Patent Considerations in M&A In today’s challenging economic climate, medical device comp

Patent Considerations in M&A
In today’s challenging economic climate, medical device companies need to be aware of the key patent issues that arise in M&A. Problems with a patent portfolio discovered during IP due diligence can lead to price adjustments, changes to the deal structure, or, in extreme cases, termination of a transaction. Below are important areas of focus that medical device companies should address to position themselves for M&A success.

1. Develop A Strategic Patent Portfolio. A strategic patent portfolio is crucial to a company’s growth and survival by providing numerous business advantages, including positioning themselves for M&A and gaining leverage for collaborations with other companies. A strategic patent portfolio can be used both offensively as a “sword” to strike competitors and defensively as a “shield” to avoid competitor attacks. Offensively, the sword prevents competitors from making, using or selling the invention.

Defensively, the shield serves as a bargaining chip against a competitor who threatens to sue for patent infringement of one of the competitor’s patents. Whether an acquiring company is reviewing a target company’s patent portfolio or a potential target is conducting an internal IP audit, medical device companies should be careful to analyze the patent portfolios to make sure they are strong both offensively and defensively.

Developing a strong portfolio first requires comprehensive patent coverage for the company’s core technology. Companies should file one or a series of patent applications providing the broadest possible patent protection to cover the core technology. To obtain broad patent protection, a medtech company should consider both current and future business objectives and contemplate ways that competitors may attempt to design around the patents. Where applicable, patent claims should be directed to the entire device, key components, disposables, methods of manufacturing, methods of treatment, therapeutic uses, combination therapies and any other aspects of the invention. As the core technology evolves, incremental improvements should be patented to form a “picket fence”
of protection around the core technology. By filing applications covering incremental improvements, medtech companies will continue to expand their presence in the marketplace. Furthermore, under the patent reform laws recently passed by Congress and promulgated by the United States Patent and Trademark Office (USPTO), which takes effect on Sept. 16 this year, it is even more important for medical device companies to file patent applications early and often.

2. Conduct IP Audits. A potential target company should conduct an internal IP audit on its patent portfolio to make sure the portfolio is complete, with no holes competitors can design around. This due diligence should include Freedom To Operate (FTO) analyses of third-party patents to assess the risk of patent infringement claims that may be brought against the target company by third parties. Patents or patent applications that still may be valuable but have expired or have been abandoned should be revived. Potential acquirers should make sure to review these FTO opinions when considering the value of the target company’s IP.

3. File International Patent Applications. Filing international patent applications further strengthens a patent portfolio and expands a company’s presence in the global marketplace. While foreign patent applications can be expensive, filing in strategic countries can be critical to the commercial success of a product and facilitate international M&A. Even during the recent economic turmoil, international M&A activity has shown resilience, with the healthcare sector accounting for 10 percent of total international M&A. A company should consider filing in specific countries with a large target market for the product, countries where competitors’ manufacturing facilities are located, and countries that export medical products to other regions through distribution channels.

4. Address Ownership Issues. Determining the ownership of all patents and patent applications is of extreme importance during an M&A transaction. Companies need to determine whether they have the full right to use their IP. Rights to IP may be gained through license or assignment, but other factors also need to be considered when determining ownership. Government and institutional funding and joint ownership both effect ownership and often are overlooked. If a target company received government funding or was involved in a joint venture, third parties may have rights or even joint ownership of the patents. In these situations, steps should be taken to ensure the company’s exclusive right to the IP is secured. All license agreements, both inbound and outbound, also should be reviewed to determine the company’s future ability to transfer and
assign their patents.

5. Clear Chain of Title. The title of all patents and patent applications should be reviewed and any unclear title to any patents should be resolved. Potential acquirers should review the USPTO database and the Uniform Commercial Code records to ensure there is clear title with no unresolved liens, security interests, or other encumbrances recorded against the target company’s patents. To aid this process, target companies should make sure all assignments are recorded at the USPTO to show clear ownership of all patents and patent applications.

Addressing these potential patent issues prior to a deal can maximize M&A valuations and avoid price adjustments, changes to the deal structure, or potential termination of a transaction during the IP due diligence stage.

* * *
With the IPO landscape still unpredictable, mergers and acquisitions are an increasingly important way for medtech companies to leverage intellectual property assets and generate new capital. Creating value-driven patent portfolios and ensuring potential patent issues have been addressed is essential to maximizing opportunities for potential M&A deals.