IP Briefs: IP Due Diligence: Key to Success in M&A Transactions - Properly conducted IP due diligence provides a potential acquirer with information that is critical in assessing the value, price,

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IP Briefs: IP Due Diligence: Key to Success in M&A Transactions
Properly conducted IP due diligence provides a potential acquirer with information that is critical in assessing the value, price, or other key elements of the transaction


BioPharm International
Volume 20, Issue 3

To assess the value of a target company or its intellectual property, the acquiring company will be concerned with the proprietary nature of the IP, how the IP is protected, and the extent of the target company's rights over the IP. The acquiring company needs to determine whether it can effectively develop and commercialize the target company's products and technologies going forward. The IP diligence process also enables the acquirer to better understand the value of the IP assets and this valuation often has a direct impact on the price of the overall transaction.

IP RISK ASSESSMENT

As part of the IP diligence process, the target generally must provide detailed documentation on the nature and scope of patent rights and the validity, enforceability, and transferability of such rights.

If the target's technology is not covered by patents, the company should describe how the technology is protected—is it through trade secret, trademark, copyright, or other protections? It is expected that all registrations protecting the company's proprietary technology have been adequately documented.

Finally, the target must address any risks to the value of the IP. Is there any pending litigation or risk of future litigation associated with the use of the technology that can be identified and quantified? Additionally, the target should expect potential acquirers to undertake a litigation review to assess any potential claims, infringement, or insurance issues.

In addition to addressing the general IP risk issues described above, IP diligence also requires the review of several key areas, including ownership issues, freedom-to-operate considerations, scope, validity and enforceability concerns, and the transfer of rights to third parties.

Ownership Issues

Ownership is one of the most important issues to explore in the IP due diligence investigation. The most critical questions will focus on the target's rights in the IP and whether those rights are free of any encumbrances and whether the rights may be cleanly transferred.

Not having clear rights over the IP can be a deal-breaker. To avoid issues that may disrupt the transaction, the target should be able to explain and document how IP rights have been assigned to the company; the company's rights to transfer and assign the IP; and whether there have been any third party challenges to the IP rights.

Freedom to Operate

In the past, acquiring companies have focused on ownership issues when valuing a target company and assessing long-term product or technology viability. However, recent deals demonstrate that acquirers are eager to fully understand freedom to operate (FTO) issues. In general, an FTO analysis evaluates whether the acquiring company will be able to make, use, or sell products without infringing on the IP rights of a third party. An FTO analysis fully explores potential legal roadblocks, such as valid patent claims of third parties. Any potential significant FTO issues often mean further diligence and analysis before the deal moves to the next stage.

Scope, Validity, and Enforceability

The scope, validity, and enforceability analysis is related to the strength of the company's IP assets. Claims must be evaluated and validated for compliance with formal requirements (for e.g., the written description, enablement, and best-mode requirements). Also, the analysis should include an investigation of enforceability issues, particularly under the US patent law, such as potential inequitable conduct issues.

Transfer of Rights to Third Parties

The company seeking to acquire a biotech firm needs to examine any transactions involving the transfer of rights relating to intellectual property. Any such analysis includes an examination of licenses, material transfer agreements, collaboration agreements, or any other transaction that involves a transfer of IP rights. For each of the agreements involving transfer of IP rights, several issues will have to be examined:

  • Patents licensed to a third party, including the specific patents licensed, any exclusivity rights, and specific inclusions or exclusions related to each party's ability to use the patents.
  • Issues related to prosecution and maintenance of the licensed patents, including reimbursement of costs.
  • Issues related to enforcement of the patents.
  • Commercial diligence obligations and service level commitments.
  • Financial terms, including milestones payments and royalty obligations.
  • Third party and company termination rights.


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