UK: Getting the Most out of Your IP Due Diligence

Last Updated: 5 April 2006
Article by Robert Burrows

The global biopharma market continues to expand and is predicted to continue doing so for many years to come. A review of recent financial and biopharma press coverage indicates that mergers and acquisitions remain prevalent within this industry. Recent press coverage also indicates that there are now thousands of small biotech companies worldwide and that larger companies are looking to expand their product portfolios by cherry picking the best of these smaller companies.

Before acquiring or selling a biotech company, it is essential to carry out a thorough review of the target company and its products before any deal is completed. As the seller, conducting such due diligence should enable you to put your "house in order", which should in turn increase the marketability of your company. Due diligence should also assist with your valuation of the business and reduce your potential liability for misrepresentation and breach of any warranties that are provided. As the buyer, due diligence will also assist with valuation, as it will provide information on what is included in the sale and, perhaps more importantly, what is not included. However, for the buyer, due diligence is primarily about risk management. How do the potential problems that will inevitably be identified fit in with the buyer’s plans for the target business? Can they be overcome and, if so, how? Finally, is this the right deal for both the buyer and the seller?

Despite its importance, due diligence generally struggles to set the pulse racing. The mere mention of due diligence often conjures up images of data rooms and a seemingly endless review of documents for issues that are potentially relevant to the deal in question. Maintaining focus can therefore be a problem. While there is no magic formula for removing the need to review large numbers of documents, the due diligence process can and should be managed in such a way that any potentially relevant issues are identified in the most efficient manner with regard to time and cost. This article aims to provide some helpful guidance on achieving that goal. It is written in the context of the sale and purchase of a biotech company, and concentrates on the due diligence that should be carried out by the buyer in respect of the target company’s intellectual property.

From an IP perspective, due diligence will concentrate on three main areas: First, what IP protection does the target company have in respect of its key technology (both developed and in development)? Secondly, are these IP rights owned by or licensed to the target company, and are they capable of assignment to the buyer? Thirdly, are there any freedom to operate issues, for example third party patents or regulatory issues, that could prevent the buyer from exploiting the key technology in the future? Set out below are ten tips for getting the most out of the time that is available for due diligence. It is acknowledged that these tips are largely common sense; however, it is surprising how often and how easily they are forgotten by both clients and lawyers alike.

  1. The due diligence that should be carried out will be dependant on the deal in question and what is important to the buyer. It is therefore essential that everyone involved knows from the outset what the deal is and why the buyer is considering the acquisition of that particular target. Without such knowledge, the correct searches are unlikely to be carried out and the most relevant issues are less likely to be identified. Alternatively, relevant issues are likely to be flagged up alongside irrelevant issues, once again making it harder for them to be identified at an early stage.
  2. In addition to knowing what the deal is about and what the scope of the due diligence exercise should be, it is also important to have a clear timetable and budget in place from the outset. Such a framework should ensure that the key aspects of the deal are covered in the time available and within budget. It should also be remembered that due diligence searches and reviews of search results often take longer than expected. The exercise should therefore be commenced as soon as possible.
  3. A search strategy will need to be devised based on those aspects of the seller’s technology that are important to the buyer, and the jurisdictions in which the buyer would like to exploit that technology. Decide with the client who is best placed to carry out the searches and which information sources should be searched. Always remember that any one search is unlikely to identify everything that is potentially relevant. Subject to time and cost restrictions, multiple, overlapping searches should therefore be carried out.
  4. It is essential that records are kept of the searches that are carried out, the results that are obtained from each search and the documents from each search that have been reviewed. Potentially relevant issues should be captured in a separate document (e.g. a skeleton IP report) or readily identifiable from a main review document, so that they can be considered with the client as the due diligence review progresses.
  5. In a large deal it is likely that different members of the due diligence team will be working on different aspects of the target company. For example, different members may be considering the patentability and/or freedom to operate issues in respect of different products that are being developed by the target company. Consequently, it is unlikely that any one person will know everything about the due diligence review. Each individual must therefore know which areas they are responsible for reporting on and that relevant issues are communicated to other members of the team and the client.
  6. Due diligence is not a static exercise, as the scope and focus of the review may need updating as issues are identified. It is therefore essential that progress reports are held at regular intervals with the client so that potentially relevant issues can be considered and the scope and focus of the review can be updated accordingly. Such meetings should also assist with the completion of the exercise on time and within budget.
  7. Patents are fundamental to any IP due diligence in the biotech field. In the same way that agreements should be reviewed by lawyers with commercial experience, there are benefits in patents being reviewed by lawyers with experience of patent litigation. Such lawyers will be experienced in assessing the scope and strength of patent protection owned by the target company and any freedom to operate issues that are identified in respect of third party patents.
  8. When considering freedom to operate issues, it is helpful to distinguish between patents that are potentially relevant to the development of a product, and patents that are potentially relevant to the launch (or continued sale) of that product. In respect of development work that occurred in the past, it may be possible to negotiate a one-off development fee with the third party, rather than seeking a royalty-based licence for future activities. In respect of products that are due to be launch in the future, the expiry date of potentially relevant patents will need to be considered, as will their potential for patent term extension. The jurisdictions in which past acts and future acts have been or will be conducted will also need to be considered.
  9. As stated in the introduction, due diligence for the buyer is about risk management. Consequently, if a third party patent does represent a potential problem, the level of risk and the options available to the buyer should be highlighted. For example, is there scope for design around, does the third party license its technology, or is it already exclusively licensed to another party. If the patent in question is a European patent, has the patent’s opposition period expired?
  10. In addition to keeping the client up to date on relevant issues as the due diligence progresses, a final report together with an executive summary of key points will need to be prepared. As stated above, this report should identify relevant issues, consider the level of risk associated with that issue, and provide commentary on the options available to the client. The report should also highlight areas where further advice or analysis is required, potentially from advisers in other jurisdictions where any problematic patent is in force. Finally, when preparing reports for a client, the laws on privilege and the possibility of future disclosure should always be kept in mind.

© Bristows 2006

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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