Practical Due Diligence
The Information You Can’t Afford Not to
Request and Review
Associate General Counsel, Millennium Pharmaceuticals
Marc S. Friedman
Member and Chair of IP Practice Group, Sills Cummis Epstein & Gro
Faye H. Russell
Partner, Latham & Watkins LLP
Goals of Team Performing Due Diligence
of the team performing the due diligence.
Evaluate the degree to which components of the target IP will satisfy each o
f those goals.
It is in th
e context of the business
that IP issues must be spotted
. While not
all of the issues will have a definite answer,
the nature and degree of IP risk will need to
from a business perspective
ligence requires effective
communication of your evaluation to decision makers. Keep the business goals in mind
throughout the due diligence process.
Issues Relating to Patent Rights
ist of possible materials to obtain from target
The evaluation of iss
ues relating to patent rights begins with the collection of
relevant patent documents, agreements relating to the intellectual property, invention
records, public disclosures and communications regarding enforcement. This
information should be requested f
rom the target. Below is a list of materials to obtain.
File histories of target patents and applications
and other descriptions
Relevant publications and seminars by targe
confidentiality agreements and material transfer agreements
Relevant invention disclosure documents
Ownership requires a high degree of certainty.
Do not assume ownership.
Determine ownership using a chain of rights analysis. Chain of rights analysis requires
working forward from each inventor to the acquirer’s rights or interest. At each link
obtain and analyze the document that provides for the
transfer of rights.
determination is a two
part process: (1) identifying all inventors and (2) determining that
each inventor has transferred rights
in the invention
Identify all inventors
Invention disclosure memos
Discussion with inventors
Have all inventors transferred rights?
Need executed assignment or license
Bad practice to rely
on employment agreements to effectuate transfer
Check recording with USPTO and foreign authorities
Check USPTO and foreign author
ity files for claims of ownership by others
Determine whether inventions were made under federal funding or other grants
that may place conditions on ownership.
Inventions made in a university under a
sponsored research agreement (SRA) may be subject to
specific provisions regarding
publication and patent rights.
Dole Act allows non
to elect to take title to NIH
(see 37 CFR 401)
the U.S. government is provided a royalty
license to the
that the invention will be manufactured substantially in
if it is used or sold in the U.
This is an important consideration if your
business group is contemplating outs
ourcing the manufacture overseas.
NIH must be notified of inventions made under an NIH grant and thereafter the election
of title must be made in a timely manner.
You should check for compliance to these
ep in mind that the
government has march
under certain circumstances.
Was invention made under a government grant
Locate grants and SRAs that cover inventions during relevant time period
taken under Bayh
NIH regulatory issues (i.e.
, regulations on licensing research tools)
Analyze possibility of march
Review License Agreements
Review all license agreements relating to the target IP.
will include licen
agreements to the target IP itself
freedom to operate
. In either case, the
scope of the license grant must be broad enough to practice the invention as your
Check the license for geographical and use restrictions that ar
What is the term of the license? Are the rights
Even in a freedom to operate license, the validity of the licensed patents
if there is a royalty obligation.
Check to determine
who has the right
the patents under the license.
Make sure that there are no grant back
improvement provisions in the license agreement that might implicate
Review all licenses in the chain
Validity of licensed patents
Grant backs or improvement provisions that reach acquirer’s IP
Evaluation of patent validity requi
a search of the prior art for references that
might render the target patent invalid due to anticipation or obviousness. This should
include a fresh prior art search by a
patent search professional. For the
acquisition of a small molecule t
a search of
the CAS Marpat Database
the dual purpose of diligence for patent validity and the freedom to operate evaluation
A Marpat search
reveals what is covered in a Markush patent claim. The search
should be based on one or
more generic structures in addition to the
should be used to learn about
scientific publications and
presentations at conferences.
prior art search
, cross check references cited in patent office
proceedings. These may be found in file wrappers and opposition documents. Look for
references in the target’s publications and presen
tations as well as in competi
and publications. Licenses may also cite relevant prior art.
Issues concerning the
often overlooked when performing
diligence on a drug candidate. It is not well
appreciated that the bar c
an be triggered
even if the drug candidate is not yet in the stream of commerce. For example, a contract
with a manufacturer to prepare material for clinical testing purposes only, even if done
under confidentiality, can trigger the 102(b) on
equitable conduct can render a patent unenforceable and evidence of
conduct may be found in a variety of places. Check whether statements made in the
target patent and in
file wrapper are consistent with other public statements regarding
the statements contradict other disclosures in
publications or other
, especially those made
An example would include a
misleading assertion of the activity or effectiveness of a drug in order to get a patent
Are statements in the patent application and file wrapper consistent with what is
in the Investigator’s Brochure or the IND application that was submitted to the FDA?
Has the applicant satisfied
duty to disclose to the USPTO information relevant
Make sure that references cited in the European Patent Office search
report, for example,
are disclosed to the USPTO.
Lack of enablement or best mode can render the patent invalid under 35 U.S.C.
112. Scientists should be consulted reg
arding whether claims are enabled. Evidence of a
best mode issue, if one exists, can be found in continuation applications, internal
memos and publications. The question is whether a best mode known to the inventor was
not disclosed in the paten
t application at the time of filing.
It does not require intent to
withhold information; an honest omission of best mode is still a violation. It might
happen if an improvement is made while the application is being prepared, and the
application gets fil
ed without disclosing the improvement.
An improved polymorph or
formulation known to the inventor before the application is filed, even if the inventor
didn’t make the improvement,
should be disclosed in the application.
ively few patents have been found invalid due to a best mode violation.
If a patent validity issue or risk is suspected for one of the above reasons, then an
evaluation needs to be made as to whether the potential problem can be rectified. A new
ch as a continuation application, reissue or re
examination may be needed to
mitigate any such risk.
Patent Validity Checklist
Sources of prior art
check references (e.g., from file wrappers, oppositions, etc.)
ublications and presentations
Competitor’s patents and publications
check related applications
Review inventor publication files
Review patent counsel files
or written description
scientist to analyze for each claim
Confirm best mode know
at time of relevant filings
Review inventor publications and internal memos
Consider need to file:
Claim scope should be analyzed in view of the critical technology or products to
be acquired, second generation or back
up candidates of interest, and the intended use of
the product. This will require a complete product descr
iption, which is available from the
manufacturing documents, product inserts and other
publications. Claims covering the product should be categorized as offensive or
defensive claims and
how broadly they cover the
field to exclude potential
An offensive claim is one that covers the intended use or commercial
embodiment of the product, whereas a defensive claim serves to prevent others from
patenting in the same space.
Understand the definition of key
terms by referring to the
patent specification and a review of the file history. Determine if and how amendments
and statements in the file wrapper
have narrowed claim scope. Does the narrowing
appreciably affect the value of the target IP?
description of product or critical technology
Samples of technology
Identify critical terms in claims
definitions of critical terms
Review file histories
Determine chances of issuance
Determine probable scope (limiting language)
first and second generation products
Covers first generation product and competitor’s first generation
Covers target and competitor’s first and second g
and Regulatory Exclusivity
The value of the intellectual property will depend on the term of exclusivity.
Both patent and regulatory exclusivity need to be considered.
Determine the natural
expiration of the key paten
ts and applications covering the product. Also determine what
extension, if any, is likely to be added. Patent term extension
in the U.S. will require learning the following FDA dates: IND approval, NDA
submission and NDA approva
If the product is currently in clinical development,
estimates of NDA submission and approval dates are usually available.
W extension is equal to one
half of the time between IND approval and NDA
submission plus all of the time from NDA
submission to approval. This extension cannot
be greater than five years and cannot extend more than 14 years after NDA approval.
, the US and
Mexico and Canada
have a 5 year
period of data exclusivity
In Europe, there is a 10 year period of
after EMEA approval. Therefore, you will need to collect
estimated marketing approval dates in the major markets of interest.
In addition to determining patent terms and exclusivit
y for the target patents, the
same should be done for the major patents covering key competitor products. This is
often overlooked. Loss of patent protection
a competitor product is likely put pricing
pressure on the target product
ricing assumptions and the inputs used
by your business colleagues
to calculate the value of the target product.
Patent term and exclusivity checklist
Determine the natural expiration of key patents
Identify patent that will be su
bject to Hatch
Obtain actual or estimated IND and NDA filing dates and estimated NDA
Calculate or estimate Hatch
Calculate or estimate marketing exclusivity period in major markets
Determine exclusivity perio
d for competitor products
Will competitor become generic before your product?
In what other countries has patent protection been sought?
Obtain from target list of countries in the key patent families
What is the status of the ex
What is the acquirer’s intended market?
What is the competitor’s market?
Freedom to Operate
Assessing freedom to operate (FTO)
the most difficult part of IP due
That’s because in many situations FTO assessment requires
with no definitive answer. It’s not always possible to know how a patent
office examiner will act or how a court will rule or how a patentee or patent applicant
will behave. Nevertheless, it is critical as part of
overall due dilig
ence to clearly
the FTO risk involved as well as possible approaches
not enough to simply tell your diligence team that an FTO issue “can go either way.”
evaluation of a small molecule therapeutic, the
CAS Marpat search
described above is essential. A similar type of search is the Derwent Merged Markush
Since the Derwent search may provides references not found by the Marpat
search, and vice versa, some people prefer to run both searches.
for determining whether a product falls within a generic claim.
however, that these databases are searching patent claims only. A further
be conducted to
encompass the patent specification in ord
er to determine the
possibility that new claims might be added.
For biological therapeutics, blast searches typically are conducted using various
databases to search for nucleotide and protein sequences. In addition, a word search on
the gene or protei
n name is recommended. Biological therapeutics, especially antibodies,
often call into play various blocking patents on basic technology.
technology patents are often available
, such as
controversial Cabilly patent
onoclonal antibodies (US 6,331,415).
ever, FTO analysis on biologic
s is often
complicated by overlapping claims
in different patents that involve analysis of claim
scope and an evaluation of who would likely win an interference
in the U.S.
more expansive than
search described above. In addition to searching
on the claims of the target
patents, a search must be conducted on processes
for making the product as well as
that may not be specifically
covered by the target
, for example, a search on the manufacturing process and the
If the FTO search reveals
a patent or patent application
will need to be carefully analyzed. What is the scope of the claims? Are they
valid? How much
term remains? What countries are covered? Make a quick
or annuity payments to know if the patent is still in force. For
nt application rather than an issued patent, you must assess whether a blocking claim
And even if
claims covering the target product are not likely to
issue, you must determine whether there is support in the application for amen
that could potentially
Where it may be needed, ask the target if a non
infringement or patent validity
opinion of counsel was obtained. If the target will not share the opinion, try to learn as
much as possible about its cont
invalidity opinion based on anticipation,
lack of enablement or other reason? In particular, what references
were relied upon to invalidate the claims? What key terms or elements were pointed to as
the basis of
fringement opinion? How were the key terms defined?
their counsel to learn as much as possible about their FTO position.
Learning what is in
the target’s opinion of counsel
will not take the place of your own independent opinion,
but it can gr
eatly help supplement your independent analysis.
If there is an FTO issue, it’s important to
understand who it is that owns
blocking patent. Are they likely to provide a license under reasonable terms? Are they
competitors? A large pharmaceutical co
likely to be
regarding one of its patent
to a research tool
than a smaller company that
patent more important to
Conduct search for blocking patents
Other sources of blocking
References cited in prosecution
“Background of Invention”
Invention disclosure documents
Target inventor’s publications
licensing and out
Assess possible blocking rights
Probability of issuance
Scope of claims
Were maintenance or annuity fees paid
Validity of claims
Nature of assignee
Determine possible actions
to be taken in light of blocking issues
Opinion of counsel
Opinion of foreign counsel
Will there be any patent enforcement issues as a result of the target’s actions or
failure to act
, usually in the marketplace
Did the ta
license certain technology
that you would want
as part of
your acquisition? Did any out
licensing directed to
technology provide the licensee with a license to target technology
that you desire
the target fail to pursue enforcement in
a way that would create a laches or estoppel issue
for you? Has the licensee paid all maintenance and annuity fees?
Scope of licensing
Term of licenses
Review enforcement correspondence
Review licensing inquiries
Determine relevance of six
year rule (35 USC 286)
Review payment of maintenance fees
Review payments of foreign annuities
Review status of product mar
Review possibilities of patent misuse
License/enforce broader than claim scope
Issues Relating to
Trade secrets can be an important component of the intellectual property to be
acquired, especially if high valu
e is placed on know
how associated with the technology.
The patent enablement and written description requirements do not require all biological
activity of a compound
to be disclosed.
And there is no need to reveal how a compound
performs in every biolo
gical system that may have been studied
or how it compares to
Considerable biology and chemistry know
how not known to others
can provide significant competitive advantage in a particular area.
information may include
clinical development strategy, timelines, cost information, and
reasonable measures have not been taken
secrets, their value is compromised.
Due diligence relating to trade secrets should be
n inventory of the important trade secrets and
reasonable measures have been taken to protect
from becoming public.
Trade secrets checklist
Work with target to identify key trade secrets
Assess measures in place for protection of
key trade secrets
CDAs and non
Security measures applied to trade secrets
Is access limited to those
who have “need to know”
Strong limits on visitors
Limitations on copying
Review written policy for ma
intaining trade secrets
licensed trade secrets
Transferable under license?
Target complying with license?
Scope of license meets needs of acquirer?
Issues Relating to
Corporate Compliance Programs
In addition to
IP due diligence, it is
important to check whether the target
company has an effective corporate compliance program to prevent health
care fraud and
It is good practice for the IP lawyer to be familiar with some
of the basics
ate compliance due diligence and make sure that there is an expert on
the team assigned to this task. Here are some of the basics.
Office of the Inspector General
for the Department of Health and Human
coordinates federal, state and
local law enforcement activities
of healthcare compliance (
In 2003, the OIG issued its
for Pharmaceutical Manufacturers
contains seven elements that have been recognized as fu
ndamental to an effective
1) The development and distribution of written standards of conduct, as well as
written policies, procedures and protocols that verbalize the company’s commitment to
, by including adherence t
o the compliance
program as an element in
evaluating management and employees) and address specific areas of potential fraud and
abuse, such as the reporting of pricing and rebate information to the federal health care
programs, and sales and marketing pra
(2) The designation of a compliance officer and other appropriate bodies (
corporate compliance committee) charged with the responsibility for developing,
operating, and monitoring the compliance program, and with authority to report direct
to the board of directors and/or the president or CEO;
(3) The development and implementation of regular, effective education and training
programs for all affected employees;
(4) The creation and maintenance of an effective line of communication betw
compliance officer and all employees, including a process (such as a hotline or other
reporting system) to receive complaints or questions, and the adoption of procedures to
protect the anonymity of complainants and to protect whistleblowers from r
(5) The use of audits and/or other risk evaluation techniques to monitor compliance,
identify problem areas, and assist in the reduction of identified problems;
(6) The development of policies and procedures addressing the non
etention of individuals or entities excluded from participation in federal health care
programs, and the enforcement of appropriate disciplinary action against employees or
contractors who have violated company policies and procedures and/or applicable fed
health care program requirements; and
(7) The development of policies and procedures for the investigation of identified
instances of noncompliance or misconduct. These should include directions regarding the
prompt and proper response to detected of
fenses, such as the initiation of appropriate
corrective action and preventive measures and processes to report the offense to relevant
authorities in appropriate
ompanies that have entered into Settlement Agreements with the federal
government may be
subject to a Corporate Integrity Agreement (CIA). CIAs require that
companies file annual reports to the OIG and may also require an on
site visit by the
OIG. Check whether the company is subject to a CIA or any other requirements as a
result of an enfor
whether the company
or any employee
excluded or debarred from the
FDA or OIG from participating in
Medicare, Medicaid, or any Federal healthcare
The OIG has an exclusion program and maintains a searchable database of
uded entities and individuals. Finally, many states such as Vermont, Minnesota and
California have fraud and abuse laws that require
tracking promotional spend on
healthcare professionals. Companies must file annual reports to various states regarding
is type of spend.
the proper filing of state reports.
between the Health Care
Compliance Association and the OIG
role of governance in compliance
the HCCA generally
does not fo
the pharma industry, the key
are useful in the pharma setting
The OIG has also worked closely with
Health Lawyers Association
AHLA) to develop
for health care or
ganization boards of directors:
An Integrated Approach to
OIG Compliance Checklist
Is there a comprehensive compliance program in pl
Does it include the seven elements?
the Company or any Person
been excluded or debarred from FDA or
in place to check semi
annually status on OIG
Compliance with state reporting (VT, MN, CA)
Is there a report of any viola
tions of the code of conduct?
Define any “reportable events” (i.e., anything brought to the
attention of senior management that a reasonable person thinks
could be a violation of criminal, civil or administrative law)
If there are any reportable events, wh
at corrective action has been
Is there a confidential disclosure program (for overpayments or
What systems are in place to track samples?