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How IP Diligence Helps Corporate Lawyers Close the Life Sciences Deal

Published in the American Bar Association Business Law Section publication Business Law Today. Access the article on the American Bar Association's website.

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To the uninitiated, the combination of patent and US Food and Drug Administration (FDA) law applicable to life sciences deals may seem needlessly technical and perhaps a subject best glazed over. What could go wrong? A lot. Consider the saga of the heart drug Angiomax. After the product was approved, the owner sought to extend the term of its patent by four years. Two months later, its lawyer prepared and filed the papers—seemingly within the statutory deadline of sixty days from drug approval. A year later, the US Patent and Trademark Office (USPTO) denied the four-year extension on the grounds that the filing was just one day late according to its rules for calculating time. The owner of Angiomax now stood to lose rights worth hundreds of millions of dollars based on a seemingly trivial one-day miscalculation.

Would a corporate lawyer conducting due diligence on a deal concerning a drug like Angiomax have flagged this issue? Would they know that the highly technical patent and FDA rules can require counting calendar days in a certain manner, and that not following these rules could lead to a very costly mistake? That is probably unlikely.

Corporate transactional lawyers and other life sciences dealmakers know how to get a deal done. They know corporate law and understand the importance of conducting diligence investigations to identify and manage business risks.

Yet corporate lawyers for life sciences transactions might benefit from consulting with an IP specialist when it comes to intellectual property (IP) diligence. IP diligence will identify and manage IP risks before the deal closes, especially patent and FDA risks that directly implicate the period of market exclusivity the product may enjoy and hence the value of the deal.

Patent lawyers can contribute a better understanding of important, but opaque, patent and IP concepts and thus improve the deal. Here are some of the most important IP concepts that may not be fully appreciated by corporate practitioners.

1. Groundbreaking Compound Patents Are Not the Key to Extending Market Exclusivity

If you develop a new therapy to cure cancer, you might win a Nobel Prize and earn a patent, too. But surprisingly, that patent may not be valuable to protect your product in the marketplace.

Developing a drug or biologic and obtaining regulatory approval is expensive and takes a long time—often ten years or longer. A drug developer will almost always patent its new therapeutic molecule during the preclinical stage, prior to starting clinical trials to obtain FDA approval. By the time the product is approved, the patent claiming the therapeutic molecule may only have a few useful years left before it expires—hardly enough exclusivity to justify the massive costs of drug development.

To protect future markets, developers invest in later-filed and later-expiring “secondary” patents that are narrower in scope. For example, drug developers will seek patents directed to methods of treating particular medical diseases or specific groups of patients for which the drug or biologic is used, as well as delivery devices and formulations for the drug. Drug developers may also seek to patent new and useful physical forms of the drug, such as salts and polymorphs (crystallized chemical forms of a drug that can be important for drug stability), and effective combination therapies in which the drug is used. In the realm of biologics, companies often patent the highly complex scientific processes required for making the drug.

These secondary patents often get far less attention than patents for pioneering chemical compounds, yet they are the workhorses that deliver the economic value necessary to make the therapeutic development process viable. Make sure that these secondary patents receive prime attention when performing diligence and are adequately addressed in your deal documents.

2. Sure, Patents Protect Your Market, but FDA Rights Can Block the Competition

Patents block competitors from making a direct or close copy of the patent owner’s invention and provide market exclusivity for a product. However, because patents can be avoided in many ways, innovators seek additional forms of market protection. The FDA offers a number of statutory exclusivities specifically for drugs, biologics, and medical devices that effectively block competitors from joining the market for critical periods of time. Likewise, the USPTO also offers drug, biologic, and device makers ways to extend the useful life of their patents to compensate for lost patent enforcement time from FDA delays in granting approvals.

The FDA provides exclusivity rights that grant drug developers the right to block competitors from obtaining competing approvals for effectively seven and a half years if the original drug is considered an orphan drug, or five years if the drug is considered to be a new chemical entity (as opposed to a new molecular entity). Some drugs may also qualify for pediatric exclusivity, which extends a product’s market exclusivity for six months in exchange for the drug developer conducting studies of its drug on pediatric patient populations. Even prospective exclusivity rights expected to be awarded to a generic first filer can stall market entry by other generic makers for years and benefit the developer of the original drug. There are several other kinds of exclusivity rights available for pharmaceuticals, biologics, medical devices, and diagnostics equipment.

Aspects of the FDA’s review processes also can result in unofficial “soft” exclusivities that protect against competition, such as stringent bioequivalent, biosimilar, and other approval standards required to obtain approval of closely similar versions of a drug, biologic, or medical device. For drugs and biologics in the form of liquids, nasal sprays, and topical ointments, the FDA often tightens the approval standards for competing generic products, making it harder to get a generic competitor’s product approved.

There are similar hurdles for medical products that operate using AI. For example, a buyer seeking to purchase a company that makes a medical device employing AI to guide surgery would need to make sure that the training dataset and other data used by the AI device’s software are owned by or licensed to the developer. Without exclusive rights to use the key data or exclusive AI software, the AI device will not have market exclusivity.

These exclusivity rights and stringent approval standards for similar products are intellectual property rights that can be just as important as patent rights in protecting the product market. The product developer must be careful in seeking and using these forms of market exclusivity.

It is important for deal documents to fully identify all the rights that protect the investment and add value to the deal. These would include traditional market exclusivity rights such as patents but should also include other lesser-known rights such as FDA exclusivity and approval standards. Ownership of these critical rights must be investigated and verified. Representations and warranties in the deal should confirm the key features of the exclusivity rights, including statements that the party owns these rights, the rights were obtained correctly, and the rights are being used properly to protect the market of interest. These non-patent rights are not vague theoretical rights but instead property rights that must be fully documented in the deal documents like other property rights.

3. Muddled IP Reps and Warranties Don’t Work

Clarity and candor are the keys to successfully completing a deal involving patents and exclusivity rights. During the diligence process, there will be many issues that cannot be immediately resolved, such as inventorship and prior art issues. Representations and warranties are the tools deal lawyers use to manage risks arising from murky patent and exclusivity issues, and they need to be as clear as possible.

Representations and warranties about patents in deal documents must reflect the issues at hand correctly and must be written with precision. For example, a representation should not comingle technical (and often confusing) concepts about patent validity with issues concerning patent inventorship, maintenance fees, ownership, or patent infringement. To make useful and effective representations, it is necessary to understand the patent processes that are the subject of the representations—which is where the assistance and advice of a patent lawyer may be useful.

4. USPTO Rules Can Void Your Security Interest in Patent Collateral

Patents are a common form of collateral in a corporate transaction and are secured by the grant of a security interest, such as interests evidenced by a UCC-1 filing. The granting of a security interest in a patent can only be validly made by the patent owner, and not a closely related company such as a parent corporation.

Verifying valid ownership can be tricky and may involve reviewing years of transfer records to establish a chain of title. To be the owner, the company must be the recipient of a written assignment of full ownership in its favor signed by the prior owner, and every link in the chain of title from the inventor to the present owner must be in place. If one of the links in the chain fails, so does the claim of ownership.

Unlike most forms of personal property, the transfer and ownership of patents is governed by federal law. US patent law requires that the transfer be in writing and then (to achieve full rights) recorded with the USPTO’s assignment division. The assignment must be made by the current owner and not a closely related party. For example, a parent corporation that fully owns a subsidiary cannot transfer ownership of patent rights owned by the subsidiary. Such a transaction would be a nullity and would create a break in the chain of ownership. Missing or defective links in the chain of title may seem like a minor issue, but they are not. If the ownership chain cannot be fully documented, ownership issues will remain unsettled and uncertain.

Thus, in a complex corporate transaction, the bona fides of every assignment in the chain of title must be examined to make sure title has properly passed to the present owner before a new transfer is made.

5. Although You Earned a Patent, You May Not Be Able to Use Your Own Invention

A common misconception about patents is the belief that a patent gives the patent owner, or patentee, the right to freely make and use the patented invention. After all, since the USPTO granted a patent that provides a right to exclude others from using the invention, why shouldn’t the patentee be able to use the invention claimed in the patent? A patent does not actually give the patent owner the right to use the patented invention. Restated in lawyerly terms, obtaining a patent does not give the patent owner freedom to operate (“FTO”). It only gives the patent owner the right to block others from making, selling, using, and importing the patented invention.

Often, a product developer will be confronted with a broader patent owned by another party that precludes the developer from practicing its own closely related invention. For example, suppose a pharmaceutical company patented a new groundbreaking therapeutic compound intended to treat a particular disease, but the compound was not approved by the FDA for lack of a suitable pharmaceutical formulation for the drug. A competitor overcomes this problem by developing an innovative new way to formulate that compound so that it is safe and effective and meets FDA standards. Even if the competitor obtains its own patent covering its formulation, it cannot make or use the formulation because doing so will infringe claims in the other company’s broader compound patent. Likewise, the original pharmaceutical company would too be precluded from practicing the competitor’s patented formulation.

Thus, it is important to understand that a patent does not give the owner the right to practice the invention. To answer that question, the diligence investigator must consider the more complex and different question of FTO.

Conclusion

Patent law presents difficult and, at times, unpredictable issues. In the worst case, the haze created by the interplay of patent and FDA statutes and regulations can cause practitioners to make simple, but devastating errors like miscounting calendar dates. Corporate practitioners should consider seeking complementary patent expertise for deals that involve patents, other IP, and related market exclusivity rights.