By Lawrence P. Horowitz of HVA, Inc. and Christopher Halliday of Morgan, Lewis & Bockius LLPIntroduction
Patents play an important part in every business development and M&A
transaction. Almost every acquirer, strategic partner, or licensee requires satisfactory completion of
intellectual property due diligence as a condition for closing. (We will refer to acquirers, strategic
partners and licensees as “buyers.” Counterparties will be referred to as
“sellers.”) Buyers’ conclusions from due diligence either support the negotiated
terms, provide reasons to ask to renegotiate terms, or serve as a rationale to walk away from the
transaction. “No change” is the best sellers can expect from patent due diligence.
Sellers communicate a great deal of information about market potential,
competition, stage of development, and underlying science to influence buyers’
valuations. They do not do the same for intellectual property, typically providing a list of issued
patents and publicly available patent applications. Buyers then calculate value, assuming the patents
only prevent competitors from marketing exact copies of sellers’ product. Assumed patent
protection neither limits competitors-in-kind nor competition from therapeutic alternatives.
Buyers thus assign the smallest possible value to patent protection. Should patent protection turn out to
be broader than assumed, buyers have acquired value for nothing more than a possibly la...
