Besides current financial concerns, investors looking to buy into US life sciences should beware. Staff motivation and retention is a critical issue and should be examined closely. Investors should also be aware that determining ownership of vital intellectual property can be a complex process under US law.

What are current issues facing US life sciences companies?

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The current difficult financing environment presents obvious issues. A less obvious issue is the effect of the environment on employee retention, even in companies with good prospects. Depressed prices of public stocks and the lack of near-term liquidity opportunities have decreased the perceived value of stock options. Further, recent and proposed changes in accounting treatment for options may make it more difficult to price employee options attractively.

In prior cycles, the “wear and tear” of surviving through difficult financing environments, coupled with the perceived lack of value of equity incentives, has reduced employee motivation and retention. In any particular company, a new financing may be insufficient motivation to retain employees. Investors should consider whether management and employees are sufficiently motivated.

What should be addressed first in due diligence for a US life sciences company?

A review of the ownership of the technology around which the company is founded is essential. Many US life science start-ups are founded by or with scientists from research institutes or universities, and are based on ideas or technologies developed while employed by such institutions. Often the “foundation” technology has been developed by more than one scientist, and sometimes at more than one institution, or with money from the US government, or from corporate sponsors – creating a matrix of possible claims of ownership.

Academic institutions may have claims as the inventor’s former employer, and parties that have provided research funding may have contractual or other claims. Inventors, certain of the value of their own contributions, often make false assumptions about the merits of their own claims of ownership.

It is important to review whether other parties may have rights in the foundation technology, and to determine if the company has obtained rights from the appropriate parties.

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It will not always be possible to determine rights to the foundation technology with certainty, and costly disputes occur even in companies that have been extremely careful about ownership rights. However, an awareness of potential risks, and an understanding of the company’s sophistication in assessing and managing those risks, is important in evaluating the overall investment opportunity.

Are there differences in US patent law that investors should be mindful of?

One unique aspect of the US patent system is the determination of the priority date of an invention. Unlike other countries, which decide the priority of an invention by its patent application filing date, the US patent law awards the priority of an invention to the party that is “the first to invent”.

In the crowded biotechnology field, this rule creates uncertainty.

The “first to file” party may not own the right to the technology, since others working in the same fields could potentially demonstrate to the US Patent and Trademark Office that they are the first to invent the technology.

A US company’s intellectual property position in the US market is usually critical to achieving investor goals. Therefore, understanding this unique rule is important in assessing investment risks.

 

Howard Clowes and Dr Nan Wu are members of the Life Sciences Group of US law firm Gray Cary

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