Vaclav Volrab /
6 December 2016AmericasKaren Mangasarian and Ryan Murphey

Life sciences transactions: look before you leap

Whether it is to replenish innovator pharmaceutical companies’ diminishing new product pipelines or because of the allure of new platform technologies, the life sciences industry has been an active sector for transactions of various kinds.

These transactions have come in the form of partnerships, joint ventures, licences, and mergers and acquisitions. Life sciences companies typically rely on patent and regulatory exclusivity to recover the enormous costs associated with developing and bringing a product to market before generic or biosimilar competition drives profits down.

This means that intellectual property (in particular, patents) is often one of the most valuable assets of a life sciences company, particularly an early stage company, which does not have a revenue stream. Anyone seeking a deal with a life sciences company must understand the value and potential risks of its IP.

The value of any patent portfolio hinges on five fundamental considerations: 1) scope of patent coverage; 2) period of patent exclusivity; 3) ownership of rights; 4) validity and enforceability of patents covering products; and 5) freedom to operate (FTO). Regardless of whether you are the target company or the buyer (or licensor or investor), the analysis should be designed to reveal the strengths and weaknesses of the patent landscape.

Scope of patent coverage

The scope of patent claims determines whether third parties will be able to design around the patents covering a company’s commercial activities and/or products in order to develop competing products. Evaluating the scope of patent coverage involves a review of the patents, the claims of those patents, and the prosecution history. Generally, the review should focus on issued patents rather than patent applications.

This is because patents set forth rights that a company has attained, whereas patent applications merely set forth rights that a company hopes to attain. Nevertheless, where a target company is at an early stage, patent applications will probably need to be considered, as the target may not have any issued patents.

The most common types of claims found in life sciences patents are i) composition of matter claims, including product claims that cover the active ingredient or compound in a drug product, or pharmaceutical composition claims that cover the active and inactive ingredients of a drug product; ii) method of use claims that relate to particular methods of using a drug, such as methods of treating, diagnosing, screening, and dosage regimens; and iii) process claims that relate to a method of manufacturing a drug.

Generally, composition of matter claims tend to provide the most robust patent protection as they cover any use of that claimed composition of matter. Method of treatment claims can also effectively protect a drug product, but may be more difficult to enforce. For example, method of treatment claims that require multiple actors to perform all of the recited steps may pose enforcement challenges. Similarly, diagnostic method claims may not withstand a validity challenge in view of recent US Supreme Court decisions relating to patent-eligible subject matter.

“Accused infringers almost always challenge validity and/or enforceability of patents, so it is important to evaluate a target’s patents for vulnerability in these areas.”

It is best for a target life sciences company to have claims of varying scope. Broad claims can prevent competitors from entering that market but are vulnerable to validity challenges. Intermediate scope claims are less vulnerable to validity challenges but are also less of a barrier for competitors. Narrow claims are more likely to withstand validity challenges but are easier to design around.

These different types of patent claims should be considered in conjunction with a drug product’s life cycle, which encompasses development, exclusivity and generic entry. At early stages of product development, broad and intermediate scope claims can be useful to deter competitors from developing alternative products. By product launch, narrower composition of matter claims directed to the product that can withstand a validity challenge should be considered.

Beyond the initial drug product, companies regularly continue their efforts to develop second generation products (eg, new formulations or dosage regimens), which provide improvements in, eg, efficacy or safety. Patents that protect these second generation products can provide additional valuable assets and extend the term of patent protection.

However, these patents may be easier to design around and more vulnerable to validity challenges. Nevertheless, such a “patent thicket” around a product can make it difficult for third parties to avoid infringement or invalidate all the patent claims, and can extend the term of patent protection for a product.

Period of patent exclusivity

The length of the patent term is also an important consideration. Because of the lengthy process for drug development and approval before marketing, products are often launched with less than the full patent term remaining. Often there is less than ten years of patent term (plus any patent term extension) to market a product before generic or biosimilar competition erodes profits.

In the US, patents filed on or after June 8, 1995 expire 20 years from the earliest effective non-provisional filing date claimed in the application. That expiration date may be extended by patent term adjustment (PTA) and/or patent term extension (PTE). PTA is awarded for delays caused by the US Patent and Trademark Office (USPTO) during patent prosecution. PTE, which cannot exceed five years, is awarded for regulatory delay that occurs after grant of certain patents covering a pharmaceutical product requiring FDA regulatory approval before marketing.

Ownership of rights

In order for a target company to transfer its rights to any patents and/or to enforce those patents against potential infringers, it must itself have rights (either through ownership or licence) to those patents. In the US, the inventor is presumed to be the initial owner of a patent or application. An inventor who does not assign his or her rights in a patent to the company is a joint owner of the patent and has an undivided and equal interest in the whole patent, and may grant non-exclusive patent rights to others regardless of the interests of any other owners.

To avoid such a situation, companies should secure a proper assignment of rights from each inventor and record those assignments in the USPTO. Any potential government rights that could result from funding should also be identified. This is a particular concern for inventions developed by academic institutions.

Validity and enforceability

Accused infringers almost always challenge validity and/or enforceability of patents, so it is important to evaluate a target’s patents for vulnerability in these areas. Patent challenges may come in the form of litigation (eg, under the Hatch-Waxman Act or Biosimilars Act) or in contested proceedings before the USPTO (eg, inter partes review, post-grant review, ex parte reexamination).

The patent validity analysis looks to the statutory requirements for patentability, including subject matter eligibility, utility, novelty, non-obviousness, written description, enablement and best mode, in light of the most current case law. Analysing the claims in view of the specification and prosecution history is a good starting place, as any disclaimers or statements made during prosecution, including affidavits or declarations, may impact the scope of the claims.

The claims should also be evaluated for patent-eligible subject matter in view of recent Supreme Court decisions—particularly relevant to gene and diagnostic method patents examined under older guidelines. Prior art searches should also be conducted and the strength of the patent claims should be analysed in view of the most recent obviousness and obviousness-type double patenting case law.

Patents should also be evaluated for enforceability issues, including evidence of inequitable conduct, such as a breach of the duty to disclose material information (eg, prior art or contradictory statements) during prosecution of the patent.

Freedom to operate

It is important to note that even though a company may have patents that protect its products and activities, that does not guarantee that the company’s products and activities do not infringe patents owned by third parties. An FTO analysis evaluates whether the company will be able to make, use and/or sell the relevant product or activities without infringing any third party patents.

Performing  an FTO analysis early in the cycle of product development provides the opportunity to implement design modifications to steer clear of situations leading to infringement liability, as well as to obtain a licence from the third party at a relatively low cost.

Because the results of an FTO analysis depend on, inter alia, the quality of the search and the subjective interpretation of the relevance of any identified patent or application, FTO analyses do not guarantee that a company will not be liable for infringement. Nevertheless, they can minimise and manage the risk.

While each transaction is unique and presents its own challenges, the foregoing considerations are a starting point for any patent assessment in the context of a transaction. Ultimately, the strengths and weaknesses identified during this analysis will help guide the determination of an appropriate value for the transaction.

Karen Mangasarian is an IP rights management partner in  Ropes & Gray’s New York Office. She can be contacted at:

Ryan Murphey is an IP rights management associate in Ropes & Gray’s New York office. He can be contacted at:

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