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Biotech Patent Portfolio Due Diligence Observations for Investors

Introduction

This is not intended to be an exhaustive consideration of how to conduct patent due diligence.  Instead the purpose of this article is to discuss issues that may need to be considered when carrying out due diligence on a biotech patent portfolio.  It is hoped that the article will be useful to anyone involved in biotech investment, as well as patent attorneys who may be in the position of advising investors.

Time Frame Of the Investment

It is important to understand that a patent portfolio does not stand still.  New applications are filed, claim amendments are made during examination and cases are abandoned or refused by Patent Offices.  Therefore it is important to know the expected timeframe of the investment.  If it is short, 1-2 years, there may not be much change in the portfolio.  However over a longer period there could be substantial changes that impact the value of the investment.  If, for example, there are three pending application undergoing examination now, is it possible they could all have been refused by the end of the investment period, leaving no protection for the technology?  In addition changes to the patent portfolios of competitors may also be relevant to you.

How Valuable are the Patents to the Investment?

It is crucial to identify situations where much of the value will be derived from the patents.  For many biotech investments that will be the case. In addition one will need to form an opinion of whether value comes from existing patents and patent applications or from ones that will be filed in the future.  That will guide how due diligence on the patent portfolio needs to be done.

The Overall Objective of Patent Due Diligence

The purpose of the exercise is to ascertain how well the relevant technology is protected by the patent portfolio.  The first judgment that needs to be made is ‘what exactly needs to be protected?’.  That must be judged objectively of the opinion of the company that is doing the research.  If the patents do not have claims that are broad enough to cover all the different ways of carrying out the technology then competitors will not be prevented from making use of it.  Once the key areas that need to be protected have been identified the patent portfolio needs to be looked at to see how well those areas are protected by granted patents and pending applications.  Preferably for important areas there should be more than one layer of patent protection, and where key areas are protected by pending applications a judgment needs to be made on whether it is probable that a patent will be granted with claims broad enough to provide adequate protection.

How to Analyse the Portfolio

The company should provide information for every live and dead case in the portfolio giving for each the relevant bibliographic details and the claims.  It is not the purpose of this article to go into detail about this aspect of due diligence, but in brief: patent term, territorial coverage, claim scope, ownership and inventorship need to be reviewed.  In addition, where relevant, all obligations and agreements with outside parties need to be investigated, including licensing agreements.

Given how long it can take for Patent Offices to process biotech cases there may be many pending patent applications in the portfolio.  As mentioned above, for pending patent applications judgments will need to be made for how likely it is that claims of adequate scope will be granted.  All available search reports and examination reports should be reviewed.  However for biotech cases it is still often difficult to predict the claim scope that will be obtained.  Sometimes objections which seem very serious can be overcome with amendments that do not limit the claims substantially, and so an open mind is needed when reviewing a case.  However in many instances it is also possible to see situations where a case is clearly in trouble, for example where little progress has been made after several examination reports or where it has gone into appeal.  One positive sign is whether another case in the same family has been granted with broad claims by a Patent Office with strict examination, such as the European Patent Office or the US Patent and Trademark Office.

Where it is unclear how well a case is doing the the company should be asked about its strategy on the case to help with one’s judgment.  Many biotech cases have inventive step issues.  These are expected and there are normally arguments that can be formulated for responding to the Examiner’s objections.  However if the case has novelty objections which are not being overcome then that may be a sign of problems that cannot be solved.

The Strengths and Weaknesses of the Portfolio

When analysing the portfolio it may be helpful to bear in mind that often ‘weak’ patent applications are filed with claims which are ambitious.  However clearly there also need to be some strong cases, or at least the prospect of filing some in the near future.  A portfolio which only has weak cases is clearly undesirable.

When evaluating the worth of weak cases it is important to remember that often patent applications can kept pending for a long time, and in some territories, such as the US indefinitely.  This is not however a favoured option, as it is expensive.  In addition weak cases might have increased chances of being allowed if relevant data is generated in due course which supports patentability.

Will a Substantial Amount of the Value Come from Future Patent Filings?

One needs to recognise if the most important patent cases have yet to be filed, for example if the company has yet to do the research which will make it possible to file those cases.  In that instance it will be more difficult to predict how likely it is that those patent cases will be granted with adequate claim scope.  However it might be essential to attempt this, for example by considering the prior art situation for such future cases, to give some idea of whether difficulties might be expected.

Third parties. Freedom to Operate, Oppositions and Litigation

Some thought should also be given as to whether competitor patent cases should be investigated.  A freedom to operate search should be done to ensure that the company can carry out its activities without infringing third party patents.  However such a search will require time and might be costly, and in my personal experience freedom to operate searches are often not performed by investors.

Identifying competitors through freedom to operate searches may have other advantages.  From their past behaviour it might be possible to predict whether they are likely to oppose cases.  It might also be useful to consider whether the company’s portfolio is able to provide an adequate defensive position against the third parties.

If oppositions, or even litigation, are expected from third parties then some thought might be given to how robust the claims are of cases likely to be opposed or litigated.

Fixing the Portfolio and New Filings

It should be apparent from the patent cases how well they have been drafted and how well examination is being handled.  It is often the case that companies are forced to cut corners on their patents when the budget is tight.  Investors will need to recognise that situation and consider whether any immediate fixing of the portfolio should be done.  Investors may choose to take partial or complete control over handling the portfolio, and as part of that ask for it to be transferred to a higher quality patent firm.

The possibility of filing more patent applications immediately should also be considered, especially if new data is available or might be soon.  That could result in a substantial increase in the portfolio very quickly, which might be reflected in an increase in value of the investment.

Independent and Expert Advice

Any reports on a patent portfolio must be looked at critically and in particular whether or not they have been prepared by an independent party needs to be borne in mind.  In addition it should be recognised that analysis of a biotech patent is a complex task that needs to be done by a lawyer or patent attorney that has the relevant skills and experience.

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