entrepreneurshipresource center

The Resource Center has all the info you'll need From content to user feedback, the resource center has the information you need for every level of the entrepreneurial process.

Legal and Strategic Challenges for Life Science and Biotech Companies

Andrew J. Sherman, Partner, Dickstein Shapiro Morin and Oshinsky LLP

Successful entrepreneurial life science companies, including pharmaceutical and biotechnology companies, typically plan an entire life cycle for each potential product, spanning many years. This cycle may involve multiple laboratory test phases after initial discovery of a novel compound or process, long-term research and development efforts, lab animal studies, pre-clinical and human clinical trials, regulatory review, commercialization, and enforcement of intellectual property (IP) rights to protect the commercial market for the product. Each phase can require enormous amounts of working capital as well as company resources and/or strategic partnering with different collaborators that can bring specific areas of expertise or technology that the company needs to achieve its long-term business goals.

Effective acquisition and use of IP assets at all phases during the product cycle are critical to achieving success in the life sciences industry. Sound use of intellectual property law can best ensure that the companies' investments of time and resources are protected, that the company can effectively leverage IP assets to drive collaborations with other entities necessary to achieving the companies' business goals, and that, in the detailed agreements striking relations with partners, the IP rights arising from the collaborations are fairly distributed so that the company is not overwhelmed by its potential partners.

Intellectual property is an asset that can be maximized like any other asset. For life science companies, IP is typically their most valuable asset. The IP that the company values may take the form of copyrights, trademarks, and trade secrets, but typically it will be patents that afford the strongest form of protection for life sciences companies. Patents frequently come into play at many phases, including the in-licensing of platform technologies; developing a patent portfolio to protect specific discoveries and potential products and the target market and/or to attract potential outside investors in order to defray further development costs; collaborating with other companies to use their patents to develop specific products or processes that may be outside the companies' areas of expertise, such as specific screening methods, therapies, or dosage forms; and as a means of leverage to effectively and fairly drive agreements with partners capable of tackling, for example, expensive clinical trials, large scale manufacturing, regulatory review, or commercialization issues.

Formulating a Patent Strategy 

A portfolio of strong and meaningful patent protection is critical to the strategic growth of most pharmaceutical and biotech companies. Unlike trade secret protection, a patent can be used to exclude others from the market even if they have independently developed the infringing product. Unlike a trademark, a patent can protect the compound or method of use of the product itself rather than only a mark identifying the source of the product. Due to the substantial investments required and which need to be protected, and also the value that patents can have in leveraging business arrangements and protecting an exclusive market for the companies' products, acquiring a robust patent portfolio—ideally owned by, or at least exclusively licensed to, the company—is critical to success in this industry.

Equally important are the early identification and avoidance of potentially blocking patent rights of others. A company can acquire a robust IP portfolio and avoid third-party patents only by having an IP plan and a sophisticated legal strategy. If the company is not treating the IP portfolio as an asset to increase the company’s bottom line, valuable business opportunities and revenues will not be realized. On the opposite side of the same coin, the worst time to discover potential IP liability is after substantial investment in R&D, manufacturing, and marketing. This is particularly true for life science companies because it can be difficult to modify an initial product to avoid infringement once that product has obtained regulatory approval, and because the development and regulatory phases for new products can be time-consuming and costly. Ideally, potentially blocking patents are identified and evaluated prior to any significant investment toward products that ultimately cannot be made, used, sold, or imported without a license. If a license is going to be necessary, it is valuable to recognize this early during formulation of the business plan for any given product.

A written IP plan, which includes the company's patent policy, procedure manual, and IP business plan is the single most valuable tool for ensuring that company managers take IP very seriously and recognize the value and business opportunities that can be realized from patent assets. The company is flirting with disaster if it does not formulate an IP plan and associated mechanisms to guide the company to make timely and informed decisions relating to IP. The catastrophe may be in the form of important ideas that were not captured, or facing infringement liability and injunctive relief against important company products. At the very least, the company will forego significant business opportunities and revenue while its more IP-savvy competitors take the lead. Inability of senior management to articulate the company’s patent strategy is a sign of trouble for life science companies.

Creating an IP Plan

The company should verify that an up-to-date IP plan is in place for managing at least the following functions:

  • Documenting the conception of inventions, with associated training and incentives for R&D to abide by company policies relating to IP.
  • Evaluating the "good ideas," seeking appropriate protection, and avoiding loss of IP rights; providing a system of contract procedures for clarifying ownership of IP rights developed in the course of business relationships.
  • Considering patents and related technology for commercial development though licensing and leveraging business deals; monitoring and detecting IP asset infringement, and pursuing defensive patenting strategies.
  • Minimizing risk of infringement liability through timely reviews, opinions, and design-around studies.
  • Formulating a system of oversight and delegation of IP functions to people or committees having the required legal, technical, and business acumen.
  • Providing systems for monitoring company IP assets, placing a value on IP assets, and verifying that the assets the company obtains fit its long-term strategy and that the company is using those assets proactively to maximize value.

Management of patent assets in life science companies should involve top-level decision makers. A useful mechanism to bring discussions on IP issues to the upper echelons is by requesting that the head of IP operations provide a comprehensive written IP plan for Board discussion and approval. The head of IP operations should be able to demonstrate that the company knows what IP assets it owns, that it has developed a business plan to capitalize on those assets, that it has set business targets for the desired returns, that it has in place product development and/or licensing plans to meet its strategic objectives, and that it has committed the resources necessary to pursue the IP plan. If the company has such a plan, then the head of IP and the Board should consider any issues in its implementation and ways in which the plan or its implementation can be up-dated or improved.

Detecting Problems Early

When potential problem areas are discovered early, it is easier to derive solutions, and fewer resources are spent exploring development dead ends. For example, when a clinical trial is necessary to obtain approval of a new drug, a company may obtain a patent search and opinion before incurring the costs of the trial. A more savvy company, however, will obtain a patent infringement evaluation earlier during the development cycle in order to save on costs of unnecessary lab and animal testing if patents block the ultimate product. Companies also should ensure that sufficient safeguards are in place so that any changes from prototype to product launch are considered in supplemental patent searches and studies, and that any preliminary testing does not itself cause infringement liability.

Life science companies should confirm that its head of IP operations is abreast of the direction of company R&D and is informed when a new development project begins. Companies should monitor the patent filings of competitors and check for published applications worldwide to provide early information as to the IP rights of other companies in their field of endeavor.

Many other nuances arise from the law involving life science patents, and companies must work closely with experienced patent to obtain meaningful patent protection and avoid the potentially blocking patent rights of competitors.

Leveraging Strategic Alliances

The biotech and life science industries are unique in that they typically involve require one or several partners along the way to complete the product cycle. Why? Many organizations, including universities, government agencies, specific technology companies, commercialization, and clinical trial specialty companies, may have resources or technology that is needed to complete the product development cycle. A typical scenario for a biotech company or investor is looking to entities upstream for basic research or platform technology and downstream for commercialization and to fund costs of clinical trials.

Secure a good-fit collaborator, one that has needs for what the company can offer and vice versa as opposed to one that has undue leverage or is looking to take advantage of a motivated or desperate entrepreneurial company. It is critical that the strategic partner selected has the wherewithal to perform its obligations, but also one that is not so powerful in terms of its own IP and strategic position that it simply overwhelms the other company, for example, by insisting on keeping for itself all rights to IP developed jointly during the collaboration.

Raising Capital

Raising growth capital for earlier-stage biotech and life-sciences companies can be especially challenging due to the large amounts needed to get through the FDA process and costly clinical trials. Traditional angels and private placement investors many not be able to handle working capital costs that could exceed tens of millions of dollars. Life sciences entrepreneurs should look for strategic investors and/or venture funds that specialize in the biotech arena, who are more likely to understand the intended use of proceeds, and who will be sensitive to the funding team’s need to get a fair valuation to avoid dilution.

If met thoughtfully and thoroughly, the challenges faced by entrepreneurial companies in the life science and biotech industries can be turned into opportunities for significant economic gain—and a lasting contribution to mankind.

comments powered by Disqus

Search the Resource Center

Stay Connected

Email Newsletter Signup

Want to get connected? Sign up to receive regular news, polls and updates from The Kauffman Foundation.

Email Newsletters

Want to be up-to-date with the latest news and updates from Entrepreneurship.org? To subscribe, just give us your email address below; you'll choose which e-newsletters you'd like to receive on the next screen.