IP Leveraging Strategies For Pharma And Biotech Companies

IP Leveraging Strategies For Pharma And Biotech Companies

Intellectual property and intangible assets are key components of the net worth and overall shareholder value of pharmaceutical and biotech companies, but many executives and general counsel fail to appreciate and take periodic inventories of these assets, which are consequently under-exploited. Until a biotech or pharmaceutical enterprise has commercial products on the market, the commercial value of that company is largely dependent upon its intellectual property portfolio and the name recognition of key scientists at the company. Patents, pending patent applications, trade secrets and licenses to these assets are the most financially significant types of intellectual property these biotechnology companies possess. After introducing approved products on the market, a biotech company may also have developed a certain degree of brand recognition so that trademarks, service marks and copyrights may also play a significant role in the value of the company. At a time when companies of all sizes and industries are under pressure to leverage what they have already developed in the form of incremental revenue streams and new opportunities, it is critical that consideration is given to periodic IP audits and strategic analyses. This is where Intellectual Property Protection and Leveraging Analysis (IPPLA) may be useful.

The focus of conducting an IPPLA is on a realistically and creatively assessing a company’s IP assets, determining the strength of these assets and finally looking for opportunities to leverage these assets into new markets thereby creating new revenue streams or improving existing business channels without devoting large capital expenditures.

Performing an intellectual property audit and strategic analysis is a particularly important growth step for pharmaceutical, medical technology and biotech (PMTB) companies of all sizes, particularly in today’s economic and capital market conditions. PMTB companies worldwide spend billions of dollars each year on R&D, often discovering new drug compound candidates, therapeutic targets or medical device technologies, which are "shelved" because of the development of other inventions or which may have applications in areas well beyond their budgets, core competencies or industry focus. Such inventions and technologies could be used to create additional revenue streams and profits for the company once a licensing or joint venturing strategy is developed and implemented.

PMTB companies are under pressure to create new opportunities and new revenue streams from existing assets (technologies, systems, brands, relationships, etc.). The results of an IPPLA may identify a need or an opportunity to restructure the company around a particular family of inventions within a PMTB company’s IP portfolio or create subsidiaries or spinout companies based on IP leveraging opportunities. PMTB companies should periodically reevaluate whether current distribution channels and market partners are really working effectively to generate the highest and best shareholder value and income streams/profits by asking themselves:

• Is this the highest and best strategy available to meet our objectives?
• What is needed to meet our objectives?
• What is origin of these relationships?
• What politics or red tape will we face if these agreements and relationships are re-evaluated?
• Should there be restructuring around a real or perceived imbalance in the economics of any existing relationships?

From an out-licensing perspective, many PMTB companies are sitting on a portfolio of patents, technologies and brands that can be licensed in non-competing ways to augment existing initiatives and core businesses. Even from an in-licensing perspective, PMTB companies may not have the resources to conduct R&D at the right level, and may want to explore access to technologies and brands which are already established or readily available on an off-the-shelf basis, coupled to training support and valued-added services. There may also be in-licensing opportunities, which when paired with the company’s current technology portfolio, can create new products, services and market opportunities.

In today’s merger and acquisition climate, an IPPLA may be an excellent way for a growing company to prepare for a buyer or a merger partner’s due diligence process, to ensure that gaps in the chain of title are filled or any potential disputes over ownership are resolved. The results of the IPPLA may also be necessary to support the company’s proposed valuation if and when it is a target in an M&A transaction. The IPPLA can also be a good opportunity to examine the company’s current IP docketing and database management systems.

The driving force behind the need for an IPPLA may be the senior management of the company, the chief patent counsel or even board members, external shareholders or venture capitalists, who are pressuring the company to produce new revenue streams before another infusion of capital can or will be committed.

Moreover, under the new Financial Accounting Standards Board’s rules, FAS 141-142, a company undergoing a merger or acquisition must now identify and evaluate IP and other "intangible" assets. The old rules permitted the company to pool many intangible assets as goodwill and then amortize it, in some cases over 40 years, effectively obscuring that the company may have overpaid for an acquisition. Thus, much of the purchase price in an acquisition used to be attributed to goodwill, and these costs only marginally affected a company’s balance sheet going forward. Those days are over. The new accounting rules no longer allow "pooling" of goodwill, which will make it easier to see where the company’s money went in an acquisition. Prior to the new rules, the process was akin to purchasing a bag of groceries without looking to see what’s in the bag. Now, companies need to know exactly what they are buying before they can attach an accurate value. The company must distinguish between tangible assets (e.g., real and personal property, inventory, FF&E) and intangible assets (patents, trademarks and copyrights, accounts receivable and other contractual obligations), and allocate a purchase price to each individual asset. However, when inventorying intangible assets, companies often fail to thoroughly identify less discrete types of IP such as unpatented technology, trade secrets, trade dress, databases, employee training manuals and other creative and artistic rights. Moreover, companies sometimes fail to properly define their known IP with sufficient scope to cover the markets they could be (and should be) entitled to own. Indeed, failing to recognize and identify all intangibles and IP prior to an acquisition can contribute to undesirable write-down’s that some companies have been forced to incur in view of the new Financial Accounting Standards Board rules.

In preparing for the analysis, an audit plan is prepared, outlining not only the scope and the specific areas of inquiry (e.g., divisions, lines of business, affiliated or non-affiliated agency operations), but also the timetable for the IPPLA, the responsible parties for each part of the IPPLA and the form of the final report to be produced.

In terms of initial information gathering, the legal and strategic audit team will identify those IP rights such as patents, copyrights and trademarks which have already been registered or are in the process of being registered. The legal and strategic audit team next will obtain copies of all affiliated agreements, employment, consulting agreements, license and maintenance agreements, joint venture agreements, distribution agreements, security documents and UCC filings. Also needed are confidentiality agreements, litigation files, source code escrow agreements (in connection with software), any documentation relating to clean room development of software, database licenses and relevant corporate policy statements, including document retention policies.

After the relevant documentation has been identified and organized, the legal and strategic IP audit team should then prepare an electronic index of the materials with respect to each IP asset. The nature of the company’s ownership interests is obviously important, covering aspects such as sole or joint ownership, exclusive or non-exclusive licensing, royalty or other costs associated with the licenses and the estimated legal duration and period of technological usefulness of the asset, and whether the nature of the interest is in doubt.

At this stage, several important areas need to be addressed. For instance, there may be restrictions on the use of the asset, such as product or agency-related restrictions, territorial restrictions, assignment or transfer restrictions, time restrictions, non-compete clauses etc., which will impact its value. The relevance of the asset to the core business of the company is also important: is it critical or ancillary, and does it connect with other key non-IP assets of the company?

It is also important to determine if the asset has been pledged, or in any other way encumbered, or if there is potential for a third-party claim of infringement or damages due to the company’s use of the asset. Finally, in the course of analyzing the assets, the legal and strategic audit team may decide it is necessary to directly interview the company’s personnel responsible for the development, acquisition or use of the IP assets.

Tightening financial markets and a slowing economy have placed a premium on capital-efficient growth strategies. How can a PMTB company leverage its own brands, expertise, technology, systems, relationships and channels into new revenue streams and increased market share without large expenditures? A broad IP inventory is one of the most important assets for any company, especially in an information- and systems-driven business environment. Moreover, until a company has conducted a thorough inventory of its IP assets, it cannot move forward in developing a proactive IP strategy that will identify potential problems or ways to avoid them. Only companies which have fully identified and evaluated their IP assets will be in a position to maximize the value of their companies and provide potential partners or suitors with detailed evidence of their valuation. It is thus critical to develop aggressive and well crafted strategies to maximize revenue opportunities from existing IP assets, a process which is facilitated by the IPPLA.