Strategic Patent Portfolios Lead to M&A Success

As a result of the current economic downturn, mergers and acquisitions (M&A) have replaced initial public offerings (IPO) as the preferred exit strategy for medtech companies. The medical technology industry has seen investments and deals increase in the past two years, with annual industry growth rates picking up since the recession depths of 2009.

Despite these positive indicators, the medtech industry faces a wide range of long-term challenges. Uncertainty in the capital markets combined with regulatory challenges, pricing pressures, and continuing changes in the delivery of global healthcare are causing medical device companies to seek new ways to remaininnovative in the competitive marketplace. Funding challenges persist and IPOs in the stock market remain too unpredictable to be a feasible growth or exit strategy for even the most promising medtech companies.

In the wake of enduring financing obstacles, medical device companies increasingly are exploring M&A to leverage existing intellectual property (IP) assets and generate new sources of capital and revenue. A company’s success as an acquiring company or as a target company of a merger depends, in large part, on the value of the company’s patent portfolio.

IPO Window Remains Closed
The economic turmoil of the last few years has caused a dramatic decline in the number of IPOs. In stark contrast to previous years, only two medtech IPOs were completed in 2009, with a slightly improved rate of nine medtech IPOs completed in 2010.

In 2011, the medtech IPO market became even more volatile. The early part of 2011 saw a surge of registrations for medtech IPOs. However, across all industries, 215 IPOs were withdrawn or postponed in 2011, the highest number ever recorded, due to an environment increasingly hostile to new stock offerings. The high hurdles of the IPO market make an IPO unattainable for most medical device companies and thus, these companies are placing more focus on M&A transactions for funding and growth opportunities.

M&A Activity Increases
M&A transactions have proven to be more resilient than IPOs in this challenging economic climate. During the last decade, medical device M&A activity increased in terms of dollar volume, with a grand total of $320.4 billion spent on medical device M&A transactions. Following peak activity in 2007 and 2008, there was a dramatic drop in M&A deals in 2009. However, the past two years have seen medtech M&A activity levels rebound.

In 2011, medtech saw a major uptick in M&A with the aggregate value of the 2011 transactions at about $63 billion, compared with about $41 billion for 2010, both way up from a historic low of $13.8 billion in 2009. In 2011, eight medtech transactions were valued at more than $1 billion, compared with four in 2010 and three in 2009.

The mammoth acquisition by Johnson & Johnson (J&J) of privately held Swiss trauma device maker Synthes for $21.3 billion, announced on April 27 last year, was the largest medtech M&A transaction of 2011. The Synthes acquisition is the third largest medtech transaction in history, and J&J’s largest acquisition ever. 2011 saw two other large medical device acquisitions with Danaher Corporation’s June 29 acquisition of biomedical laboratory instrument maker Beckman Coulter for $6.3 billion, and Apax Partners’ Nov. 4 acquisition of wound care company Kinetic Concepts for $6.8 billion. The medical device merger trend is continuing, as evidenced by the March 12, 2012, announcement that automated external defibrillator maker Zoll Medical will be acquired by Japan’s Asahi Kasei for $2.2 billion.

Recent M&A activity has been driven by a consolidation strategy that is influenced by several factors, most notably the acquisition of novel technologies and the achievement of sales synergies. Pressed by the struggling economy, top-tier medical device makers are expected to continue their M&A binge, especially as a means to enter new markets and diversify their product offerings. As the acquisitions of 2011 illustrate, medtech companies want to acquire leading-edge technologies with high potential for growth. It is no surprise that entrepreneurial owners of privately held medtech companies, venture capitalists, and private equity owners are all expected to explore the M&A route for exiting from medtech investments made over the past several years.

A number of established medtech companies are bargain hunting by acquiring distressed or bankrupt companies hurt by the economic downturn, rather than through highly leveraged buyouts. For medical device companies, intellectual property assets are a primary driver of value in deals. By creating a comprehensive strategic patent portfolio, medtech companies can maximize opportunities for potential M&A transactions.

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.

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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.


David J. Dykeman is co-chair of the Intellectual Property Department in the Boston, Mass., office of the international law firm Greenberg Traurig LLP. A registered patent attorney with over fifteen years of experience in patents, intellectual property, and licensing, David’s practice focuses on securing strategic worldwide intellectual property protection and related business strategy for high-tech clients, with particular expertise in medical devices, life sciences, biotechnology and healthcare IT. David can be reached at (617) 310-6009 or [email protected]. Bethany A. Stokes is an attorney in the Boston office of Greenberg Traurig and a member of the Intellectual Property and Technology practice group. Bethany’s practice involves intellectual property due diligence investigations, licensing, and trademark and copyright prosecution. She frequently works with clients in the medtech, information technology, and life-sciences industries. Bethany can be reached at (617) 310-6098 or [email protected].