March 15, 2009 (Vol. 29, No. 6)

Strategy Could Allow Surviving Firms to Increase Their Value

The current economic crisis has hit nearly every business sector, including the pharmaceutical and biotechnology sector. Unlike previous recessions, changes in the fundamentals of the industry have left it more sensitive to economic conditions.  Further, the credit crisis is also affecting the industry’s capital structure and its ability to raise funds.

The economic crisis has depressed market capitalizations and reduced available working capital. In the U.S., the number of publicly traded biotech companies trading below their cash value has skyrocketed, with 69 companies trading at less than half their cash value at the end of 2008. In addition, more than 300 public life sciences companies were operating with less than one year of capital at the end of 2008, representing an increase of nearly fivefold from the previous year. The depressed share prices has made raising funds using follow-on financings difficult and unattractive.

Private companies are not faring any better. Venture capital has become harder to obtain. In the fourth quarter of 2007, VCs invested $8.1 billion in 850 venture deals. That number decreased by 31% to $5.6 billion invested in 790 deals by the fourth quarter of 2008. Thus, although VCs are still funding companies, they are being selective. VCs themselves are facing funding issues since institutions and endowments are investing less in venture capital. Further, the exits for VCs have been few recently and not as profitable in comparison to those of the late 1990s. VCs also have to consider the major issue of funding private companies when more advanced public companies are selling at below-private valuations. 

The economic downturn will eventually reverse. In the near future, however, the number of life science companies is likely to decrease significantly. Many companies going out of business will do so owning valuable patents and other types of intellectual property. A strategy to buy these assets at depressed values could save the purchasing company a significant amount of time and money in R&D and legal costs, including legal disputes. 

The present situation thus presents an opportunity for survivors of the downturn to increase in value by building an IP portfolio that will either provide them with an advantage in the marketplace when economic conditions improve or make them more attractive for a partnership or M&A deal with big pharmaceutical companies.

Under normal circumstances, a well-designed IP portfolio furthers the business goals of the company and protects the technologies around which the company is built. Thus the company’s business strategy should be supported by an IP portfolio that helps to provide a sustainable competitive advantage. The IP strategy tells inventors areas to innovate, the legal team how to evaluate that innovation, and the management where and how to invest. The IP strategy should use other tactics as well, such as the use of defensive publications for weakening competitors’ IP positions, or the use of trade secrets to protect manufacturing technology.

Under today’s economically stressed conditions, where valuations of life science companies are severely depressed, there is an opportunity to create new business opportunities or create barriers to entry for competitors at low cost.

In one scenario, an expanded IP portfolio could be created around a company’s existing IP portfolio where the expanded IP portfolio could be monetized through divestments and spin-offs. Thus, for example, if the company has some unused patents on screening methods, it might consider acquiring intellectual property that vertically integrates the technology. 

The company could evaluate patents on the sequence of the targets, the targets themselves, and methods for selecting a therapeutic dose for a patient by determining the genotype and/or the phenotype of the patient and correlating it to activity of the target. If the target is not central to the company’s business, the integrated IP portfolio could be used to create a spin-out.  The integrated IP portfolio also presents an opportunity to generate additional licensing revenues.

Narinder S. Banait, Ph.D., J.D.

M&A Activity

In another scenario, the company might consider acquiring additional IP to make itself a target for an M&A deal. Recently, the lack of capital has resulted in investment bankers aggressively promoting acquisitions of companies that lack the capital to survive for long. Large companies have not radically changed their strategies, however, despite depressed valuations as evidenced by a lack of increase in the M&A activity. A smaller company might consider strategically building an IP portfolio that might make it an attractive target.

For example, a diagnostic company focusing on detection and quantitation of a particular analyte using particular bodily fluids might consider acquiring IP that allows it to analyze similar analytes in related bodily fluids. Such a strategic move will provide a competitive advantage by expanding the services that could be provided, cover alternative diagnostics, and reduce likely IP disputes. All of these could make the company a better target for M&A.

The most economical way to monitor the buying opportunities is for in-house counsel at the companies to take the lead. Additional resources could be provided by law firms. In addition, there are public auctions, predissolution sales, as well as intermediary players that can help monitor available assets and broker the deals.

The current economic condition is extremely difficult, but it also represents  considerable opportunities. Companies should seize this opportunity to build an IP portfolio that not only builds value and saves considerable time and money in R&D and legal costs, but might also result in delivering better patient care. The companies that act and make the right decisions will likely weather the recession and emerge strong. 

Narinder S. Banait, Ph.D., J.D. ([email protected]), is a partner at
Fenwick & West. Web:

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