Medical Device Link.

Originally Published MX November/December 2002

GOVERNMENTAL & LEGAL AFFAIRS

Intelligent patent management is critical to an emerging medical device company's business growth.

Barbara A. Wrigley

An intellectual property (IP) strategy and a sound patent protection plan are strong supports for CEOs of early-stage medical technology companies seeking additional sources of funding. In deciding whether or not to commit their money to a particular enterprise, investors typically consider such factors as the uniqueness of the technology (that is, how different from market precursors), the sustainable competitive advantage it promises (based on what the company has done to protect its intellectual property), and the exit strategy goal (merger or acquisition, initial public offering, or purchase by future investors).

Most investors will perform extensive due diligence before making the decision to fund. Having a cogent IP strategy that dovetails with its strategic plan will not only ensure a successful exit strategy for the start-up medtech firm, it will also enable the company CEO to make a compelling case for the funding necessary to achieve that objective.

Aligning IP Strategy with Company Strategy

An IP strategic plan aligned with the overall business plan will allow company entrepreneurs to reap rewards at exit time. Such an alignment signals to an investor that the company is focused and that the CEO is IP savvy. A new company must start with a general business plan that identifies first and foremost how the firm wants to position itself in the marketplace, and secondarily what its business objectives are.

The Company Business Plan. One typical method of establishing a business plan is to conduct a strengths, weaknesses, opportunities, and threats (SWOT) analysis. The data collected from SWOT analysis are used to develop the company's business objectives.

For example, the CEO might want the company's products to hold a proprietary position in the marketplace, or might intend the firm to dominate the market. Claiming a proprietary market position will mean protecting the company's products and key manufacturing processes by patent or trade secret. Securing a strong proprietary position will typically lead to having a dominant position, at least with respect to the product in question. A dominant position in the marketplace may mean dominating a particular niche, if the company is a niche player, or simply deriving more gross revenue from its proprietary product than competing companies do from theirs. If obtaining investment funding is a goal of the company, then a proprietary market position can serve as a strong enticement.

A CEO may also ask whether a reasonable start-up business objective is foreclosing competition in a particular area of the market. A strong patent position will usually help shut out competition, but the IP strategy must be aggressive and well thought out. Rarely will one patent on a product enable a company to foreclose competition completely. If an attractive product nets gross margins in excess of 50%, a third party will surely design around the company's patent, or challenge the patent, which may then be held invalid and, therefore, unenforceable. However, what is called a patented position can be established. This involves holding many patents that cover different aspects of one product. A patented position is a stronger position from which to preclude competition.

Other desirable business objectives are to be able to anticipate product obsolescence in order to start developing the second-generation product at an opportune time, to foresee technology shifts that will affect the company, and to track the product development activities of competitors. An IP-savvy CEO can use the U.S. and foreign patent systems to accomplish all of these objectives.

To complete the business plan, the CEO will establish objectives for gross margin, operating income, and company growth, among others.

The IP Strategic Plan. Once the company's overall strategic plan is outlined, the CEO will set the objectives that pertain to its intellectual property. Typical IP objectives are that the patents the company obtains cover the commercial embodiment of the product and that the patents are positioned to cover the next generation of products the firm develops. Because a competitor can slavishly copy an innovator's product more easily and less expensively than developing its own, a critical IP objective for the entrepreneurial enterprise is to guard against competitors designing around its patents.

The CEO must question whether it is enough for the company to have a patented position for its own products only. Perhaps it also should seek to obtain patents on competitive technology. This would enable the company to build an effective wall around its own technology, thereby keeping the competition at bay. Such a strategy entails monitoring the U.S. and foreign patent databases, identifying technology trends, and patenting not-yet-commercialized embodiments of those trends. In the long run, the company will secure a truly proprietary market position using this technique, and may even derive licensing revenues from the patents if it desires.

The next step for the chief executive is to ascertain the board of directors'—and the CEO's own—willingness to enforce the company's IP rights against infringers. If the firm is not going to enforce its patents when challenged with competition, should it be spending money seeking patent protection at all?

Enforcement, although expensive, should be part of an IP strategic plan for several reasons. First, enforcement will curtail designing-around efforts by competitors because they will become acutely aware of the company's intention to protect its rights. Second, once a patent has been successfully litigated, it will be easier to get preliminary injunctions against subsequent infringing activities, thus making it possible to shut down the competition without incurring huge patent litigation costs.

After all the objectives for intellectual property are enumerated, the company must then examine them for consistency with its business objectives. If the two sets of objectives are consistent, then the IP strategic plan is aligned with the company's overall strategic plan.

Components of an IP Strategic Plan

An IP strategic plan consists of three key components: the portfolio development strategy, the patenting strategy, and IP value extraction.

Portfolio Development. Developing a strong IP portfolio will create value for the company by erecting competitive barriers to entering the product market that the portfolio protects. This value derives from foreclosing or slowing competition, creating lead time for the company to conduct clinical trials and enter the regulatory process, and, finally, allowing it to enter the market strongly by distributing its product well in advance of competitors.

Figure 1. An array of patents based on a technology platform provides focus. (click to enlarge)

Unfortunately, because funding can be scarce for the early-stage company, the tendency is to adopt a one-invention/one-patent strategy for each invention. The result often is that the company's patent portfolio does not provide the focus that investors look for. These potential sources of funding perceive that the company does not know what business it wants to be in and are reluctant to invest. Therefore, the CEO should consider instituting a technology-platform approach to patenting for each invention (see Figure 1).

Consider three inventions patented by one company: a polysulfone hollow-fiber membrane for use in a dialyzer, a polyimide spiral-wound membrane for use in a drug delivery system, and a polypropylene flat-sheet membrane for use in dental applications. An investor examining this portfolio might conclude that the company is not focused because it is in three different channels of trade.

However, some simple planning of the technology strategy prior to patenting allows a cogent case to be made for focus. What all three inventions have in common is a membrane. Therefore, a patent on "membranes and methods of manufacture" may be filed. Subsequent patent applications could be filed for use of the polysulfone, polyimide, and polypropylene polymers in making those membranes. Further applications could be filed to cover the commercial embodiments of the different membranes—wetspun, flat sheet, spiralwound, and meltspun. Finally, the manufacturer could apply for patents on different applications, such as dialyzers, water filters, dialysate filters, oxygenators, hemoconcentrators, hemofilters, artificial livers, pH regulators in bioreactor systems, and drug delivery devices. An investor would conclude from this strategy that the company focuses on membranes for use in medical applications and that there are numerous applications for the membrane technology. This perception would be a powerful incentive to invest.

In developing a strong patent portfolio, the CEO must decide whether competitive assessment is necessary. Competitive assessment is a powerful patent-based competitive intelligence tool that can accomplish many objectives. It can bring to light patents that might present an obstacle to the company's developing a particular product. Early identification gives the company an opportunity to design around any problematic patent. The assessment enables the firm to plot out a competitive landscape identifying the competitors active in the technology field and the weaknesses, or holes, in their patents. The company can subsequently exploit these weaknesses by filing patent applications covering the identified holes. Competitive assessment might also identify weaknesses in the company's own portfolio that can be shored up through the filing of continuing patent applications. It can be used to uncover opportunities for product development and to outline a pathway to future development. Finally, the competitive assessment process can uncover prior art that may be submitted to the U.S. Patent and Trademark Office against a competitor's published application.

Patenting Strategy. Concurrently with strengthening the patent portfolio, the company should be developing a patenting strategy. A strategy prevents the wasteful knee-jerk tendency to patent everything that results from the R&D effort. In this regard, the CEO and other company executives must settle on a definition of the company's core technology. Strategic patenting involves focusing on seeking patent protection primarily for the company's core technology and the functions related to that technology. Core technology is technology that is or will be essential to the fulfillment of the company's business plan. Noncore technology is technology ancillary to the business plan. While the emphasis in strategic patenting is to patent the core technology and the sustainable competitive advantage embedded in it, noncore technology may also be patented in order to develop licensing opportunities for the company.

Identifying, the sustainable competitive advantage of the core technology involves answering the questions, "What is it about this technology that provides the most important advantage over the competition?" and, "Will that advantage withstand the test of time?" A positive answer to the second question establishes sustainability. Once identified, the sustainable market advantage can be patented. The advantage is strengthened by patenting key performance features associated with it. Also to be considered is whether any business methods or methods of distribution associated with core-technology-based products exist that would enable the company to market and sell its products to competitive advantage.

IP Value Extraction. The goal of any IP strategic plan is to extract value from the IP portfolio. This can be accomplished in a variety of ways. One is to foreclose competition by holding superior patent rights, which creates the ability to maximize gross profit margins. Aggressively enforcing rights in intellectual property against third parties in order to secure identification with the technology has the side benefit of collecting damage awards, and perhaps enhanced awards. Selling the technology outright or donating it to a charitable or educational institution in order to generate a favorable tax situation are other value-extraction possibilities.

A company can extract value from both its core technology and its noncore technology, using a different strategy for each.

Typically, the early-stage medical device company will want to adopt a dual offensive and defensive approach to extracting value from core technology. The offensive approach entails filing prior-art documents against competitors' patents, patenting competitive technology, and enforcing patent rights against competitors. This offensive patent strategy delays or precludes the rise of competition. Defensive approaches also foreclose competition, but by means of a different mechanism.

Figure 2. Patent continuation practice allows the patent portfolio to expand with the technology landscape. Continuation, continuation-in-part (CIP), and divisional applications derived from the parent application can be filed to foreclose competition during the life cycle of a medical device. (click to enlarge)

A defensive strategy for value extraction is to adopt an aggressive continuation practice respecting the company's own patent portfolio. This involves filing a parent patent application on a core technology product originally and then filing continuations, continuations-in-part (CIP), and divisional applications as the technology landscape unfolds (see Figure 2). Continuation practice that leaves the door open to future applications creates patent-expansion opportunities and is an attractive inducement for investment. A defensive strategy may develop into an offensive strategy as the company faces the decision to enforce its patents; however, its chief aim is to provide the focus that investors look for when making decisions to fund.

Finally, core technology can be licensed to create value. Company executives should think long and hard about this decision. On the other hand, if the core technology lends itself to applications in different fields of use, as in the membrane example above, a decision to license may be well-founded.

Extracting value from noncore technology could involve a decision to license, sell, or donate. Noncore technology lends itself handily to licensing and to sale. However, the patents that cover noncore technology exclusively and not any aspect of the core technology must first be identified in order to avoid surprises.

The first step in extracting value from peripheral technology is to determine what technology the company wants to license. That may sound axiomatic, but many companies never bother to identify the technology they want to license, focusing instead on which patents should be licensed. Such an approach may lead to the later unhappy realization that the company has inadvertently licensed its core technology to the competition because it was embedded in one of the licensed non-core-technology patents.

Integrating IP Strategy into the Overall Strategic Plan

Once the IP strategic plan is developed, it must be integrated into the company's overall strategic plan to ensure its successful implementation. This is accomplished by educating managers, in-house inventors, and key employees about company objectives pertinent to intellectual property, and reasons for establishing an IP strategic plan. Communication with all important players is critical.

The CEO must have buy-in at all levels of the organization, particularly the interface between R&D and marketing. Seeking competitive intelligence and other input from marketing executives and feeding that into the product development effort will ensure buy-in from these two critical segments of the company. Meetings stressing the importance of the company's intellectual property to the business plan will also result in the requisite buy-in.

The company must also take steps to "incentivize" IP development via monetary awards and recognition programs. While not everything that emerges from the development program will turn out to be a contribution to core technology, creativity, innovation, and idea conception should be rewarded in order to encourage efforts by inventive employees. Consider the contribution to technology of Alexander Graham Bell. Bell was working on developing improvements to the telegraph when he created the telephone. So, while a company's focus might be on its core technology, contributions to noncore technology should also be incentivized and rewarded. Ultimately, the company will profit by licensing or selling the innovative contribution.

Finally, to see whether IP strategy integration has been successful, performance must be measured. Several mechanisms for this are available. For example, innovation can be measured as a percentage of sales, that is, the number of patents per gross revenue of product sales. Other yardsticks are the number of patents per inventor and the revenue derived per patent from patented technology.

Conclusion

What the medical technology company has done to protect its intellectual property, whether the patent portfolio is focused on core technology developments, and how distinct from competing technology the early-stage company's own technology is—these are factors investors consider in making the decision whether to participate with funding. A cogent IP strategy that dovetails with the company's overall strategic plan will not only ensure a successful exit strategy for company entrepreneurs, but will also enable the CEO to make a compelling case for receiving the funding necessary to achieve that goal.

Barbara A. Wrigley is a partner in the intellectual property practice group of Oppenheimer Wolff & Donnelly LLP and cochairs the firm's medical device industry practice group.

Copyright ©2002 MX