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Cross-border business development transactions in the pharmaceutical industry primarily involve resource integration through technology licensing to achieve business expansion. This includes both the licensing out and introduction of pharmaceutical technologies. These transactions fundamentally involve intellectual property licensing, and it is crucial to pay close attention to associated legal risks throughout the process.

Due diligence

Conducting IP due diligence is a standard and indispensable step to mitigate legal risks associated with IP. This process primarily involves investigating and analysing the basic status of pharmaceutical technology IP, risks of patent infringement, and IP-related agreements.

IP status

IP due diligence typically entails examining the status of IP, including its content, registration status, term and ownership. Mechanisms such as patent term adjustment (PTA), patent term extension (PTE), and terminal disclaimer (TD) may affect the effective term of IPs. During due diligence, it is important to review relevant legal provisions to ascertain the precise validity period of IP.

The PTA system compensates for unreasonable delays during the patent licensing process, while the PTE system addresses time consumed in the regulatory review and approval of new drugs. The TD system, implemented in the US, prevents applicants from repeatedly extending patent protection for the same invention through successive applications, thereby avoiding overlapping grants.

When conducting due diligence on IP ownership, it is crucial to verify whether the IP was independently developed by the licensor, or if it involved collaboration or outsourcing to third parties. In cases of joint or commissioned development, agreements between the licensor and third parties must be reviewed to clarify ownership rights. Additionally, if an IP is a service invention, the employment status of the research and development personnel should also be investigated.

Operational freedom

A freedom to operate analysis determines whether a technology can be freely used, developed and commercialised without infringing on others¡¯ patent rights. The process involves understanding the technical background of relevant IP, dividing the technology into distinct components, conducting patent searches and analyses for each component and, finally, assessing potential infringement risks.

Stability analysis

Stability analysis evaluates the likelihood of a patent being invalidated, based on the three essential criteria required for granting patent rights: novelty, inventiveness and utility.

Apart from satisfying the above-mentioned three criteria, an analysis should consider whether the IP falls within the scope of patentable subject matter under the law. Given the strong reliance of pharmaceutical patents on data, regional differences in standards for data support must be considered, including the validity of experimental data and the criteria for accepting supplementary data in different jurisdictions. Additionally, attention should be paid to whether confidentiality reviews are required, and whether they can be completed on time.

Patent portfolios

Patent portfolio analysis involves evaluating the technical solutions, geographical coverage, competitive products and the prospects of IP transactions.

For geographical coverage analysis, it is essential to assess whether the core IP holder has obtained patent protection or has filed applications in key sales markets, target markets and potential expansion regions.

In technical portfolio analysis, the technology should first be deconstructed and analysed and, after analysis, the core technology should be fully protected through subsequent applications, if necessary. For critical technologies that are simple and easy to replicate, improvements should be made to enhance technical barriers, preventing imitation or copying by competitors.

For core technologies with shorter protection periods, the PTA system can be utilised to extend the patent protection term. These measures collectively establish a robust IP protection network.

Clause design

The design of licensing agreement clauses is essential to cross-border pharmaceutical business development transactions, regardless of whether using a licensing agreement model or a hybrid model. Specifically, IP clauses are crucial and should be based on thorough IP due diligence. Key considerations include IP ownership, types of licences, and the availability of sub-licensing options.

When addressing IP ownership, parties may agree to joint ownership, allowing each party to use the IP independently but prohibiting granting rights to third parties without mutual consent. Alternatively, IP can be categorised, with ownership of different categories assigned to respective parties.

For future IP improvements or optimisations, it may be agreed that the improving party should notify the other party within a specified time period. If the other party wishes to obtain a licence for the improved IP, the corresponding fees should be paid but retain a right of first refusal. Alternatively, it can be agreed that any improvements made by either party will result in equal benefit sharing.

Agreements should also clearly define the type, scope and duration of a licence, and specify whether sub-licensing by the licensee is permitted.

Cross-border business development transactions in the pharmaceutical industry involve complex processes and components, where IP due diligence and clause design are crucial.

Li Hongmei is a partner and Li Qianwen is an intern at ETR Law Firm

Jeffrey Quan, a senior partner of the firm, also contributed to this article