Intellectual property due diligence can be practiced in a variety of transactional contexts including mergers and acquisitions, licensing, initial public offerings, and private equity financing, among others.

In this recap of our June presentation, which includes video and an accompanying transcript, three panelists -- Melissa Rones, an IP transactions partner at Ropes & Gray; Lisa Geller, Head of Intellectual Property at Seres Therapeutics; and Kerry Flynn, Vice President, Chief IP Counsel at Vertex Pharmaceuticals -- explore the issues and strategies for conducting IP due diligence to mitigate risk and add value. The panelists provide lessons learned and perspectives of different stakeholders in the due diligence process.

This presentation is part of Life Sciences Quarterly, a new quarterly seminar series that delivers insights from Ropes & Gray attorneys, speakers from government and industry and other professionals as they examine key developments, issues and trends affecting the life sciences sector.


Transcript: 

Marc Rubenstein: Welcome everyone to our June edition of the Ropes & Gray Life Sciences Quarterly, a series we initiated this year to bring a diverse range of topics and a diverse range of formats to our Life Science clients and friends in the Boston area. So, we're very glad that you're all here.

Today's diverse topic is IP Diligence, and what diligences do and issues that arise in performing IP Diligence. I imagine everybody in this room has touched on these topics to some extent in the course of their travels in the industry. We have a great panel with us today to talk about these topics. We have Lisa Geller from Seres Therapeutics, my colleague Melissa Rones from our IP Group at Ropes & Gray, and Kerry Flynn from Vertex. My name is Marc Rubenstein. I'm in the Life Sciences Group at Ropes & Gray. I'll give each of our panelists a moment to talk about themselves and let us know what they've done in their career.

Lisa Geller: So, I started off, maybe a semi-relevant part of my life for this, as an academic scientist. And then I like to think of it as I retired from Academic Science, and this is my retirement hobby as a patent attorney. So, I started off at law firms doing strictly patent law, started doing some licensing work, a little tiny bit of litigation, and then went to Biogen for a while where I worked in a large law department. Now, I mostly like startups and small companies. So, I work for Seres now. Which also means often being the first patent attorney or the first attorney into these companies, taking at least two of them over through their IPOs, so it means you also learn a lot about corporate law, employment law, and whatever else anybody drops on your desk. It's fun.

Melissa Rones: So, as Marc said, I'm Melissa Rones, and I'm in the IP Practice at Ropes & Gray here in the Boston office. Like Lisa, before coming good to the law, I started out in Academics Science and did a Ph.D. in Cell and Development Biology, and then came to Ropes & Gray, and I've been there for 17 years. My practice is a mix of things – patent strategy, licensing, and due diligence in a variety of contexts, including, mergers and acquisitions, licensing, IPO, and private financings.

Kerry Flynn: I'm Kerry Flynn at Vertex Pharmaceuticals. My history is I started out in large law firms practicing patent law. Over the years, I've done several in-house stints at Biogen, Cubist, Shire and now Vertex. So, I'm happy to be here.

Marc Rubenstein: So, for those of you who fear that I actually was going to try and say something about IP diligence, fear not. I'm moderating our wonderful panel of experts, but we would invite all of you to ask questions or engage in dialogue with us as we go along. The size of the audience lends itself well to having a discussion with you rather than merely talking to you. So, I'm going start with sort of the basic question. When you, at the front end of a transaction, be it a merger, an acquisition, or a licensing transaction or a public/private equity investment, how do first approach accessing the scope and the areas of emphasis in a diligence project? What do you think about as you roll up your sleeves to dig in?

Lisa Geller: Who wants to start?

Kerry Flynn: I'm happy to start. So, the first thing I do is talk to the business development folks to make sure I have a thorough understanding of the goal of the transaction that they're contemplating, because without that conversation, it's really difficult to determine the scope and the depth of your due diligence that you're going to perform as part of that transaction. So, my first step is always talk to the business development guys, find out... or girls... sorry about that, but find out how much money are we spending on this transaction, what is the impact of this transaction, what's the goal, and go from there.

Lisa Geller: I think the one thing I would say is business development is my first stop. My second stop is often R&D and/or Commercial, because the first thing that happens is often business development is not completely aligned with what... depending on what the deal is about with R&D and Commercial, and sometimes what I find my role is to suggest that we all sit in a room together and make sure we're all on the same page with the story about what we're trying to accomplish with whatever the deal is.

Marc Rubenstein: What sort of misalignment do you see, so... misunderstanding about what the value driver is, or the commercial opportunity, or help us understand a bit what misalignment might you see?

Lisa Geller: So, sometimes what I'm seeing is we're doing... there's something where what the business person is all about acquiring, for example, a license to some IP. But, in fact, what the R&D people want is to get into the data that the other party has. They want to create some kind of collaboration. They see this as the first step in making that collaboration. That shifts the feeling of the deal, so that's particularly something. Once in a while BD will see an opportunity that seems to them very important, then you'll talk to the commercial guy and they'll say, 'Hmm... you know, not the greatest indication in the world. What else is there? Let us know.'

Melissa Rones: Yeah, and I think as outside counsel, it's connecting with our clients and either, through whoever the point-of-contact is going to be, some combination usually of the IP team, sometimes the larger business development and deal team, and get feedback on what the internal drivers are. Understanding what the deal structure's going to be, any information that the team has about what are the most important aspects of the transaction – is it particular swaths of IP? Are there known issues that everyone is sensitized to on the front end that we're going to a particular deep dive on, or any sort of known areas of sensitivity? I also like to always have a good feeling for what the likely competitors or competitive technologies are. That could be very helpful sometimes in scoping a review, particularly if you're going to do any kind of searching or third-party analysis to really have a good feeling for what the likely competitive positions might be.

Marc Rubenstein: So, since we rarely in our lives have the luxury of having as much time to do things as we want to do, or if your outside counsel doesn't have as much budget to do what you feel your client should have you do, when you're trying to figure out areas of emphasis. If you're trying to allocate, fit with either the time or the budget constraints and obviously, I think this will vary, of course, depending on what you're buying, what you're licensing, whether it's a clinical stage asset or early platform technology, but how do you sort of map out what you're going to prioritize and emphasize?

Lisa Geller: Well, I mean, what this makes me think of actually, the first diligence I ever did where I was sent over, it was one company purchasing another. We were sent, I alone was sent over to the law firm that had been managing the patent portfolio and it was in the days when it was all still paper. I was ushered into a conference room that was completely lined knee-deep in file wrappers, all patent prosecution, and told, "there you are, go for it and we're signing the deal tomorrow no matter what you find." I was like, order me a cocktail.

Marc Rubenstein: So you took the afternoon off, right? What's the point?

Lisa Geller: I was like, okay. You know, and in that case the first thing is just check ownership, make sure there are no liens, I mean the really, really basic stuff and every once in a while that does trip something up. It can always be fixed. It usually can be fixed. But I start there.

Kerry Flynn: I agree. I think there is always a question of what are you going to do with the IP information if I find out there's a freedom to operate problem or they don't own the patent you're trying to acquire. Because if they're not going to do anything with that information from a business standpoint, and as many of you know if you do identify issues, there's many different ways you can address those things in the context of a transaction. But understanding if the client or your company is comfortable with the risk and what they really need to know. Then oftentimes we also stage the diligence so we do what we call loosely desk-top diligence, which is "I'm going to spend a couple of hours and see if there's any red flags that pop up easily," to guide the business development conversation at the initial stages before you do a really in-depth diligence. So I think, oftentimes, staging it and being clear if you're working with outside counsel that I'd like you to spend two days on this or I'd like you to spend two hours on this. There's a big difference there. And what kind of information do you really need at that stage of the transaction?

Melissa Rones: And I think I would add to ownership. Making sure that you have a good understanding or that you feel comfortable to the extent that there's in-licensed intellectual property with those contracts. So I think sometimes some people think of that as legal diligence because it's a contract, but if it's a significant material license, although it certainly is legal diligence and they'll be aspects that will be the focus of probably other members of your deal team, and in terms of choice of law and maybe some indemnification and some other sort of things that may fall maybe not squarely in the IP bucket if it's a material license, I think generally you want to make sure that somebody on your IP team has looked at it and thought about it and is comfortable that the rights that are purported to be licensed are, in fact, licensed, that you have the field is correct with what you want to do. I think we've seen that, from time to time, the license may be completely fine for what the entity that holds the license was doing or wants to do, but perhaps, and this is where maybe conversations with your business development and commercial team come in to play, maybe it's not sufficient for the area that you think that your company would take the technology, the direction of the type of technology, so being able to raise that as a potential issue relatively early can be helpful.

Kerry Flynn: Just to follow-up on your point on the ownership issue. There have been circumstances where the business development group gets very excited about the technology and the technology is not owned by the party that they're starting to negotiate with, and it sounds kind of odd, but this happens more often than you would think, especially in the context of technologies that may have originated in an academic institution, and then the investigators leave the institution, they start a small start-up company, and oftentimes the university or the academic institution still owns the rights and the patents and the data. Yet business development is talking to the spinoff. So, it's important to make sure that you're negotiating with the party who owns the rights that you want or the asset that you want.

Melissa Rones: And I think on a similar note, just to make sure that everyone knows going in that this is in-licensed intellectual property, not owned intellectual property, and how that gets treated. I think the other thing is, when you are looking at ownership, identifying to the extent that there's co-owned IP, as opposed to solely owned IP, not that that's necessarily a bad thing, but there's other things that you'll check for, right? If it's co-owned, does the entity you're dealing with have a license for the co-owners, such that they have all the rights and you'd have exclusive dominion over it? Or is it essentially kind of freedom to operate situation that doesn't give you exclusivity in that IP, just gives you a right to practice?

Marc Rubenstein: Or do you have a good license at all if they haven't gotten consent of the joint owner for European licensing? Or do you have the right to enforce if they haven't gotten the agreement of the joint ownership to join in enforcement suits?

Lisa Geller: Enforcement, and that's one of the really key reasons, to me, to make sure that when those things get reviewed that there's a patent attorney. Because often the corporate attorneys, wise as they are, just don't know what the traps are on the IP side if you don't have the right, or if you don't have enough of the rights. It's a useless piece of IP, you can't go to court.

Question from audience: How concerned about inventorship are you when you're concerned about ownership and what the parties have done to determine inventorship?

Lisa Geller: Yeah, oh gosh, I'm a lawyer it depends. You know often there are different little things. I mean, I don't usually get time, nor does my outside counsel have time, to really do that in-depth. And this is going to sound terrible – I rely, on some level, on what's your gut feeling about this? I mean with a lot of information. So, if I see the paper that went with patent or a patent application, and I see five names on it and the lead author on that paper is not an inventor, I need to know why that happened. And I usually need to know that from the attorney who wrote that patent application. So it's judgment I think, just because of the timing and the expense, but you know if I had all the time in the world.

Melissa Rones: I think it's very hard, and on inventorship, I completely agree with Lisa. I think the other thing I look for is to try to suss out to what extent is there likely to be a risk? Was this worked on entirely in-house? You know, at the entity? If so, investorship may end up not being quite correct, but the risk that affects ownership is presumably substantially lower and so I don't feel like there's sort of the red flag there in contrast to, "well actually this was a collaborative effort with another institution," or we use these consultants and I can't, and I actually don't have an agreement or something that leads you to believe that if inventorship were to be wrong, it could cause a problem with ownership. As opposed to situations where inventorship may be wrong but it's unlikely to cause any harm.

Lisa Geller: So for me that also comes back to this question: why are we doing this? You know, if it's really not a very good patent application and it's probably, you're doing it more because for reasons the company wants it or they want the relationship, I'm probably not going to kill myself over it. If it's key, then yeah, we're going to dig. So it comes back to that initial conversation with everyone: why are we doing this?

Melissa Rones: And I think that kind of goes to, and it depends on the stage of the deal, sometimes if it's a particularly early company, they may have few or even no real patents. It may be know-how. It may be data and there may be very little registered intellectual property. If it's a later stage company or even sort of a mid-stage company, there may be lots and lots of patent filings, but maybe a very small portion of them are actually directly relevant to the deal, are material to the key compounds or the key indications and the rest is other stuff the company was doing and filing on that, candidly from your perspective, it could all go away and it wouldn't effect deal value at all. In situations where I'm digging into the portfolio, generally my first question to get a handle on, in this table of 50 patent applications, point me to the ones that you think that you purport to cover the two key products or that you purport to provide protection for this disease indication, and chances are those are the ones that I'm going to spend time on. Everything else I'm probably just going to look at chain of title and make sure the company either owns it or has the license to it, if that, and maybe nothing else at all, because it's unlikely that will really be a driver for the business.

Kerry Flynn: And I tend to think a little bit differently than both of you on this. I do spend a little bit more time on inventorship analysis, especially if it is a European derived invention, to make sure that the parties do in fact have the right to own it and license it. So I do the inventorship analysis, not on every patent that we are licensing, but especially if it's a composition of matter patent, that's going to be if it's a small molecule list-able in the United States and we want to have the ability to enforce that. If it's a biologic, similarly, if it's a patent that I think I really am going to want to rely on to protect the exclusivity in the market, then I'll have a good look at the inventorship because it does impact ownership so many times.

Marc Rubenstein: Kerry, because I know not everybody here is a lawyer or a patent lawyer, can you go a little more into depth about the risks of European inventorship in particular?

Kerry Flynn: Okay, so many countries in Europe have special laws that relate to things like compensation must be paid to the inventors in order for the transfer of IP rights to happen. Inventors may have a right to license their own inventions, or a first right of negotiation. So you need to be aware of those things. And the other thing you need to be aware of is that, if there are co-inventors, in many countries, you need to have certain rights in agreement between the various co-inventors to be able to assert your patent or to be able to license it.

Lisa Geller: And I would add to that. The thing I recently found out was that if you have consultants from foreign countries, there's that they are also in some countries, laws and regulations about the consultants, that is say, they have to register with their government if they're going to consult for a private company. There's some talk to your outside counsel for details, but it can add another layer of just wanting to be sure that those rights really do transfer, those agreements were done properly and people did their side of it.

Marc Rubenstein: So, keying off of that, are you seeing trends in greater emphasis on ex-US IP issues in your diligence? Compared to 10 years ago when we all were doing this same sort of stuff? And you all were?

Kerry Flynn: I would say absolutely yes, given some of the deals I worked with you on Marc. They have been sort of key topics of negotiation. How do you deal with those issues, and especially if you're dealing with smaller companies who don't understand the ramifications of co-inventorship from different institutions in different countries? There's also a level of naiveté that even the people who own the asset, own the IP, don't understand the risks. So many of the negotiations we've had were actually in the position of sort of educating our counterparts throughout the negotiation and identifying risks that they were not even aware of, and how you do that in a negotiation, and then get the appropriate protections that you need in the agreement, is something that we didn't use to be so concerned about 10 or 15 years ago.

Marc Rubenstein: Not for any particular good reason, it's just that we've all gotten a little better, more sophisticated over time

Kerry Flynn: And I think, depending in life sciences industry, you're seeing a lot more of invention and companies in Europe that are doing deals in the U.S. Whereas, I think originally there weren't so many there.

Melissa Rones: And I think that there's some view that the value of the European patent may be about to increase or may become, we'll see, but there's some changes in the way patents are going to be validated and enforced about Europe that may be coming into effect. That would permit the challenge of a European patent in a single proceeding in a single court as opposed to having to go into each and every country in which the patent is enforced in Europe. So, in a system where you have to go into each and every country, it raises the cost of challenging a third parties' patents and so and it decreases the likelihood, just sort of statistically, that you'll be successful in each and every forum where you challenge the patent. If you can do it all in one proceeding, potentially that patent becomes very binary: it's either extremely valuable or it falls in one proceeding. So if that comes in effect, I think it further highlights the potential value and risks of European patents.

Lisa Geller: So, just to be clear, there's sort of two pieces. One is the stuff that whatever intellectual property you were planning on in-licensing, but then there's what are the third parties after. I think that at least in my experience especially, is that your full patent strategy is going to involve and be sort of a puzzle of putting together strategies in Europe and other countries with the U.S. strategy in keeping those integrated. And so, if you see a situation like that, then certainly the European becomes especially much more important.

Question from audience: Would you expect there would be jurisdiction shopping for where, if there was a centralized procedure for European patent enforcement, would people gravitate toward one country or another based on those courts?

Lisa Geller: People do.

Question from audience: I recognized they do now, but if there was a situation where there's a single European-wide ruling, would it be a national courts under national law which opine on that or would European legislation govern how the courts...

Lisa Geller: Yeah, also yes. You know, I'm not sure where we are, but right now once you get the European patent, but then once you go to court, you're in each national, right? And under the unified patent court, I'm not going to be the first penguin off of that ice flow, so...

Melissa Rones: But at some point, if its ratified and it comes into play, and I think life sciences will be in London, so it would be...

Lisa Geller: Maybe, that's not clear, that's actually not clear right now just as a side bar...

Melissa Rones: Fair enough, fair enough. I think it will all work out, no.

Kerry Flynn: They're divided by technologies, the forums, but under the unitary patent system, different technologies have different centers where you can file patent infringement law suits and where you can challenge infringement. So that may be somewhat dictated by your technology. I think in terms of the jurisdiction issue, what they're trying to do, and again this hasn't been formalized, is get a three-panel of judges with judges from different countries to weigh in. So they haven't quite worked out all the kinks on how this is going actually play out, but it's going to be interesting. Again, I think as Lisa said, I'm not sure I'm going to pick my key patent to be the first one under the unitary patent system. I'd be a little nervous.

Melissa Rones: Oh absolutely. There's going to be, if it all comes into play, they'll be a transition period where you, for your own patents, can opt in or opt out of the unitary patent system. So, I think to this point, they'll be a lot of games if this happens. There will be a lot of gamesmanship about, given how do you feel about your different patents, do you think you're better served by having your key composition of matter patents that you view as very strong forcing third parties to litigate you in each and every jurisdiction, or do you feel very strong and you'd want one universal ruling. So there will be, if this happens, there will be a lot of gamesmanship.

Lisa Geller: So one of the other things that, I mean since we sort of strayed a little bit but that does come back to in some ways the diligence is that, for those of you who aren't patent attorneys, what gets said in patent prosecution in other countries can come back into the U.S. in litigation. So you must, or at least to the extent possible, have control over what happens in other countries for the prosecution and for the litigation because it really can come back in very, very bad ways if you don't have some level of control over that. Every once in a while you get into a diligence situation where the BD people say we just want the U.S. and we don't care about controlling Europe. If you can convince them otherwise, or at least educate them that this could be an issue later, all the better.

Marc Rubenstein: I assume if you're doing a territorial deal where you're just getting U.S. rights, which are challenging in lots of ways. I guess at the minimum you'd want to negotiate for sort of cooperation and input.

Lisa Geller: That may be all you get but at least making...

Marc Rubenstein: But getting that is even better than not having any insight into what's going on.

Lisa Geller: I mean, I think to some extent in diligence, part of the job is making sure people have, the business development people have, enough information that they can what Melissa would call, you're giving actionable advice. So, making sure they see what the risks are and if they choose not to take your advice, they don't.

Marc Rubenstein: That's never happened to you

Lisa Geller: Oh no.

Question from audience: So, as a risk assessment opportunity exercise, can you talk a little bit more about how you create value from an IP perspective as well reduced risk?

Melissa Rones: I'll take a first swing at this. I think there's a couple of ways. I think sometimes through diligence you identify something: a chink in the chain of title, a license agreement that has a little language that isn't favorable or something comes up in diligence. I think part of the potential to create value is having identified it, and assuming it's fixable, having a strategy or presenting a strategy to fix it. Whether that gets done, prior to a deal being done or it's part of what you're going to do later, will of course depend on the deal dynamics and the nature of the problem. If it's readily fixable, you might be just as happy to have control fixing it after you've done the deal and, because you've done this diligence exercise, you have the chance to fix an issue now rather than waiting until maybe a later time where it's harder to fix or maybe even when there's an issue like a chain of title issue could create a real problem even if it's a readily fixable thing if you don't discover it before you assert the patent. And now somebody argues that you brought suit that you didn't have standing to bring, and even though the problem was fixable, you didn't fix it, and so your suit gets dismissed. Maybe you can re-bring it, but you've prejudiced yourself in some way. So I think that's one way in which value can get created by the diligence process. I think the other way will depend on how deep you've, how deep a dive you've had a chance to do, but sometimes in the course of doing a deep review of somebody's patent portfolio and talking to your scientists, you have ideas, you generate new IP or you generate a strategy for how you're going to advance the IP post-transaction. Maybe it's a hole in the protection they were very strong here, but they haven't explored here. Maybe it's, for good or for bad, the patents don't disclose this, this is an area we know we're going to work on. Maybe it's a formulation, maybe it's a new use, and that becomes part of the patent strategy going forward to helpfully extend exclusivity or just create additional barriers to entry. And then I think maybe one additional way is, to the extent that you're doing any sort of a third party patent analysis, you identify third party patents that can be another opportunity to mitigate risk and to create value, maybe identify an opportunity for licensing and you actually can go out and do another transaction that ties up the additional IP because you know about it. Maybe it's now something that you know going forward and are monitoring so you can make decisions about opposing the patent in Europe, bringing IPRM in the U.S., filing papers. I think those are just a few examples of how the diligence process, by bringing up potential issues, lets you mitigate the risk and possibly create entirely new value.

Lisa Geller: So another kind of, I don't know if you'd call it value, but I won't say that I haven't done this, is staying in touch with the BD people as you go through the process and sometimes it's very useful to them to say, here are the weaknesses we see in that portfolio. I know we still want it, but if you're working out the financials, if you're working something out, sometimes it's helpful for business development to have a bargaining chip and sometimes the IP can be a piece of that to sort of say, well it's not that great, there's all this stuff, you're not getting patents in Europe and whatever. You know, maybe your IP isn't as valuable as you think it is and they can adjust the deal a little bit more in favor of your company.

Kerry Flynn: And we always look when we're analyzing patents in a due diligence, and if we see some weaknesses we don't stop there. We go to the next question which is, what can I do to strengthen that? And a lot of times that requires that you analyze the file histories of the patents you're looking at and seeing, are there opportunities to get better claims? One of the things that we see in the industry as patent attorneys, is the law has been changing over the years so that now instead of these great big broad omnibus claims that we used to think were the end-all be-all, now the more narrowly structured claims tend to be the more desirable and the more valuable. So, a lot of times when we're looking at these older portfolios, especially, you'll see these great big giant claims and we look at them and we go, I don't know how we are going to enforce that, but there's support to get my nice little narrow claim that covers my product, so I can add the value by continuing prosecution on those applications if there's something still pending. And so I think that's where I've seen the biggest value creation as I look at somebody else's portfolio.

Question from audience: Any potential weaknesses relative to the indication area? You at Vertex, often indications give you a pretty decent commercial protection, U.S. and elsewhere. How would that influence the, not necessarily the diligence, but having a look at the upside of the diligence? Many of us, obviously in this part of the world, do work with orphan indications.

Kerry Flynn: Right, some ways the other types of exclusivity you can get on it are stronger or more valuable than a patent that's weak. For example, orphan drug exclusivities you get in the U.S., you get your seven years and that will prevent somebody else from getting approval for same or similar molecules for the same indication. I think the problem that people run into there is, if you have a molecule or drug that is useful for many indications, including the orphan indication, it becomes less reliable. But in some instances, for example, Shire had a product on the market in Europe for many years with no patent protection and they relied on date exclusivity and orphan protection and it was a terrific product for them. But that product couldn't be used for other indications.

Melissa Rones: And I think it can drive how sensitive you are. If you know that you're going to have orphan exclusivity and you feel good about it because this isn't a drug that's likely to have many other uses or many other non-orphan uses, then right, in the course of diligence you may be less concerned that the patent is weak, or maybe that will influence where you would tack on your PTE, your hatch Waxman extension, because you know you don't need it on this patent because of the orphan indication, maybe you'll try it on a different patent because why not. And so I think it kind of all goes into the hopper when you think about the total exclusivity package for the opportunity.

Lisa Geller: So again, I talk to my R&D and my CMC people in these because sometimes the question, it's worth putting into this sort of set of questions, (a) is anybody going to try to copy this drug, which sometimes just goes with is this really, I mean I do biologics and the question is it just going to be too hard, is it not low hanging fruit? So, you balance those things about. I would always rather not have to rely on orphan. You can lose it, which I have had happen, so you would like to have belt and suspenders if you can. But again, it's really a business decision, you lay it out and somebody makes that decision.

Melissa Rones: And I think one point I just want to echo, from both your question and Kerry's response, is that I think I always, I don't want to say always, in the vast majorities of diligences that I've ever done either the company or usually both the company and we will check and confirm that you agree with any assessment by the target that the patents actually do cover the product and you might think well that's of course and they say that they do and of course they do. But interestingly enough, there are many, many well, it has happened not infrequently, where upon further analysis, either it doesn't and people are just incorrect, or it's not as clear as you would like it to be. There's an argument, right a more than colorable argument that the patent doesn't purport to cover what the target thinks it covers. So I might think that's an example of not only the risk assessment, but where in many circumstances, if it's an error right somebody just made a mistake in the drafting of the claims and made an error in the chemical formula or made an error in the way a combination or composition is being described and there's support in the application, then in all likelihood that can be remedied and you've remedied it and saved yourself the issue downstream. Or if it's something like disclosure for an IPO or something like that, you've not presented to the investing community that you have patents that cover your product if in fact you don't yet. Even if you will, but you don't yet. So that's something I think I pretty much universally do.

Kerry Flynn: I think, from the exclusivity piece, one of my old bosses used to say to me, "we're exclusivity lawyers, we're not patent lawyers." And when we were presenting a diligence to management, we would have a chart that would overlap the orphan drug exclusivities with the patent exclusivities with the regulatory data exclusivities, because each of those offers a slightly different level of protection and some, for example an orphan, you can break orphan if you've got a patient benefit or better product. Regulatory exclusivities are great, but if you're not going to do a straight generic application and you want to generate your own clinical data, that doesn't help you much. So, educating management is important to see that each of those exclusivities is important to a product, but understanding the limits of those because oftentimes people assume that orphan exclusivity will keep out all products for our indication. I've had that conversation with people that I work with now where Vertex is a CF company and people are like, can't we stop all CF drugs we have orphan exclusivity and it's like, yeah, that would be great if we could, but it also would be anticompetitive, but no, we can't do that. So, making sure people who do that understand the limitations that you have.

Marc Rubenstein: Do you have another question?

Question from audience: I'm just going to follow-up and ask a question about how do you find yourself taking more aggressive views on the need for a patent than, for instance, the target? So, in other words, you can envisage basically saying we don't need that full royalty because we've got this protection and that's another way for me as a way of generating value.

Lisa Geller: Which is cheaper? I mean, it's usually cheaper to license. I'm not sure I'm understanding, I mean for me at some level it's always less expensive, almost always to in-license something, even if it's meh, than it is to worry about whether they're going to get something and come after you later. You know, there's one starting point perhaps overly pragmatic, but I work in small companies with limited budgets.

Kerry Flynn: And you have more opportunities to knock patents out now since the AIA came in. You have the ability in the U.S. to actually go through an IPR or a post-grant proceeding and challenge patents that may be problematic, but you don't think are that strong. And so sometimes you can knock them out there and then avoid the need to get a license. But if you're going to take that tactic, you should make sure that you're likely to succeed.

Lisa Geller: But it's still $500 to $1 million roughly, depending on your field. You know it's again, small company, that's a lot of money. Drug on the market worth $2 billion, sure, no problem.

Melissa Rones: Well it's interesting, I think there are definitely more opportunities to challenge. I think, it's still across the proceedings at the U.S. patent office, life sciences, you know biotech and pharma, still represent a relatively small percentage of the proceedings that have been brought. So, it's sort of interesting in there's people different hypothesis as to why that is in comparison to sort of high tech, where they're at the board every day. So, the combination of, there still seems to be maybe a little bit more of the view among life sciences company that you kind of keep your powder dry for litigation and if you really want to challenge something you do it in court, not at the patent office. Undoubtedly that will change over time I think, but it's still interestingly a relatively, I don't have a recent figure, but I think it's less than 20% of the proceeding, maybe even a tiny bit lower are life sciences.

Marc Rubenstein: So we touched on this a little bit already, as we've touched on most of things which is good, but integrating your diligence with other members of the deal team and sort of best practices or horrible war stories, or a little bit of both.

Kerry Flynn: Get in the room.

Lisa Geller: Get in the room, actually getting them. I don't have this problem with small companies usually, but sometimes it's like hello, when were you going to tell me you're doing a deal? And what do you mean, as I said before, you're signing it tomorrow? Um, you know so there's that's the first one is get in the room and make sure they're well educated beforehand, that they realize that you really need the IP integration, early on.

Marc Rubenstein:     So define "beforehand". How often are you guys involved at the term sheet stage or when typically are you brought into the deal?

Kerry Flynn: We're usually brought in before the term sheet stage, and the nice thing is that even though we don't provide a lot of input or a lot of diligence, we can give some input as to the framework because even though term sheets are generally not binding, it's tough to negotiate something completely different. It just makes it a little bit more difficult, so.

Lisa Geller: I agree. I am almost always now in before the term sheet.

Melissa Rones: And I think the other thing about integration, obviously there's no substitute for getting in the same room. I think, I think during this sort of diligence and the collecting of information, I'm a sort of big proponent in not being too cabined, as outside counsel, in my thinking and my approach, to the data room. There's interesting and important information that touches IP throughout the data room generally. It rarely all sits in a folder labeled IP. And granted, obviously it doesn't make sense to have every member of the team look at every piece of paper, so I'm not suggesting that, right that would be inefficient and impossible for lots of reasons. That said, there's almost always important and interesting information that sits in the IND that tells me important things about the product and the formulation, lets me confirm what the product looks like and what the formulation looks like and obviously important things about the contracts that are going to sit in other places. So I think it's important not to be sort of too cabined in your thinking when you approach diligence in a data room because you may then not have access or not look at information that's helpful. The thing I hate the most is when somebody tries to limit, not the client I mean, like the target, tries to limit access in the data room I go, are you the patent lawyer you can have access to the IP file, and my response is almost always, "Hmmm, that's not really going to work for me." Because I just think there's just too much important information. You can't rely on other people to stick it in the right place.

Kerry Flynn: And they're not going to notice the issues that will come up, so I agree with that. I think on the flip side, it's also very important when you're actually doing the transaction, that your IP lawyers are integrated into the negotiations because there's many places where you can slip up and to give your patent attorney the IP section of the contract and say could you please look at this, it's almost malpractice, because you need to look at the whole deal. You need to know how's this going to work, how is the co-development or who's doing what, what do the definitions mean, what's a licensed product, is it in fact covered by the claims of the patents, what are you paying a royalty on? So all these things that people typically think are corporate legal issues are actually deeply entwined with the IP issues to make a really good document work for you.

Lisa Geller: It also, I mean, I completely agree with that, and if they're not going to show me, I mean you know I pout until they give me the whole thing. You know, another way that the IP attorney can be helpful, is that sometimes these agreements get going and you know the chief science officer really just goes blank when they look at all the legalese that they're asked to look at the document to see if it covers what they need, and the IP attorney is often the person who can best help translate what the needs are for R&D or maybe CMC all the way up to the business development people. And that, it's that kind of joining piece that sometimes I think people don't get all the value out of their patent attorneys for. So, I strongly encourage people to include them because of that added value.

Question from audience: I have a question about IP diligence readouts. I hear lots of schools of thought. You write it down; you never write it down; you only talk in a room. So I'm curious what your views are. When do you write it down, when do you only talk about what you found? If you could let us know.

Kerry Flynn: So for me, I always write down the exclusivity chart as I understand it as of today. When I'm looking at Freedom to Operate issues, I do not write those down. I'll say "see Kerry, she'll tell you" because I don't want to have that. And often times when you're doing a diligence, it's preliminary – you only have a limited amount of time and resources to investigate an issue – and so your advice might change down the road and those documents can be very damaging, obviously in litigation, so I tend not to write down negative stuff. For exclusivity, I don't really mind doing that because I see much less risk there.

Melissa Rones: I agree. I often will push back on the diligence memo concept. I mean, unless it is, essentially, this is what we looked at or these are the activities. Unless it's just to document that fact that you performed diligence from, sort of, an internal risk perspective. I agree negative things I really prefer to just discuss and not write down. Not only could your opinion change if you had more information, but in all likelihood you're going to do the transaction and now it's your issue. So having a bunch of memos that say "this patent is weak" isn't a great thing to have in your file when you may choose to assert the patent a couple of years down the road and certainly wouldn't want to have to defend these papers in your files that say "it's a weak patent" or "claim 1 isn't enforceable" or something really negative like that.

Lisa Geller: So this reminds me of a somewhat related point, which is if the company knows that they're coming up on financing, IPO, setting up to be purchased, or anything like that, giving your IP attorney as much warning as possible, they may not want to start a litigation. Actually, sometimes they may not want to do it right before the queue either. Give them some warning about what's going on, don't isolate them. Because there may be some things that they would want to do to fix up the portfolios, some actions they may not want to take because you don't really want to have to talk about them in diligence. You just have to be strategic about that, but attorneys can't do that unless you include them in sort of what the general company strategy is at that level.

Melissa Rones: And I think sort of related points, the downside of not writing everything down is, depending on the nature of the team and the company, some people I think worry then that good stuff that comes up in diligence like strategies for improvement or things like that, how do you make sure that those things don't get lost so that they're actually acted upon post-deal? So I think there's a little bit of a balance there. I think there are times where things can be written down generally or a kind of checklist of going forward action items, that are kind of written factually and without sort of color in terms of "we're fixing this" or "just we're going to do" without characterizing it as to its purpose or what it purports to fix.

Lisa Geller: You mean you never write down "this is a useless piece of garbage."

Melissa Rones: Never do I write that down.

Lisa Geller: Good, you're hired.

Melissa Rones: Well, I write that down, but never about IP. I mean, there are other useless pieces of garbage.

Marc Rubenstein: We just have a few more minutes. I've got more questions I could ask, but I want to make sure that people don't have other questions for our panelists.

Question from audience:  For each of you, what have been late stage show stoppers here? This one and sort of a bomber 5 to 12. Based on those experiences what advice would you give?

Lisa Geller: Well, you know what I'm going to say is I have, for all of this, I have never, at least in my experience, had a deal not happen actually because of an IP issue. I have occasionally had something not happen because the business development people said "you know we're not actually as crazy about this deal as we thought we were, can you find something in the IP to help us blame it on you."

Melissa Rones: People do like to blame the IP lawyers. Yeah, I've not had a deal completely not happen solely because of an IP issue. I've had deals not happen because there were all kinds of issues and it just ended up not being a good deal. I've more frequently had an IP issue result in some change to the deal – a change in the price, an indemnification to address a particular identified issue, going forward strategy, cleaning up a chain of title before signing. So I've more often had IP drive changes in the contract and/or strategy for remedying the issue than completely killing the deal.

Kerry Flynn: I think there's only one deal I can think of that IP actually killed and it became a conversation of what's in the box, what are you trying to license, and business development was actually negotiating with the wrong party. They thought they owned some IP and an asset, and they didn't. Although the potential target's business development people thought they owned it, but they didn't. So we ended up doing a deal with another party, but not with the original party.

Melissa Rones: So it really changed the contract. It changed the names of the parties.

Kerry Flynn: It changed the names of the parties.

Marc Rubenstein: The deal was done.

Lisa Geller: I killed one deal and it was because it turns out that the party, the company, had actually licensed something from the University and the University had filed the identical patent in Spain five years before. We just came to a screaming stop; there was nothing we could do.

Marc Rubenstein: It just wasn't IP.

Lisa Geller: Yeah.

Marc Rubenstein: Thank you. Well that's the time we have. I want to be respectful of the time of the people here who need to go create drugs for unmet needs so please join me in thanking our panelists. This is terrific.

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