Intellectual property 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, 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.
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. Recent years have seen continuing acquisitions in the biotechnology industry. While the total number of acquisitions has declined somewhat, the dollar value of some acquisitions has been significant with Amgen attempting to acquire Horizon for USD27.8 billion and Pfizer attempting to acquire Seagen for USD43 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.
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:
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.
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:
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.
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:
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.
Conducting a thorough IP due diligence on a target company will allow a prospective purchaser/investor to:
Ultimately thoroughly conducted IP due diligence allows a prospective purchaser/investor to make more informed decisions in any corporate transaction.
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.
We recommend engaging experienced IP counsel to assist with the IP due diligence process to minimise these risks whilst maximising the value of the present IP portfolio and its future potential.
Prue Cowin and Patrick McManamny are experienced patent attorneys in IP due diligence, working together with our specialised search company, Athena IP®.