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22 Biotechnology L. Rep. 1 (2003)

handle is hein.journals/bothnl22 and id is 1 raw text is: 22 Biotechnology Law Report 1
Number 1 (February 2003)
© Mary Ann Liebert, Inc.
Critical Issues for Due Diligence Review of
Biotechnology In-License Agreements
STEPHEN C. FERRUOLO and DAVID A. CHARAPP*

INTRODUCTION
PERHAPS THE MOST IMPORTANT STEP a venture cap-
ital fund makes before agreeing to invest in a
start-up biotechnology company is an in-depth due
diligence review of any license agreements for core
technology that the company in-licenses from a uni-
versity, research institution, or other company. Un-
dertaking such a review requires a full understand-
ing of the critical issues in these license agreements.
Failing to recognize potential problems in a com-
pany's intellectual property portfolio could result in
serious impediments to the ability of the company
to realize its business plan and could also increase
the risks of investing in the company. On the other
hand, by recognizing potential key issues, the in-
vestor will be able to assign a more appropriate val-
uation to the company or, as a condition to closing
the investment, to require the company to negotiate
amendments to the license agreement.
The following discussion highlights the provisions
in a license agreement that venture capital funds,
other investors, or other potential stakeholders
should carefully review and consider before closing
a financing. The discussion also points out a variety
of problematic provisions that could adversely affect
an investment in a biotechnology company.
DEFINITIONS
The most important parts of the license agreement
are the definitions relating to the intellectual prop-

erty being licensed. If intellectual property is not
covered by the license agreement, the biotechnol-
ogy company has no right to use it. A potential in-
vestor needs to understand what technology the
company needs, or will need in the future, to con-
firm that the needed technology is covered by the
license agreement.
The key definitions in a license agreement are the
following terms (or their equivalents): Patents,
Know-How, Field, Product, and Territory.
What intellectual property?
A threshold issue is whether the license includes
only patents (issued or patent application) or extends
to know-how, the related proprietary information,
and trade secrets that may be needed to practice the
patented inventions. If the latter is the case, the de-
finitions need to be broad enough to cover all issued
patents, pending patent applications, trade secrets,
and know-how the company needs to conduct its
current and contemplated business.1 In order to
make this judgment, it is essential to have a detailed
knowledge of the company's business plan, as well
as of the underlying technology. For this, experi-
enced IP counsel is needed. Company scientists
should be interviewed to learn exactly what they be-
lieve is needed from the licensor to achieve the com-
pany's goals. Because the scientists are often not in-
volved in negotiating license agreements, there can
be a disconnect between what the company's sci-
1 For most biotechnology companies, particularly those in drug
discovery and development, patent licenses are more important
and commonplace than trademark or copyright licenses, al-
though copyright licenses are very important for bioinformat-
ics companies. As such, this discussion is primarily geared to-
ward issues in patent licenses. Issues that are specific to
trademark or copyright licenses are not included.

1

* Stephen Ferruolo is a shareholder, and David Charapp is an
associate, in the San Diego office of Heller Ehrman White
& McAuliffe LLP. © Copyright 2003 Heller Ehrman White &
McAuliffe LLP.

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