Best Practices for IP Due Diligence Investigations of Pharma Inventions, Contributed by Robert W. Esmond, Sterne, Kessler, Goldstein & Fox P.L.L.C.

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This paper will examine best practices for carrying out an IP due diligence investigation of an anticipated IP transaction involving a pharmaceutical invention. It is not possible to anticipate and discuss all possible issues that may need to be investigated. This paper merely sets forth a path to follow that may lead to other paths for investigation.

Typically, the due diligence investigation is divided into three parts, the first two of which overlap to some extent. The first part is the validity/patentability investigation. The second part is the freedom to operate (“FTO”) investigation. The third part involves determining whether the rights to the IP have been secured properly.

How the investigation is carried out is determined in part by the client and the nature of the transaction in question. Sometimes, it is necessary to be extremely thorough from the start, and the investigation may involve turning over every rock, for example, when a company is to be acquired. When faced with such an investigation, it is wise to establish a team of professionals who are assigned various tasks, sometime overlapping as a quality control check. Other times, your client may wish for a very quick investigation to be carried out with a report on any obvious problems. Still further, sometimes the client will want a relatively thorough investigation, but at a relatively low cost. Whenever a less than complete investigation is carried out, it is important to make clear to the client that not all avenues of investigation were pursued, and to set out what else might be done in a written report to the client.

Often clients will request an estimate for the due diligence investigation or set forth an upper limit that may be incurred. It can be difficult to establish an estimate at the outset of the investigation, as one never knows what issues will be uncovered, what the database search charges might be, how many teleconferences there might be with the other side, how may third party patents might be uncovered and have to be analyzed, etc. If the investigation is intended to be extremely thorough, then the estimate should be high and based upon the past experience of the practitioner. If not, one way to control costs is to provide a fixed number which, when reached, will result in an oral report describing what was found and what remains to be done. If serious problems are reported, then the client may decide not to go forward with the transaction, thus terminating the investigation. If no serious problems are found, then the client may authorize additional investigation based upon a new fixed number. This iterative process can be very useful when other diligence activities are being carried out in parallel, for example, whether the pharmaceutical is expected to exhibit therapeutic efficacy, or whether a reasonable licensing deal can be struck. If any one of these parallel investigations turns negative, then the whole process can be stopped, thus limiting the expense.

We have experience in carrying out IP due diligence investigations on behalf of companies and venture capitalist firms. Depending on the size of the anticipated transaction, IP due diligence investigations on behalf of companies can be very large and cost hundreds of thousands of dollars. On the other hand, IP due diligence investigations on behalf of venture capitalist firms tend to be smaller, in part because of lower budgets and less IP being evaluated. If the IP due diligence is not completely thorough, it is critical that the limitations of the investigation be set forth in the report. The report should also make clear the limitations of the report, that the report comprises only the opinions of the practitioner, and that the patent office or court may hold otherwise based upon the facts as they are found. The report should never say definitively that an invention is valid/patentable, or that there is freedom to operate.


— Obtain a List of the Relevant IP

The first step in an IP due diligence investigation is to obtain a list of all issued patents and/or pending applications that protect the pharmaceutical in question. This is typically accomplished by asking the company who owns, controls, or licenses the IP for a list of the U.S. and foreign applications and patents. If the application is unpublished, the company may be reluctant to disclose the application without a confidentiality agreement (“CDA”) in place. However, since most companies require the execution of a CDA prior to disclosing confidential information in connection with a transaction, it is likely that the CDA will already be in place. The request for the list of relevant IP should be made immediately. A further request for information may be made as the project progresses, as discussed below.

Once a list of the relevant IP is obtained, it is important to review the claims to see how the pharmaceutical is being protected. Composition of matter protection is critical in the pharma space. Such claims provide the strongest patent protection. Assuming there are composition of matter patents, they should be reviewed first. If the compound is to be co-administered with another drug, then one should also review any patents protecting the combination. Next, one should review any method of treatment patents. Less important are method of manufacture, intermediate, metabolite, pharmaceutical composition, polymorph, solvate, pharmacokinetic, methods of patient selection, and methods of patient monitoring. Each has its own weakness and limitation, but do provide a potential basis for extending the term of protection beyond the expiration of the composition of matter patent. For example, it is often possible to design around method of manufacture, polymorph, and solvate patents. However, it may not be possible to design around method of patient selection and method of patient monitoring should the FDA require such selection and/or monitoring on the drug label.

— Read the Patent and its File History

The next step is to read the file histories. Often, validity issues will present themselves simply upon reading a file history. Patent examiners do make mistakes in issuing patents that should not have been allowed. This is due sometimes to ignorance of the patent law or changes to the patent law. For example, in 2007, the U.S. Supreme Court changed the standards for finding obviousness from one that was relatively strict to a looser standard.1Thus, patents that might have been held as valid pre-2007 might now be held invalid as obvious. Thus, a practitioner who is up on the case law can often identify key weaknesses of a patent.

When reviewing the file history, one should look out for other key issues such as (1) whether priority was claimed properly, (2) whether narrowing amendments and/or arguments were made, (3) whether the applicant complied with the duty of disclosure to the patent office, (4) whether there are affidavits with carefully worded language which might be hiding important information, (5) whether the maintenance/annuity fees have been paid, (6) whether any patent term adjustment was calculated correctly, and (7) whether the drug is eligible for patent term extension. It is also important to search to see if the patent has been involved in any reexamination, reissue, or litigation.

Before any patent searching is carried out, we often look at the file histories of the foreign counterpart applications for prior art, oppositions, inconsistent statements, and litigation. Often, prior art was cited in the foreign applications that was not considered by the U.S. examiner. Sometimes, such prior art was cited in the foreign patent office as anticipating the invention. If such anticipating prior art is discovered, it may be time to inform the client that there are serious questions regarding the validity of the patent.

— Search the Prior Art

Assuming that no new prior art is discovered by reviewing the file histories, a search of the prior art should be carried out. The nature of the search depends heavily on the technology and what is intended to be commercialized. While the patent claims might be very broad and encompass anticipatory prior art, this fact may be of little consequence if there is a narrow claim that is free of the prior art and protects the compound per se. In this situation, the patent owner will likely file a patent infringement lawsuit based only upon infringement of the narrow claim. Thus, one should start with a search of what was known about the pharmaceutical in question prior to the filing of the patent application.

The first place to start one’s search is the patent office web site,2 where one may search key words of patents back to 1976 and published applications back to 2001. Also, one can start with a Google search using key words.

One should also search for the inventors’ names. If the inventor is also a university professor, they may have published research concerning the subject invention before the first filing date or between the first filing date and the international filing date, a year later. In either case, the inventor may have created prior art that will invalidate the patent in the United States and/or foreign countries. Inventor publications after the filing date may be relevant if they make reference to questions regarding enablement/operability, the best mode of carrying out the invention, or raise questions regarding the inventorship. In addition, grant applications are often filed well before the filing of an application, are made available to the public under the Freedom of Information Act, and can become prior art once the grant application is approved and notice is published. The existence of a grant application is typically disclosed in the patent application, as required by the law. Thus, published grant applications can be a source of invalidating prior art.

One should also search for copending applications and other patents owned by the company and/or which name some of the same inventors. Sometimes, such applications and patents can give rise to obviousness-type double patenting (“ODP”) issues. An ODP defense in litigation can be overcome by the filing of a terminal disclaimer, a document signed by the patent owner or his representative that agrees that the patent in question will be enforceable only for such time that the patents in question are co-owned. The document also disclaims the longer patent term. The filing of such a terminal disclaimer can result in the loss of valuable patent protection.

One can also search international applications,3 European applications4 and other foreign patent office web sites. All of these searches can be carried out with no database charges and may lead to information that calls the patent into question.

It is also possible to search U.S. patents using the patent classification system.5 This involves searching the classification of the patent or application. The classification can be found on the first page of an issued patent. However, a patent classification search is very tedious as all patents in a particular class/subclass may need to be reviewed. In general, it is best to avoid a patent classification search unless no prior art has been uncovered by searching the free electronic databases.

One can also search by hand Chemical Abstracts for prior art dating back to the early 1900′s. This is only recommended when it is suspected that the best prior art is dated prior to advent of commercial databases. It is recommended that one start by searching the molecular formula of the chemical compound in the decentennial indexes.

Finally, commercial databases can be searched. Since database charges can rack up very quickly, in general, the use of such databases should be carried out only after no prior art has been found with the free sources. However, often one must start with a commercial database, for example, when carrying out a substructure search on a chemical compound. Common commercial databases that can be searched are provided by Dialog,6Chemical Abstracts,7ChemFinder,8 ChemSpider,9 the National Library of Medicine,10 and the National Cancer Institute.11

One should also search the patent office web site to determine whether there have been any certificates of correction. If there are printing errors in the claims or text has been left out in the printed patent, it may result in the invalidity of the patent. If such errors are found, they should be reported with a recommendation that a request for a certificate of correction be filed.

One should also carry out a search at the patent office web site to see whether the patent has been involved in a patent reexamination, patent reissue, and/or interference proceeding. Such proceedings may have resulted in new prior art being considered by the patent office and new weaknesses in the patent. In addition, one should search to see whether the patent has been involved in litigation.12

Regardless of how much searching is carried out, it will never be possible to access all prior art that may be used to defeat a patent should it be litigated. There is a large reservoir of prior art that cannot be easily accessed electronically, including books on library shelves and foreign language documents. However, it is usually possible to cover most sources of prior art that might be brought up in the lawsuit. After all, it is unlikely that a defendant would send searchers to all libraries in the world, looking for a needle in a haystack.

— Evaluate Anticipation and/or Obviousness

Patentable inventions must be novel and not obvious in view of the prior art. In the United States, novelty is governed by 35 U.S.C. § 102 and related case law. Obviousness is governed by 35 U.S.C. § 103 and related case law.

Even if the pharmaceutical in question is found in the prior art, the analysis may not be over. Sometimes, a pharmaceutical was known previously and an important new use has been discovered. AZT was discovered in the 1960′s as a potential antiviral agent. In the 1980′s, it was discovered that AZT was useful for the treatment of HIV infection.13 The patent claiming the use of AZT for the treatment of HIV infection made Boroughs Welcome and its successor companies a large amount of money. However, compound patents are considered to be much more valuable than method patents, as a different method of using the same compound can be developed. Once the new method is approved for marketing, the pharmaceutical can be sold off-label, thus avoiding the method patent.

If the pharmaceutical is not found in the prior art, then one must look at the closest prior art to see if the differences between the claimed invention and the prior art would have been obvious to one of ordinary skill in the art. Such an obviousness determination can be complex. In general, if the invention involves combining two compounds known to be useful for the same purpose, the invention may be held as obvious if the patent is litigated, unless there was something truly unexpected about the combination. If the invention is a chemical compound, then it may be much more difficult to defeat the patent. The case law requires that there be some reason for selecting the closest prior art compound and some reason to modify the compound to give what is claimed.14 If the closest compound in a prior art document has no characterizing data while other compounds do, then there is a good argument that there was no reason to select the closest compound for further modification, and the claim to the compound is valid. In addition, the reason to modify may be hard to establish if the structural differences between the compounds are great.

Even if an invention appears to be obvious on its face, there are secondary factors (the so-called secondary indicia of non-obviousness) that can be used to establish that the invention was in fact not obvious. Typically such secondary factors include unexpected results, i.e. the invention worked much better than would have been expected based upon what was known at the time. Other less frequently employed secondary factors include the failures of others to achieve the invention, long felt but unfulfilled need for the invention, and commercial success in the marketplace.

— Evaluate Enablement and Written Description

If there is no data in the application demonstrating that the invention works as advertised, and if the art was undeveloped and/or unpredictable, there is a risk that the patent office will reject the application as not enabled. Thus, when reviewing a patent application, one should look for data that would convince one of skill in the art that the invention will work. For example, in the 1980′s when there was no known treatment for HIV infection, it is likely that an examiner would have required some sort of data in a patent application claiming an HIV drug and/or its use. Human clinical data is not required. Data with an animal model of the disease may be sufficient as well as in vitro data with an assay known to be correlated to human efficacy. The data can be submitted in the application as well as after the filing of the application.15

Written description for pharmaceutical inventions is usually not an issue, as pharma patents generally have a good description of the drug in the form of a structure or chemical name. Written description is certainly not an issue when there is a claim limited to the particular drug that is to be marketed. However, written description may be an issue when the claim recites a compound defined only in functional terms. For example, if the claim reads as follows, there is likely to be a written description problem.

A method for selectively inhibiting [a certain enzyme] activity in a human host, comprising administering a compound that selectively inhibits activity of the [enzyme in question] to a human host in need of such treatment.

A claim such as this was found invalid for lack of written description where no such inhibitors were disclosed in the patent.16


The purpose of an FTO investigation is to determine whether there are patents and/or applications controlled by third parties that may block the commercialization of the pharmaceutical. Such patents may claim the compound, method of treatment, method of manufacture, intermediate, metabolite, pharmaceutical composition, polymorph, solvate, methods of patient selection, and/or methods of patient monitoring. If the compound is to be administered with another known drug, then one must also search for patents which claim the co-administration of the two compounds.

If you have first carried out the patent validity study, you will have already searched the patent literature for the closest prior art and will have likely uncovered any patents that might affect the freedom to sell the compound in question. However, additional searches should be carried out in order to determine if there are patents or applications which claim the particular method of making, the intermediates, any metabolites if known, the particular pharmaceutical composition, any polymorphs, any solvates and, if relevant, methods of patient selection and methods of patient monitoring.

If any relevant patents are identified, it is a good time to contact the client and advise them of the findings. If the patent claims the compound and blocks its sale, the client may decide to stop the due diligence process and termination the potential transaction. On the other hand, depending on the apparent strength of the patent, the client may authorize a validity search and opinion. The client may also request that you investigate whether there is a license available.

Assuming that no blocking patents are identified, the client report should list the most relevant patents and may give a short explanation of what is claimed and why there is no FTO issue. If blocking patents are identified, it is wise to inform the client orally since any report may be discovered should the blocking patent be asserted against your client. If an invalidity and/or non-infringement position is developed, such position should be communicated in writing.


The first step in determining whether ownership to an invention has been secured is to search for the recorded assignment on the patent office web site.17 If there are no recorded assignments, then you should ask the purported patent owner for copies of the assignments from the inventors to the company, and ask that they be recorded.

Sometimes there is no assignment and the owner has relied on an employment agreement to transfer the ownership rights to the owner. In this situation, it is important to carefully review the employment agreement. If it contains language that recites that the employee “hereby assigns all inventions,” then the agreement will likely be held as a present and enforceable assignment to the employer. However, if instead, the agreement provides that the employee “will” assign all inventions, it is likely that a court will hold that the ownership rights only vest in the company when an assignment is executed. Thus, should an employee assign his rights to another entity in violation of his duty to assign in the future, the assignment to the other entity will likely be held valid.18

The second step is to interview the inventor(s) and find out how the invention was made, and by whom and when. Sometimes, the inventorship is not determined properly. If so, it is important that the inventorship be corrected so that it is not challenged in the future. It is also important to identify all inventors and obtain their ownership rights, to prevent them from transferring those rights to another party in the future. Failure to do so may result in a defendant in a patent litigation obtaining the rights from the unnamed inventor, and arguing that they have the right to practice the invention.

If the company has licensed the patent portfolio, it is important to request a copy of the license agreement and carefully review its terms. There are many issues to be considered when reviewing a license agreement and such issues will not be discussed here, other than to say that an exclusive license is critical. If the license is non-exclusive, it may allow others to practice the invention, making the transaction not worthwhile.


The best patent estate protecting a pharmaceutical will comprise valid claims covering the compound and its use for which it is to be marketed. If there are no claims covering the compound, method of use claims are second best, but not optimal. Other types of patent claims may help in strengthening the patent and possibly extending the patent term, but are usually not a substitute for compound and method of use claims.

A proper due diligence investigation can only identify possible problems in a patent estate, and will never uncover all possible problems should the patents be litigated. Thus, a quick and cursory search of the prior art is not likely to uncover all issues. Depending on the nature of the transaction, one should be prepared to have carried out an extensive search and analysis of the company’s patents and third party patents. The failure to carry out a proper due diligence investigation can result in the purchase of an essentially worthless patent estate.

Robert W. Esmond, Ph.D., Esq. is a director in the Biotechnology/Chemical Group at Sterne, Kessler, Goldstein & Fox P.L.L.C. where he focuses on counseling clients in various intellectual property matters such as patentability investigations, validity and infringement analyses, freedom to operate and FDA/ANDA practice. He has prepared and prosecuted patent applications relating to pharmaceuticals, flavor chemicals, polymers, molecular and cell biology, high throughput screening assays, immunodiagnostic assays, stem cells and therapeutic methods. He may be reached at  

This paper is intended to be informative and should not be construed as legal advice for any specific fact situation. Opinions expressed herein are those of the author and not necessarily the opinions of Sterne Kessler Goldstein & Fox P.L.L.C., or any of its clients. Readers should not act upon this information presented without consulting professional legal counsel.  


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