ALLIANCE AND LICENSING STRATEGIES
Companies in the biotech industry typically require one or several partners as they complete the product development cycle.
Many entities, including universities, government agencies, specific technology companies, commercialization organizations,
and clinical trial specialty companies, may have resources or technology needed to complete the cycle. A typical scenario
for a biotech enterprise or investor involves looking to entities upstream for basic research or platform technology, and
looking downstream for commercialization and to fund costs of clinical trials. Alliances also provide an effective means of
broadening a patent portfolio. When the enterprise finds itself on the wrong side of a patent infringement suit, the patent
alliance can be used to fire back at the plaintiff and thereby promote settlement.11
In 1988, Hoffmann-La Roche and Cetus Corp. negotiated a licensing agreement for two anti-cancer drugs, Interleukin-2 and Polyethylene
Glycol Modified IL-2. This agreement became the prototype for cross-licensing between companies with parallel patents. In
addition, many cross-licensing arrangements arise as an attempt to settle disputes on conflicting claims in the litigation
process or in expectation of impending litigation. Indeed, according to Carl Shapiro, professor of business strategy at the
University of California at Berkeley, "Virtually every patent license can be viewed as a settlement of a patent dispute: the
royalty rate presumably reflects the two parties' strengths or weaknesses in patent litigation in conjunction with the licensee's
ability to invent around the patent. The same is true of cross-licenses, where net payments reflect the strength of each party's
patent portfolio along with its commercial exposure to the other's patents."12
It has long been acknowledged that new innovations build on previous ones. Examples include the Cohen-Boyer patent on the
technology for inserting foreign genetic material into bacteria, the Genentech patent on a technology for getting foreign
genes to "express," the polymerase chain reaction (PCR) technology for replicating DNA in test tubes, gene guns, and recent
suppression technologies that cause gene sequences to become inactive. The salient feature of such a property is that it is
efficient to let firms other than the patent holder use it. The reason is that the follow-on innovator typically needs to
obtain the right to use the previously patented innovation. When such a right is not secured by a licensing agreement before
engaging in research and development, the infringer may become involved in a legal dispute ex-post. The patent holder is entitled
to litigate and collect damages, to be compensated for infringement. It is not surprising that follow-on innovators typically
refrain from engaging in ex-ante licensing agreements with patent holders.
In March 1997, Hyseq sued Affymetrix in the Northern District of California. Hyseq alleged that Affymetrix infringed Hyseq's
patents for DNA sequencing by hybridization (SBH) on microarrays.13 In October 2001, the parties agreed to a settlement that acknowledged the validity of all the patents at issue between them.
As a result of the settlement, Affymetrix obtained a 10% ownership of Callida Genomics, a new Hyseq subsidiary to which Hyseq
assigned all of its SBH patents. Hyseq's early patents covered SBH techniques; in contrast, many of Affymetrix's early patents
covered microarray manufacturing processes. Although Affymetrix did patent some experimental applications of microarrays,
its settlement agreement with Hyseq suggests the value of analyzing research and development strengths in anticipation of
litigation. Had Hyseq and Affymetrix focused simply on sequencing and manufacturing strengths respectively, the companies
might have come to an adequate cross-licensing arrangement without incurring expensive litigation.
CONDUCTING PATENT DUE DILIGENCE INVESTIGATIONS
Patent due diligence is the detailed patent investigation of a business, the aim being to identify problems within the business,
especially those that might result in future liabilities.14 Due diligence of a biotech's patent portfolio will cover the following issues:
- The biotech's key product candidates and platform technologies. These will be investigated to determine whether they are adequately
covered or protected by patents. The length of each patent's unexpired term will also be investigated.
- Protection of the biotech's inventions. Have these been protected in key territories, and are procedures are in place to ensure
that all renewal fees have been paid for those territories?
- Employment contracts and research contracts. These will be reviewed to determine how ownership of intellectual property is
dealt with in the business.
- Challenges or opposition to a biotech's patents. The due diligence process will establish whether there have been any of these,
whether the patents actually provide useful protection, and whether they can be circumvented.
- Pending or threatened actions, as well as potential risk for such action. Due diligence reviews will consider whether another
party has offered the biotech licenses to its technology, or has threatened to sue. Further investigations may involve relevant
third-party patents, and if these exist, may question whether the company has sought infringement and validity advice in respect
of those patents.