IP Due Diligence Review for Life Sciences Companies: Essential Preparations for Successful Transactions

What You Need To Know

  • Managing patent lifecycles and exclusivity periods helps maximize your intellectual property’s value.
  • Employing AI raises special patentability considerations, particularly in drug discovery.
  • Patent ownership issues can create significant complications during diligence, making proper chain-of-title documentation critical.
  • The prevalence of in-licensing in the life sciences calls for careful attention to key aspects of licensing agreements.

For life sciences companies preparing for potential acquisition or investment, intellectual property (IP) often represents the cornerstone of your value, making thorough preparation and strategic foresight essential for successful transactions.

You don’t need to wait for a potential acquisition to prepare for diligence—in fact, you shouldn’t. Fenwick’s Hayan Yoon, Ph.D.; Key Shin; Dan Becker, M.D.; and Glenn Foulds, Ph.D. explored strategies to prepare for diligence in their recent CLE session, “IP Due Diligence for Life Sciences Companies and Investors.” Here's what companies should know about positioning their IP portfolio for scrutiny.

IP Due Diligence Review Fundamentals

The IP due diligence review process is more than a simple checklist exercise. It's a comprehensive evaluation of a company's IP assets and associated risks that directly impact transaction value. And timing plays a crucial role—particularly regarding patent lifecycles and exclusivity periods. Well-prepared companies analyze their IP portfolio's ability to provide market protection well beyond product launch dates, considering both patent and regulatory exclusivity timelines.

Consider a strategic patent lifecycle management program. While composition-of-matter patents traditionally offer the strongest and broadest protection, they may expire before providing meaningful commercial exclusivity. But companies can build layered patent portfolios that protect multiple aspects of their products. An increasingly common scenario involves repurposing existing drugs for new indications. While the original composition patent may have expired, companies can secure patent protection through subsequent patents (e.g., method-of-treatment claims). However, this requires thorough evaluation of prior art.

Artificial intelligence requires special attention in drug discovery. Simply having AI identify potential drug molecules isn't sufficient for patentability—there must be meaningful human intellectual contribution to the invention process. Clearly document human contributions to AI-assisted inventions.

IP Ownership Complexities Require Vigilance

Patent ownership issues can create significant complications during diligence. Three common scenarios highlight the importance of proper chain-of-title documentation:

Companies with complex corporate structures must ensure patent rights flow correctly between parent companies and subsidiaries. When employment agreements assign rights to multiple corporate entities, additional assignments may be needed to consolidate rights with the appropriate entity.

University collaborations require particular attention. When university inventors assign rights directly to a company, these assignments may be invalid if the university's employment agreements automatically vest rights with the institution. Securing proper assignments from the university itself is critical.

Companies hiring inventors from competitors should carefully review employment agreements and timelines. Prior employers may claim rights to subsequent inventions, which highlights the importance of documenting clear separation between prior work and new innovations.

In-Licensing Considerations

Many life sciences companies rely on in-licensed IP alongside their proprietary technology. When preparing for diligence, companies should review several key aspects of their licensing agreements:

Ideally, “Field of Use" and “Territory” cover all potential applications and markets. At minimum, they should clearly encompass the company's intended uses. Geographic marketing rights should extend across the globe for major drug development programs so as to maximize value.

Exclusivity terms will be carefully scrutinized. Core patents and critical trade secrets should be exclusively licensed. While general know-how might be non-exclusively licensed, product-specific data should remain under the company's exclusive control.

Sublicensing rights should not require licensor consent. This maintains freedom to structure future down-stream business relationships. Revenue sharing provisions for sublicense grants should decrease as development progresses, reflecting the licensee's increased investment and achievement of program advances with corresponding reduction in risk of failure.

Rights in materials deserve special attention. Rights to use biological materials (e.g., cells, viruses, etc.) typically governed by terms of a Material Transfer Agreement (MTA) which permits “research use only” and commercial use will require a separate license. Confirm that commercial use rights will be available at viable financial terms.

Strategic Recommendations

Starting IP diligence preparation well before a transaction is crucial. This gives companies time to identify and address potential issues, strengthen their IP positions where needed, and develop clear narratives around their IP strategy and risk management approaches

Start by mapping IP protection relative to anticipated product launch dates, then document clear chains of title for all patent families and review in-licensing agreements for potential obstacles to future transactions.

Remember that most chain-of-title issues can be corrected if identified early. Regular IP portfolio audits can help identify and resolve issues before they impact transactions.

Similarly, problematic license terms can be adjusted with licensors.

By understanding these diligence focus areas and preparing accordingly, life sciences companies can position themselves as attractive targets while maximizing the value of their IP assets.

Access the full webinar and learn about Fenwick’s life sciences and intellectual property capabilities.