Medical Device Link.

Originally Published MX May/June 2003

GOVERNMENTAL & LEGAL AFFAIRS

For many medtech companies, gathering an IP portfolio and managing it effectively are key tasks for company survival.

Moderated by Steve Halasey

The very existence of many medical technology companies is embodied in their portfolio of intellectual property (IP). For such companies, having clear ownership of and freedom to use their IP is the lifeblood of their product development efforts.

But the importance of IP to medtech companies doesn't stop there. Having a well-managed IP portfolio can often be a determining factor in a company's ability to attract and retain investment funding. Such a portfolio can strengthen a company's position in its core markets, or even broaden its ability to enter new fields of endeavor.

Moreover, savvy medtech executives can use their company's IP holdings to achieve a wide variety of strategic objectives. A company's IP is often at the core of its partnering agreements with other firms, as well its arrangements for licensing and distribution. And in extreme applications, company leaders can make use of their IP holdings defensively—thereby preventing would-be competitors from entering the firm's core market areas.

To take the other side of the coin, failure to manage a company's IP portfolio carefully can have dire consequences. Company leaders who do not ensure their rights in this regard will likely encounter difficulty in attracting funding, and may even find their company's avenues to product development closed off by competitors.

For medtech executives seeking to gain the benefits of a well-managed IP portfolio, the first step is to select and acquire the IP that their company requires. The sources of such properties can be varied, including government, academic, and commercial sources. So too are the methods of acquisition, which often involve significant negotiation of appropriate terms. But whatever the source and method, company leaders will have their hands full to ensure that their IP portfolio is kept up to date and used to its best effect.

To find out more about how medtech company leaders are finding and using IP, MX spoke with four experts in the field (see sidebar). The complete text of this roundtable can be accessed via the MX Web site at http://www.devicelink.com/mx.

MX: How would you rank the importance of intellectual property for medical technology manufacturers?

Stuart L. Foster: It very much depends on the kind of company a firm aspires to be. IP may not be that important for a company that is only involved in the distribution of commodity products. But for entities that want to be considered high-technology, high-growth-rate companies, IP ownership is critical.

There are any number of medical device examples in which IP has made the critical difference in the growth rate of the companies. So if a company is looking to attain high growth by developing cutting-edge devices that will provide new clinical value and patient benefits, then IP is a very integral part of that equation.

Stephen C. Macevicz: My experience has been in the areas of assays and devices for the life sciences research market, rather than in therapeutics, but I would agree. If a company intends to position itself in a high-growth situation, IP is crucial.

Colin Hunsley: Companies looking to develop a new technology in their specialized market area are reluctant to invest the requisite money unless they also have a strong IP position or a good patent portfolio behind them. A company that has a strong IP position gains a much better grip on where its product can fit in the marketplace and greater assurance of being able to make a good profit with that opportunity.

For advanced-technology and growth companies that rely heavily on having a good IP portfolio, what are the best sources of medtech IP?

Hunsley: BTG is probably more opportunistic than any sector- dedicated medtech company can be. Dedicated companies have to focus very specifically on their chosen areas. And in those areas, they have to maintain links to the key universities, the key researchers, and perhaps even some state research organizations.

By contrast, BTG can work across a much broader range. We work with research charities, hospitals, universities, and even small companies. All of those are also potential sources of IP.

Foster: Edwards Lifesciences is in a little different position, because we are a company that is dedicated to a specific business. For our industry sector, finding IP can be sort of a messy proposition that's a bit like trying to boil the ocean. We narrow our search down to the strategic areas that we think will be important for our future growth. Otherwise, the search would be too wide to accomplish.

Within those strategic areas, we then do the best we can to unearth intellectual properties of interest. These can come from a variety of different sources. And as we find IP that we think would be useful for our future requirements, we investigate further.

Richmond A. Wolf: Clearly universities and national laboratories have been fine sources of new technologies. I think this will continue, so it is necessary for companies interested in acquiring the technology to spend time understanding how these institutions work. It will make for easier deals and shorter time to completion of the deals.

The current economy offers a new set of opportunities for cash-rich companies. There are many small medical device businesses that have essentially one product and are attacking a captive market, or one that is small with little growth potential. These companies cannot raise significant capital in the current climate and have therefore become increasingly interesting acquisition opportunities. Many of these companies are prerevenue, and larger companies can sometimes acquire them for very low costs.

Are the sources of IP different or narrower for companies that are active in the diagnostics or life sciences research sectors?

Macevicz: I think the sources are both different and narrower. When I was involved with Applied Bio Systems Inc. (ABI), the company successfully inlicensed several products to supplement its general product lines, usually from academic institutions. Except for IP in the DNA-sequencing area, which is a fairly broad product line for ABI, most of those inlicensing situations were rather narrow. ABI conducted a great deal of diligence to scope out any freedom to operate issues, so that was definitely an important aspect.

I have also been involved in a situation where inlicensed technology was the basis for the whole company's being. That led to some difficulties, mainly because the company had a coexclusive license to a broad technology, and the granting institution was impatient to see the IP developed. Since there were competitors that wanted to get into the field, that made for a very interesting situation.

Is there significant variation in the quality or maturity of IP from different sources?

Hunsley: Academic IP tends to be quite raw. It is often brought forward at a very early stage, long before the IP has begun to be fleshed out, so that it is not apparent what the property really consists of. That kind of IP can make a great starting platform. But where a company is trying to use the IP to make improvements in existing product lines, things are often quite tricky.

Small start-up companies offer a similar sort of IP, but with a much more commercial approach and attitude, which I think is very useful.

Companies sometimes look for more-mature, established technologies to bolster their IP position or develop a defensive position. That kind of IP is often found among the noncore technologies of other established companies, and it is sometimes possible to get hold of such properties.

Wolf: I would agree that university IP is often less developed than IP acquired from a company because of the nature of basic research. Nevertheless, there is also variation in the development of technologies from university to university. It is important to work with schools that have a good track record for commercializing their technology.

Would you assign the same importance to IP coming from governmental or academic sources, or are those properties too immature to be considered seriously?

Foster: We look at them seriously, but they are generally at such an early stage that they don't have the kind of value that can be found in IP from a commercial entity.

Government and academic institutions tend not to appreciate fully the process by which intellectual property is commercialized. As a result, they completely underestimate the investment and time required to do that.

Macevicz: I agree that some academic institutions often have unrealistic expectations. In my experience, the transaction usually goes smoother when the academic institution has staff with direct industry experience.

Strategic Uses of IP

Do medtech companies acquire IP primarily to flesh out their existing portfolio, or to provide a basis for other strategic moves?

Hunsley: Most of the IP seeking of companies in the medical device area is related to pursuing specific opportunities and trying to further innovation.

One exception in the medical device area is the field of orthopedics, where there is quite a lot of defensive cross-licensing of IP. Companies that supply orthopedic products to hospitals must usually have quite an extensive range of products, because hospitals expect their suppliers to provide everything needed to perform a particular procedure. So in this field it makes sense for companies to cross-license, so that they can win contracts. Clearly, there is some level on which these companies compete, and some IP that they use competitively. But some of their IP is also cross-licensed.

Is that equally true for other medtech sectors? For instance, the biotech area comes to mind as a sector that has witnessed a lot of defensive IP positioning related to the products of the human genome project.

Macevicz: The IP in that area has undergone a lot of turmoil, which is typical of an area that is undergoing explosive growth.

The original IP filings in biotechnology were incredibly broad and people put a lot of stock in them. But as the years have gone by, patent offices and courts all over the world have cut back on the scope of protections that people can obtain for these kinds of inventions. Particularly in the genomics area, a lot of older patents have questionable validity, and there is quite a bit of uncertainty about some established IP positions.

Does that uncertainty make it difficult for a company to use its genomics IP in any strategic fashion?

Macevicz: Yes, I think it adds a level of complexity because there is a degree of uncertainty as to whether the patents can successfully keep out competitors.

Stu, have you encountered anything like that in the cardiovascular field?

Foster: I would agree with some of the initial comments. However, in the medical device field, I don't think there is much defensive patent acquisition going on. Companies will engage in IP trades, but they tend to trade their offensive positions rather than trading for defense. Once a company has attained a nice position in a particular platform, it might wind up trading with another party to attain a position in another platform. That's the way we generally look at it, so we are very offense-minded.

Medtech company efforts are generally aimed toward filling in existing lines and acquiring growth platforms. Although we probably do more work on line extension, the growth platform deals tend to have greater impact.

Due Diligence

Once a company has identified a desirable property, what is involved in conducting the due diligence required for the deal? What should companies be looking for to ensure that they are doing a good deal?

Macevicz: The first thing is for the company to make sure that the scope of the IP is adequate for its needs. Next, it is important to conduct a strong prior art search to confirm that the patent is valid and that there is no invalidating art. Obviously, if the IP is invalid it won't do much good for a company that is serious about keeping competitors out of its market.

Conducting a rigorous prior art search is especially important when the licensor is an academic institution, because such institutions usually develop patents under a very tight budget. Oftentimes there is absolutely no prior-art search beyond what the inventors have told the patent attorneys working for the institution.

Foster: There are a number of things that must be done, but the first thing has to be figuring out the exact scope of the IP claims. This is especially important if the company intends to license an application that hasn't yet been issued, because then the company has to guess about which claims the patent office is likely to allow and which it will disallow. The hardest part of the process can be understanding the breadth of the IP, because companies need to be certain what the IP will provide in terms of freedom to operate as well as what the IP permits other companies to do in terms of defense.

The second thing that has to be done, believe it or not, is to ensure that the ownership of the patent is as stated. The company has to ensure that the inventors named really are the inventors, that all of the named inventors have actually assigned their rights to the correct parties, and that the folks who are licensing or selling the IP have the right to do so. In short, the company has to check that there are no loose ends hanging anywhere. We have encountered several instances in which issues of this sort arose during negotiations.

Hunsley: At the end of the day, patent and IP due diligence is a lot of hard work.

We frequently use software tools to map out the whole area, so that we can visualize all of the related pieces of IP. These tools enable us to identify what companies or institutions have interests in the area, so that we can get a feel for how significant a particular piece of IP might be. This method enables us to determine whether we are looking at something unique, or something around which a lot of freedom-of-use questions are likely to arise.

After that, we can begin to focus on the actual IP that is being offered—which really amounts to having an attorney plow through all the relevant patent materials and inspect the claims that the IP owner is currently striving to achieve.

Since our business is based in part on increasing the value of the IP, it's important for our attorneys to determine whether we might be able to broaden the patents and how far we might be able to drive them. We also need to know how well the IP claims match the key benefits that the technology is meant to provide, and how well those benefits match the market opportunity.

The process pulls together three elements: a technology view, a market view, and an analysis of whether the IP actually covers the match between the first two elements. All too often, the IP doesn't actually cover that match at all.

Valuation

Is there a widely accepted model that can be used to assign valuation to a particular IP prior to a transfer?

Wolf: Essentially, the value of a particular piece of IP is whatever price the market will pay for it. So the model is really one that's wide open to negotiations on a case-by-case basis.

Foster: I don't think there's any formula for that. It can be extraordinarily difficult for a company to determine the value of an individual IP within the entire realm of investments it plans to make in order to bring a new product to market.

Companies that are strategically oriented generally have business or economic models for the platforms they are trying to create. So the challenge for any particular deal is to understand what the IP is worth within the designated platform. Companies first have to rely on their experience and knowledge of the field, but at the end of the day, part of the decision is a judgment call.

To what extent is the value of IP related to general economic conditions or to investment trends in medical technology? Right now, for instance, are IP valuations depressed just as entrepreneurial company valuations are depressed?

Foster:> In general they tend to go along with each other. In today's environment, where it is very difficult to raise money for new medical technology companies, IP values tend to get depressed as well.

The road is littered with failures, and these days the difficulty of traversing it is truly great. So it's certain that IP values have diminished as a result of a tough investment environment.

Wolf: IP valuations are heavily dependent on such issues because ultimately the value of a piece of IP is whatever the licensee is willing and able to pay for it. If the licensee is cash poor, it's not likely to pay much for the license.

Hunsley: I tend to agree. Sometimes the biggest competitor for a piece of IP comes from guys who are trying to pull together a venture-backed start-up company. At the moment that route is much less open to them, so there is a greater opportunity for IP to remain available for licensing.

Do IP valuations in a particular sector rise when investors have high expectations for the sector? When investors have high hopes for new cardiovascular products or spin-offs from the human genome project, for instance, does that translate into higher valuations for IP in those fields?

Foster: There is always great interest in the cardiovascular field, so I'm not sure whether it has recently been attenuated or amplified. There is a huge interest in finding the next breakthrough technology that will provide great clinical benefit; every company is hunting for the next great platform. But the number of technologies that actually make it to market is relatively small, and because it is such a long road and because the environment is so difficult, IP values today tend to be depressed.

The current environment is more of a buyers' market. I have not seen any big gold rush that would bring about a frenzied buying spree and raise values on raw IP.

Macevicz: Regardless of investor sentiment, IP is still very important. So far, the fallout from the human genome project hasn't lent enough clarity to the picture to reassure investors or would-be licensees.

So the widespread publicity about the potential of genome-based technologies has not suddenly attracted a lot of capital that might increase valuations of IP in the field?

Macevicz: No. I think people are struggling to understand where the next markets for genomics-related products will be. When that issue is clear, I think the IP will follow that lead.

Conclusion

How do you think the importance of a medtech company's IP portfolio may change in the next few years?

Hunsley: IP is going to be one of the key competitive tools for all sectors of industry, but especially for the medical device area. It is a key aspect of a company's functions that cannot be made cheaper by having it performed in another territory, and for that reason I think it is going to become more and more important.

Companies should all recognize that IP is quite high-risk stuff. No matter how diligent a company is with its patents, a piece of prior art can always crawl out of the woodwork from somewhere. It happens, and companies that are handling IP just have to be prepared to ride the roller coaster.

Macevicz: Universities and government labs are going to continue to be great sources of new IP, at least in the life sciences market. There will also be markets for small companies and large companies alike.

Wolf: My business is trying to get technology out of the university and into the hands of commercial companies, and I definitely think that university IP will continue to become more important to medical device companies.

The rate at which patents have issued from the U.S. Patent and Trademark Office (PTO) has increased dramatically over the past decade. In the entire history of the PTO there have been some 6 million patents issued, and something like 2 million of those were issued within the past 10 years.

Those numbers only begin to suggest the increasing complexity and growing importance of IP acquisition in general, and of due diligence in particular.

Foster: I do absolutely believe that IP will continue to be a critical factor in the success of medical device companies. However, it is not the only factor.

The history of intellectual property in medical devices is a convoluted one. Very few commercially available medical devices have had to be pulled back because of IP ownership issues. If such devices can provide value for patients there is always a deal to be struck, because in the end it is the patient's welfare that is the most important thing.

So IP will remain absolutely critical—but still only one of many critical factors in commercializing new medical technologies.

Copyright ©2003 MX