Intellectual Property Due Diligence Considerations for Prospective Investors of Emerging Life Sciences Companies

The objective of an intellectual property due diligence investigation is to provide an evaluation of the quality of the IP assets that cover the company’s commercial products and services. For life sciences companies, their patent estate is often a crucial piece of their business and revenue model. However, investors do not always view a due diligence of these IP assets as the center of a prospective business transaction, because the valuation of the company is often more centered on its scientific and commercial potential.

Due diligence can uncover potential risks and advantages associated with the IP assets that may affect the company’s value, and these risks are not always obvious from a cursory review. Often, the benefits of a due diligence investigation outweigh the associated expense. Although a deep dive into patent landscapes is not necessary for every transaction, a baseline understanding of the target company’s patent estate can provide valuable insight into the company’s current position in the technology space, as well as its long-term prospects.

Learning how to identify the appropriate level of IP due diligence by using our considerations can help with decision-making and risk-assessment calculations for a potential investor.

• Level One: The Sanity Check (also known as “minimal due diligence”)
  • Appropriate for: early-stage (seed, Series A) companies, and/or low-level investment
  • At this stage, the due diligence of the patent estate can be minimal to determine whether good practices are in place for developing chain of title and potentially for invention capture
  • Action items:*
    • Review of formalities documents, such as patent-filing receipts and assignments, to ensure chain of title practices are in place
    • Review of employment agreements for IP assignment provisions
    • Review of license agreements for any In-Licensed IP
    • For any patent families that have been examined, review of the references cited by the patent office(s) and disclosed by the applicant for any high-level freedom-to-operate issues
    • Perform estimated expiration date calculations of any issued patents
• Level Two: The Standard Check (also known as “moderate due diligence”)
  • Appropriate for: later-stage financings; investment level may include a board position
  • At this stage, the due diligence of the patent estate can be targeted to determine whether the company has valid and enforceable IP assets that protect the commercial products
  • Action items:*
    • Analyze global IP portfolio for validity and enforceability, and coverage of lead/commercial products
    • Review patents from known competitors for any potential freedom-to-operate issues
    • Complete the action items for a Level One due diligence
• Level Three: The Enhanced and Thorough Check (also known as “clearance due diligence”)
  • Appropriate for: mid-stage companies with strong lead or commercial products; equity investments that can include board/C-suite positions
  • At this stage, the due diligence of the patent estate can be comprehensive to determine the strengths and weaknesses of the IP assets covering the company’s commercial products and also identify potential patent infringement risks
  • Action items:*
    • Analyze global IP portfolio including published and unpublished patent filings in view of commercial and future products
    • Review prosecution histories of the U.S. applications to appraise current IP strategies and identify any potential life cycle management opportunities
    • Deeper review of potential freedom to operate risks by assessing third-party IP
    • Review any pending litigation involving the company
    • Complete the action items for a Level Two due diligence

For further considerations, be on the lookout for our next installment where we take a deeper dive in to the due diligence action items. Please contact Gargi Talukder for advice on a due diligence assessment.

*Note that all “action items” are general suggestions that may need to be refined for the particular target company involved.