objectives of the ESLSC in order to assess if the IP is serving its purpose.
The audit should also identify, inventory and record all assets, with the obvious focus on patents. Inventory and review should include identifying legal status; ownership review and status, including chain of title; priority and expiration dates; and, most importantly, claim scope. In addition to the patents themselves, the broader ecosystem of the patents should be included and encompass all IP-related agreements, such as licenses and licensing obligations, collaborations, assignments, employment agreements and inventorship analysis.
While identifying the components of the portfolio can appear to be relatively straightforward, it can become more complex depending on whether all IP was generated by the company itself, in-licensed from a university, or created through collaboration with joint inventorship.
With the business goals identified and inventory established, the second stage of the audit is the strategic review: analyzing, assessing and evaluating the IP based on goals and strategy of the ESLSC.
A systematic analysis begins with whether the patent portfolio offers protection for the commercial product and its use. Many portfolio reviews reveal a surprising disconnect between the earliest patent filing strategies and the ESLSC’s evolving development goals. Periodic auditing ensures the portfolio tracks those goals, including any shifts or adjustments in strategy. If the portfolio aligns with the commercial product, then an evaluation of the scope of protection is merited. Things to consider include, for example:
- Are the most preferred molecules covered and do the claims offer the breadth required to capture market share?
- Are the narrow scope claims sufficient to protect the molecules itself? Are backup compounds covered?
- What life cycle management strategy, if any, has been contemplated?
- What is the exclusivity term captured by the patents and does it align with the commercial development goals of the ESLSC?
- Is the ESLSC taking advantage of tools for extending the life of a patent in view of the regulatory and approval pathway?
One of the most important themes to address during this stage is risk and how to address it. This involves understanding both the strengths and weaknesses of the portfolio to determine if there are any gaps or problems that need to be addressed. This is especially true with regard to freedom to operate and the potential for litigation. Consider, for example, whether the ESLSC’s patent portfolio accounts for the competitive landscape and takes into account any freedom to operate obstacles or has identified licenses that may be required and the cost associated with them.
Preparing for Third-Party Diligence
The advantage of an ongoing auditing and strategic review practice is the ability to perform a holistic analysis of the IP estate and identify strengths and weaknesses before being identified in a potential third-party diligence. Doing so allows the ESLSC the time needed to take appropriate remedial action and address omissions, if any, and avoid the risk of missing out on potential opportunities. While no portfolio is without issues, an ongoing audit and review practice provides certainty to potential partners that the estate has been thoughtfully crafted, cared for, and risk mitigation strategies have been contemplated.
It is important to note that depending on what type of third-party diligence is expected, a further audit can be narrowly tailored for the specific diligence circumstances. For example, if the ESLSC is contemplating a licensing deal or a financial transaction, a more specific audit can be performed using the information already gathered to view the portfolio through the lens of an interested third party.
Breaking the audit and review process into stages and working with outside counsel on focused and strategic objectives for each stage, depending on the circumstances, allows for the most meaningful and valuable use of resources to ensure a patent portfolio is given the time and attention it needs to be an ESLSC’s most robust asset.
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