Top 10 Legal Issues Biotech Start-Ups Must Address

November 1, 2008

BioPharm International

Volume 21, Issue 11

A top-10 list of critical legal issues that biotech start-ups should make an effort to address, even when the capital squeeze is intense.

Biotechnology start-ups face a dizzying array of business and legal requirements and a limited budget forces them to prioritize their expenditures. Companies rush to stay cash-flow positive, attract investors, and expand the platform while at the same time feeding as much capital as possible into research and development (R&D) efforts to accelerate the maturity of the product line and its commercialization. In the process, start-ups must make tough choices about the legal issues that require a share of the capital as well.

Although each business is unique, there are certain common experiences. The following is a top-10 list of critical legal issues that biotech start-ups should make an effort to address with the aid of legal counsel, even when the capital squeeze is intense. An investment upfront can secure long-term dividends for the financial stability and profitability of the venture.

1) KNOW THY IP

For biotech start-ups, intellectual property (IP) is its most valuable asset. The success of the start-up rests on the value of its IP, which determines whether the company will be able to attract investors and strategic partners. The IP is not only the product line, but also the data, ideas, trademarks, trade secrets, know how, and copyrights that accompany it. Companies should undertake basic IP due diligence to confirm the legal status of key IP components. The start-up must keep abreast of the competition. It is essential to know who the competition is and what the competition is doing. It is recommended that before any major research or development endeavors are started, a patent landscape search be conducted in the field of related research, products, and services to gain an accurate assessment of what IP protection might be obtained by the company and the potential market value of such IP. Information concerning competitors' IP should be updated on a regular basis and must be disseminated to the business people and researchers so that informed decisions concerning IP and products can be made. Obtaining and maintaining patents involves risk management as well as asset protection, which can take up a significant portion of the company's IP budget. Consequently, the biotech start-up must choose wisely which innovations to protect and must put in place internal mechanisms for ensuring ownership of its IP and protecting the confidentiality of its business.

2) TALENT SEARCH

Capital resources are best used for recruiting top-notch researchers to establish a high quality research program and to provide sufficient funding for researchers to pursue their ideas for a prolonged period of time. Careful attention to the employment contracts, with specific attention to stock options and compensation provisions as well as IP provisions, is essential. Employee agreements are typically used to assert company ownership of IP developed by employees during their employment and obtain an agreement to assign and execute all assignments and other documents necessary to secure ownership of IP in the company. The employment contract should also include an obligation of confidentiality with respect to the company business and IP and non-compete provisions, thereby preventing employees from leaving with valuable IP and joining the competition. IP provisions should also be included in any agreements with consultants and anyone who works directly or indirectly in the company's R&D.

3) KEEP IT SIMPLE

A key element in any successful IP and regulatory strategy is developing a plan that is simple enough to be understood and communicated by all—the business, technical, and legal staff—who will ultimately be responsible for carrying out the plan. Consultation with legal counsel for developing this plan to make sure that it covers the most critical regulatory concerns as well as encourages a culture of compliance consistency within the organization is helpful and provides a useful compliance foundation as the company grows.

4) DIVERSIFY

Most successful companies use an IP strategy that is proactive, rather than reactive, and that combines a diverse set of tools for acquiring IP. Such tactics include obtaining patents to protect the company's innovations, rather than relying on trade secret protection, which is too easily lost unless extensive internal protections and safeguards are put in place to maintain confidentiality. Layered IP protection using a combination of copyright, trade secrets, and patent protection for different aspects of innovations eligible for such protection is another way to diversify. Registering copyrights of original software and database works, for example, provides a relatively inexpensive means to obtain IP protection on the software program, while patents may protect the software's novel functionality. Developing patents with varying claim scope (e.g., claims to compositions, methods of making and using) also provides diversified IP protection. An IP strategy should also include licensing-in essential or useful IP and obtaining defensive patents in areas in which the company wishes to keep competitors at bay or to create a royalty stream. Defensive publications may also be useful in preventing competitors from obtaining patent protection for innovations that the company for one reason or another does not want to seek patent protection or does not feel confident that confidentiality can be maintained. Developing a mixed patent portfolio provides the company leverage in licensing deals, and positions the company for joint ventures or research collaborations. An IP portfolio is incomplete, however, if it does not protect the company's non-patent IP as well. A biotech start-up should register proprietary software with the US Copyright Office to obtain enhanced rights of enforcement of its software innovations. It should protect its company name and other names or symbols used to identify its products or services by filing intent to use trademark applications and domain name use early on in development. Protection of trade secrets is essential, particularly if the company's patent budget is not large enough to enable filing patents for all innovations. Protecting trademarks requires setting in place internal safeguards such as limited and secured access to information and confidentiality obligations.

5) CHECK IT TWICE

Periodically conducting internal due diligence of the company's patent portfolio is an effective way of verifying that innovations and product developments are covered by the portfolio and that the company is not maintaining IP of little or no value to it. Often, research and development evolve along unexpected lines and if care is not taken, new products or innovations may not be covered by existing patent claims, or the company may continue to seek and pay for patent protection for unsuccessful or abandoned research endeavors or product lines. It is highly recommended to have one person who is familiar with the company's research program and goals in charge of reviewing the company's patent portfolio to ensure that appropriate patent protection is maintained. That person should maintain a good relationship with any outside IP counsel involved in the company's patent prosecution and transaction work to ensure mutual understanding of the R&D achievements and aims and the goals of the business. Outside IP counsel should be apprised of any changes in the company's business plans or research and development endeavors that may affect the company's IP portfolio. The information obtained from conducting internal due diligence and the knowledge of competitors' IP is an invaluable tool to any company looking to form strategic alliances. Valuation of the deal often turns on the strength or potential strength and weakness of the IP assets. Internal due diligence helps to mitigate against a submarine issue surfacing during due diligence undertaken by a potential development partner or investor.

6) REGULATED ENVIRONMENT

The world of biomedical innovation is an intensely regulated environment. Start-up companies must rapidly familiarize themselves with applicable regulations issued under laws such as HIPAA and by regulatory authorities such as the FDA and OHRP. In certain cases, these regulations will not directly govern the actions of the company, but will govern the actions of the provider research sites that conduct the company's clinical trials. Biotech start-ups may also work with reference laboratories or other outside providers in connection with basic and animal research, and start-ups that involve genetic-based therapies may face additional federal and state law considerations. Start-ups waste valuable time and resources by including provisions in research study agreements that, while appearing to be commonsensical, stumble over tripwire regulations forcing protracted negotiations to modify the provisions. Legal assistance upfront in developing template agreements and in receiving compliance training can orient the start-up to the specifics of the regulatory environment and provide a roadmap for how these regulatory milestones affect the company's business.

7) PLAN AHEAD

Certain regulatory requirements can be met in advance and allocating resources to identify must-have components of research agreements, informed consent documents, material transfer agreements, and authorizations can position the company well. If these requirements are not met when the company is poised to take-off, critical filings with the FDA and others could be in jeopardy.

8) PAPER TRAIL

Compliance is not just about what you do, it's also about what you say that you do. Basic policies and standard operating procedures are essential to memorialize the compliant practices to which the company is committed. If something goes wrong down the line, policies and procedures can be a useful mitigating strategy. In addition, simple documentation tools can routinize compliance to make it easier for employees to understand the compliance steps while at the same time doing double-duty as documentary confirmation that the employees have complied with the policy requirements.

9) READ ALL ABOUT IT

Product lines, success rates, business hazards, and timetables can all be very fluid for start-ups. This fluidity can continue even after the company goes public, especially if the product is not yet fully commercialized. A common trap for young companies is failure to invest in carefully drafted securities filings, press releases, and other public documents to eliminate misleading public statements about company's fiscal health, business plans, and risks.

10) PAYDAY

Although product approval by the FDA can seem like the ultimate goal, FDA approval just means you can sell your product. It does not guarantee that health plans will pay for it. Biotech start-ups often miss critical opportunities to engage with legal counsel to develop reimbursement strategies that maximize the chance that a product will be awarded a favorable code and quickly make its way into the marketplace.

In the everyday crunch to keep moving, generate market excitement, and strategically allocate resources, it can be difficult to plan ahead for the rainy day. Unfortunately, IP and regulatory compliance are long-term endeavors that require attention even when nothing is going wrong. IP and regulatory compliance strategies must be scaled, however, to the business realities of the company. The foregoing list is an attempt to identify 10 specific legal needs, out of the many legal needs a company might face, where an ounce of prevention is worth a pound of cure.

Jennifer S. Geetter, 202.756.8205, jgeetter@mwe.comKelli Watson Francuzenko, 202.756.8351, kwatson@mwe.com and Judith Toffenetti, 202. 756.8320, jtoffenetti@mwe.com are all partners at McDermott Will & Emery, Washington, DC.