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
Mar 01, 2007
Volume 20, Issue 3

Sergio Garica
The biotechnology sector enjoyed a banner year for building capital during 2006—raising $29.6 billion, compared with $20.2 billion in 2005. Although this fundraising activity is a positive sign for emerging companies seeking capital to support drug development programs, the challenges that early stage companies face today are more daunting than ever.

The costs to bring a successful drug candidate to market from discovery through launch continue to escalate. Moreover, the IPO window has not been an inviting one for most emerging life sciences companies. On the regulatory front, the FDA has adopted a more conservative approach requiring life sciences companies to meet additional regulatory hurdles to get product candidates approved. This environment is forcing companies to spend more on drug development.

To support their products in development, emerging biotech companies need to obtain global clinical, regulatory, and medical affairs expertise. This has led to multimillion dollar partnering deals and a record number of acquisitions of emerging biotech companies by large pharma or big biotech firms. Over 300 merger and acquisition (M&A) deals were completed during the year 2006.

Merck Pays Big Dollars for Sirna Acquisition
For large pharma and biotech companies, acquisitions of emerging biotech companies allow them to expand their product pipelines with new, cutting-edge technologies, or drug candidates that were not invented through internal R&D efforts. This strategy—to grow pipelines through acquisitions—was stimulated, in part, by the American Jobs Creation Act of 2004. This legislation has enabled US-based pharmaceutical companies to repatriate approximately $100 billion of dererred foreign income, at a 5.25% US corporate tax rate and many of these pharma companies are using these repatriated earnings to finance M&A deals.


In the not-too-distant past, pharmaceutical companies were interested only in licensing or acquiring biotechnology products that had substantial validation in human clinical trials. This is no longer the case, as indicated by a couple of recent acquisitions: Merck's acquisition of Sirna and Amgen's acquisition of Avidia. Both transactions involved the payment of a substantial premium for early stage, platform technology.


As M&A activity continues to shatter records, the due diligence process has assumed greater significance in biotech deals. Life sciences M&A transactions present unique challenges in investigating and valuing products in development. These transactions also present critical regulatory and antitrust issues that must be dealt with early in the process. Also, the early diligence process must focus on intellectual property (IP) considerations. Although IP due diligence is relevant to virtually any transaction between biotech companies, a detailed investigation into IP assets is particularly critical 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 proposed transaction. These transactions require a thorough process for identifying all intellectual property assets, confirming ownership over those assets, and ensuring that the assets are free of technical defects or encumbrances.


The nature and scope of the IP diligence inquiry will vary widely, depending on the maturity of the target company and the nature of its products or its core technology. An initial IP diligence request may list a broad range of IP assets, including copyrights, trademarks, trade secrets, patents, patent applications, and know-how. The focus of the IP diligence investigation for biotech transactions is on patents, patent applications, and know-how.

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