The Comprehensive Checklist for Due Diligence in the ... - iSites

echinoidclapBiotechnology

Dec 1, 2012 (4 years and 9 months ago)

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The
Practical Due Diligence

Checklist
:

The Information You Can’t Afford Not to
Request and Review


Robert Silverman


Associate General Counsel, Millennium Pharmaceuticals


Marc S. Friedman


Member and Chair of IP Practice Group, Sills Cummis Epstein & Gro
ss P.C.



Faye H. Russell


Partner, Latham & Watkins LLP




Goals of Team Performing Due Diligence


Always

understand the
business goals

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

and
evaluated
. While not
all of the issues will have a definite answer,
the nature and degree of IP risk will need to
be articulated

from a business perspective
.

Due di
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


A.

L
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



Product literature
, publications

and other descriptions



In
-
licensing agreements


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2
-



Out
-
licensing agreements



Relevant publications and seminars by targe
t



Relevant
confidentiality agreements and material transfer agreements



Relevant invention disclosure documents



Relevant notebooks



Employee agreements



Correspondence re
garding

enforcement

of IP


B.

Ownership

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.

Ownership
determination is a two
-
part process: (1) identifying all inventors and (2) determining that
each inventor has transferred rights

in the invention
.


(1)
Identify all inventors



Invention disclosure memos



Inventor publications



Discussion with inventors

(2)

Have all inventors transferred rights?



Need executed assignment or license



Bad practice to rely
only
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.
The Bayh
-
Dole Act allows non
-
profit
organizations such
as universities

to elect to take title to NIH
-
funded inventions

(see 37 CFR 401)
.

In return

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3
-

the U.S. government is provided a royalty
-
free
,

non
-
exclusive
license to the

invention.
Note that

the title
owner agree
s

that the invention will be manufactured substantially in
the U.S.
if it is used or sold in the U.
S.

This is an important consideration if your
business group is contemplating outs
ourcing the manufacture overseas.
Furthermore, the

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
Bayh
-
Dole requirements.

Also ke
ep in mind that the

government has march
-
in rights
under certain circumstances.


(3)

Was invention made under a government grant
and/
or SRA
?



Locate grants and SRAs that cover inventions during relevant time period



Was title

taken under Bayh
-
Dole Act
?



Document
timely election

of title



Ar
e the
re

NIH regulatory issues (i.e.
, regulations on licensing research tools)



Analyze possibility of march
-
in rights


C.

Review License Agreements

Review all license agreements relating to the target IP.
This

will include licen
se
agreements to the target IP itself
and

freedom to operate

licenses
. In either case, the

scope of the license grant must be broad enough to practice the invention as your
business intends.
Check the license for geographical and use restrictions that ar
e
inconsistent with
your
business goals.

What is the term of the license? Are the rights
transferable?
Even in a freedom to operate license, the validity of the licensed patents
should

be evaluated

if there is a royalty obligation.

Check to determine
who has the right
to enforce

the patents under the license.

Make sure that there are no grant back
s

or
improvement provisions in the license agreement that might implicate
your

pre
-
existing
intellectual property.


Review all licenses in the chain

for
:



Tra
nsferability



Term


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-



Scope

o

Use restrictions?

o

Geographic territory?



Enforcement obligations



Royalty obligations



Validity of licensed patents



Grant backs or improvement provisions that reach acquirer’s IP


D.

Patent Validity


Evaluation of patent validity requi
res

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
competent
patent search professional. For the
acquisition of a small molecule t
herapeutic,
a search of

the CAS Marpat Database
serves
the dual purpose of diligence for patent validity and the freedom to operate evaluation
discussed below
(see
http://www.cas.org/CASFILES/marpat.h
tml
)
.

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
product’s
exact structure.


Other searches
should be used to learn about
scientific publications and

presentations at conferences.

In
addition to

this

prior art search
ing
, 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
tor
s


patents
and publications. Licenses may also cite relevant prior art.

Issues concerning the

102(b) on
-
sale bar
are

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
-
sale bar.

In
equitable conduct can render a patent unenforceable and evidence of
such

conduct may be found in a variety of places. Check whether statements made in the
target patent and in
its

file wrapper are consistent with other public statements regarding
the inve
ntion. Do
the statements contradict other disclosures in
publications or other

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patent
s
, especially those made

by the

same inventors?

An example would include a
misleading assertion of the activity or effectiveness of a drug in order to get a patent
allow
ed.

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
the
duty to disclose to the USPTO information relevant
to
patentability?

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
possible
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.
Keep
in mind
,
however,

that relat
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
filing su
ch as a continuation application, reissue or re
-
examination may be needed to
mitigate any such risk.


Patent Validity Checklist




Anticipation

and Obviousness

o

Sources of prior art

o

Cross
-
check references (e.g., from file wrappers, oppositions, etc.)

o

Target p
ublications and presentations

o

Competitor’s patents and publications

o

Litigation


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o

Scientific literature

o

Scientific conferences



Inequitable conduct

o

Cross
-
check related applications

o

Review inventor publication files

o

Review patent counsel files



Lack

of enablemen
t

or written description

o

Consult

scientist to analyze for each claim



Best mode

o

Confirm best mode know
n

at time of relevant filings

o

Review inventor publications and internal memos



Consider need to file:

o

Amended claims

o

Continuations

o

Divisionals

o

Reissues

o

Re
-
e
xaminations


E.

Claim Scope


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
product literature,
product samples,
manufacturing documents, product inserts and other
publications. Claims covering the product should be categorized as offensive or
defensive claims and
by
how broadly they cover the
field to exclude potential
competition.
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?



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Claim Scope

Checklist



Obtain

from target
description of product or critical technology

o

Samples of technology

o

Specifications/product literature

o

Manufacturing documents

o

Target advertisements

o

Target publications

o

Product inserts



Identify critical terms in claims



Confirm
definitions of critical terms

o

Specification

o

File history

o

Normal usage



Pending applications

o

Review file histories

o

Determine chances of issuance

o

Determine probable scope (limiting language)



C
ategorize claims

o

Defensive

claims



Covers
target’s
first generation
product

o

Broad defensive

claims



Covers
target’s
first and second generation products

o

Offensive



Covers first generation product and competitor’s first generation
product

o

Broad Offensive/Pion
eering



Covers target and competitor’s first and second g
e
neration pr
oducts,
and beyond


F.

Patent Terms

and Regulatory Exclusivity



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-

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
Hatch
-
Waxman
patent term
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
l.

If the product is currently in clinical development,
estimates of NDA submission and approval dates are usually available.

The maximum
H
-
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.
Furthermore
, the US and

other

NAFTA

countries
Mexico and Canada
have a 5 year
period of data exclusivity

after
FDA approval
.
In Europe, there is a 10 year period of
marketing exclusivity

after EMEA approval. Therefore, you will need to collect

actual or

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
on

a competitor product is likely put pricing
pressure on the target product
.

This
may

affect p
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

o

US patents

o

Ex
-
US patents



Identify patent that will be su
bject to Hatch
-
Waxman extension



Obtain actual or estimated IND and NDA filing dates and estimated NDA
approval date



Calculate or estimate Hatch
-
Waxman extension



Calculate or estimate marketing exclusivity period in major markets



Determine exclusivity perio
d for competitor products

o

Will competitor become generic before your product?


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G.
Ex
-
US Filings

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
-
US pate
nts?



What is the acquirer’s intended market?



What is the competitor’s market?


H.

Freedom to Operate

Assessing freedom to operate (FTO)
may be

the most difficult part of IP due
diligence.
That’s because in many situations FTO assessment requires
using so
und
judgment
, but

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
your

overall due dilig
ence to clearly
articulate

the FTO risk involved as well as possible approaches
to mitigate

that risk.

It is
not enough to simply tell your diligence team that an FTO issue “can go either way.”

For the
FTO

evaluation of a small molecule therapeutic, the

CAS Marpat search
described above is essential. A similar type of search is the Derwent Merged Markush

search
.
Since the Derwent search may provides references not found by the Marpat
search, and vice versa, some people prefer to run both searches.
The
se databases

are
especially valuable

for determining whether a product falls within a generic claim.
Note,
however, that these databases are searching patent claims only. A further

FTO search
must
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.
Licenses to
the basic
technology patents are often available
, such as
Genentech’s

controversial Cabilly patent
for m
onoclonal antibodies (US 6,331,415).

How
ever, FTO analysis on biologic
s is often

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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.

The
scope of

the
FTO search
usually
is
more expansive than

the patentability
search described above. In addition to searching
based
on the claims of the target
patents, a search must be conducted on processes
for making the product as well as

various
commercial embod
iments
that may not be specifically

covered by the target
patents
. This
would include
, for example, a search on the manufacturing process and the
product
formulation.

If the FTO search reveals
a patent or patent application

that
is

potentially
blocking,
i
t

will need to be carefully analyzed. What is the scope of the claims? Are they
valid? How much
patent
term remains? What countries are covered? Make a quick
check
of

maintenance
or annuity payments to know if the patent is still in force. For

a
pate
nt application rather than an issued patent, you must assess whether a blocking claim
will issue.

And even if

the published
claims covering the target product are not likely to
issue, you must determine whether there is support in the application for amen
ded claims
that could potentially
cover

the product.

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
ents. Was
an

invalidity opinion based on anticipation,
non
-
obviousness,
and
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
a

non
-
in
fringement opinion? How were the key terms defined?

Interview
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

the
blocking patent. Are they likely to provide a license under reasonable terms? Are they
competitors? A large pharmaceutical co
mpany is
more
likely to be
deal favorably
regarding one of its patent
s

to a research tool
than a smaller company that
would consider

such a

patent more important to
its

business.




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FTO Checklist



Conduct search for blocking patents



Other sources of blocking

information

o

Target patents/applications



References cited in prosecution



“Background of Invention”



Search reports



Invention disclosure documents

o

Opposition proceedings

o

Re
-
examinations/re
-
issues

o

Target inventor’s publications

o

Target’s in
-
licensing and out
-
l
icensing situations

o

Enforcement efforts



Assess possible blocking rights

o

Issued/pending?



Probability of issuance

o

Countries

o

Scope of claims

o

Were maintenance or annuity fees paid

o

Validity of claims

o

Remaining term



Nature of assignee



Determine possible actions
to be taken in light of blocking issues

o

Opinion of counsel



Opinion of foreign counsel

o

License


I.
Enforcement Issues

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
rget out
-
license certain technology
that you would want
as part of

your acquisition? Did any out
-
licensing directed to
other


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-

technology provide the licensee with a license to target technology

that you desire
? Did
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?



Enforcement Issues

Checklist



Target out
-
licensed technology

o

Scope of licensing

o

Term of licenses

o

Enforcement obligations

o

Termination prov
isions

o

Royalty stream



Laches/estoppel issues

o

Review enforcement correspondence

o

Review licensing inquiries

o

Determine relevance of six
-
year rule (35 USC 286)



Review payment of maintenance fees



Review payments of foreign annuities



Review status of product mar
king



Review possibilities of patent misuse

o

License/enforce broader than claim scope

o

If found,
what
remedies?


Issues Relating to
Trade Secrets


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
competitor products
.
Considerable biology and chemistry know
-
how not known to others
can provide significant competitive advantage in a particular area.
Other sensitive

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-

information may include

clinical development strategy, timelines, cost information, and
marketing plans
.
When

reasonable measures have not been taken

to protect
these
trade
secrets, their value is compromised.

Due diligence relating to trade secrets should be
aimed at
taking a
n inventory of the important trade secrets and
determining whether
reasonable measures have been taken to protect
them

from becoming public.


Trade secrets checklist



Work with target to identify key trade secrets



Assess measures in place for protection of

key trade secrets

o

CDAs and non
-
use agreements

o

Security measures applied to trade secrets

o

Is access limited to those
who have “need to know”



Locked doors/files



Computer passwords



Strong limits on visitors



Limitations on copying

o

Review written policy for ma
intaining trade secrets



In
-
licensed trade secrets

o

Transferable under license?

o

Target complying with license?

o

Scope of license meets needs of acquirer?

o

Enforcement obligations?

o

Exclusivity?


Issues Relating to
Corporate Compliance Programs



In addition to
IP due diligence, it is
very
important to check whether the target
company has an effective corporate compliance program to prevent health

care fraud and
abuse.
It is good practice for the IP lawyer to be familiar with some
of the basics
concerning

corpor
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.


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-

The
Office of the Inspector General
for the Department of Health and Human
Services (OIG)
coordinates federal, state and
local law enforcement activities
in th
e
area

of healthcare compliance (
http://oig.hhs.gov
)
.


In 2003, the OIG issued its
Compliance
Program Guidance
(CPG)
for Pharmaceutical Manufacturers
(
http://www.oig.hhs.gov/authorities/docs/03/050503FRCPGPharmac.pdf
)
.
The CPG

contains seven elements that have been recognized as fu
ndamental to an effective
compliance program:


(
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
compliance (
e.g.
, 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
ctices;

(2) The designation of a compliance officer and other appropriate bodies (
e.g.
, a
corporate compliance committee) charged with the responsibility for developing,
operating, and monitoring the compliance program, and with authority to report direct
ly
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
een the
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
etaliation;

(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
-
employment or
r
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
eral
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
.



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-


C
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
cement action.

Check

whether the company
or any employee

is

excluded or debarred from the
FDA or OIG from participating in
Medicare, Medicaid, or any Federal healthcare
program
.


The OIG has an exclusion program and maintains a searchable database of
excl
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
th
is type of spend.
the proper filing of state reports.



In
June 2004
a roundtable
meeting
took place
between the Health Care
Compliance Association and the OIG

regarding the
role of governance in compliance
programs.


While
the HCCA generally

does not fo
cus
on

the pharma industry, the key
concepts
are useful in the pharma setting
.

See
http://oig.hhs.gov/fraud/docs/complianceguidance/ComplianceRoundtable112204.pdf
;
http://www.hcca
-
info.org/Content/NavigationMenu/About_HCCA/Compliance_Focus_Groups/Pharmaceutical/Phar
maceutical.htm

The OIG has also worked closely with

the American
Health Lawyers Association
(
AHLA) to develop

resource
s

for health care or
ganization boards of directors:

Corporate Responsibility


and

Corporate Compliance

and
An Integrated Approach to
Corporate Compliance
.



See
http://oig.hhs.gov/fraud/docs/complianceguidance/Tab%204E%20Appendx
-
Final.pdf
;
http://oig.hhs.gov/publications/docs/press/2003/040203release.pdf


OIG Compliance Checklist



Is there a comprehensive compliance program in pl
ace?

o

Does it include the seven elements?


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-



Has
the Company or any Person

been excluded or debarred from FDA or
OIG?

o

System

in place to check semi
-
annually status on OIG
and

FDA
lists



Compliance with state reporting (VT, MN, CA)



Is there a report of any viola
tions of the code of conduct?

o

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)

o

If there are any reportable events, wh
at corrective action has been
taken?

o

Is there a confidential disclosure program (for overpayments or
other issues)?



What systems are in place to track samples?