Market Exclusivity—Paramount in Evaluating Target Companies

Companies of interest to big pharma tend to be those that have one or two late-stage clinical programs with NCEs or biological entities. Several primary business screens require an entity to occupy a therapeutic niche supplementary/complementary to the suitor’s therapeutic portfolio, an annual prospective market of at least $500 million, and a credible prospect of FDA approval.

Market exclusivity is king. Substantial time and effort is spent annually to comprehensively evaluate prospective market exclusivity of many target entities. This is a promiscuous business. Before an exclusive licensing deal or outright acquisition is consummated, numerous target companies are evaluated in great detail. Elegant science and elucidation of the mechanism of action of the lead entity, for example, is certainly a proud accomplishment and of great interest but usually only to the founders of the target company. Once the courting begins the focus of the suitor is market exclusivity.

Integral factors to market exclusivity that ultimately drive or prove fatal to a deal include relevant facts, freedom to operate (FTO), intellectual property (IP) exclusivity, third-party agreements, and regulatory exclusivity. Each of these factors is paramount in diligent analysis and valuation.

Litigation to maintain market exclusivity can be expected during the life cycle of any successful new therapeutic entity. Once a new therapeutic entity is approved and exhibits, for example, $500 million in annual sales, market exclusivity will almost certainly be challenged. Since imminent challenge to market exclusivity is to be expected near product life-cycle peak, big pharma’s decision-makers necessarily focus beforehand on evaluating the likelihood of any challenger succeeding.

Relevant Facts

Certain critical facts are necessary and are always required before evaluation of current and prospective market exclusivity of the target entity can materially begin. Counsel first need to know the exact chemical structure of the compound, salt and/or polymorph characteristics if applicable, exact method of manufacture, intermediate forms, the exact drug substance, formulation, dosage, and administration. Counsel also need to know exactly how the entity works mechanistically at the pharmacological level and what human condition(s) the entity is intended to control.

During diligence in contrast to litigation, counsel do not have access to discovery records, notebooks, and corporate emails. Therefore, not all facts relevant to the ultimate outcome of exclusivity are obtainable at this initial stage. Experienced counsel, however, frequently read between the lines of available materials to identify areas of uncertainty and potential risk.

Freedom to Operate

The most substantive issue is whether any third parties own current or prospective patent claims relevant to the ability to make, use, sell, offer for sale, or import the entity. Types of patent claims that could preclude FTO include claims to structurally defined genera that encompass the target entity, combination of structural and functional characteristics that together are properly construed to cover the target entity, methods of use of a structural or functional genera that covers the target entity, combination therapy, formulations, dosage, and/or administration.

The ability to identify relevant third-party rights requires a comprehensive understanding of the facts summarized above as well as a thorough understanding of the technology and terminology. For example, state-of-the-art features and modifications included in the target entity, closest art, as well as the source and history of related entities are all relevant. Once third-party patents are identified that could be relevant, the proper scope of the claims is determined as well as the term and jurisdiction of the patent. The target company is generally asked to comment or present its position on these issues. If necessary, validity and enforceability are independently evaluated.

Late-stage biopharmaceuticals tend to have more FTO issues than small molecule compounds due to the nature of the relatively recent technology. Third-party claims are frequently relevant to these molecules usually in terms of processes, features, and modifications that improve efficacy, stability, and half-life. Many of these biotech third-party patents, however, tend to be relevant to many different biopharmaceuticals. In many instances nonexclusive licenses are already in place by the target company. A common issue, however, in the biopharmaceutical industry is royalty-stacking, which is sometimes due to the necessity of several license agreements.

Target companies that are aware of and have addressed or are otherwise well-prepared to address these critical issues indeed provide value in positioning themselves for a transaction.

IP Exclusivity

The patent claim aspect of market exclusivity is frequently the driving force, particularly those involving small molecule compounds. Decision makers in the industry know too well that patents listable in the FDA Orange book, i.e., drawn toward the compound, formulation, finished dosage form, and approved method of use, are fundamentally the sole barriers to generic entry.

The company will ultimately need to prevail in patent litigation to maintain market exclusivity during the peak of the product life cycle in several paragraph IV ANDA litigation matters. Therefore relevant small molecule patents are king in the industry. These are carefully evaluated and confirmed to be valid and enforceable under current authoritative interpretation of the statutory requirements for patentability (as well as to have substantial term remaining particularly in the U.S., Europe, and Japan).

Since no regulatory path analogous to the ANDA process is in place for follow-on biopharmaceuticals, the biotech industry currently need not rely on patents solely as a barrier to threats of market exclusivity. Nevertheless, clearly valid and enforceable patents relevant to biopharmaceutical entities, formulation, methods of use, and dosage are similarly of paramount importance in dictating market exclusivity and hence value in a target company.

Fundamental factors of IP exclusivity include:
Relevant Scope. Patent claims owned or controlled by the target company must clearly encompass the exact substance and method of use described in the current or prospective NDA or BLA. Claims of wide, medium, and narrow breadth as well as claims drawn to the same subject matter using different terms provide substantial control against imminent challenge.

Term. This refers to the amount of time remaining on current and prospective relevant patents, particularly the therapeutic substance. In many instances carefully managed portfolios can enhance the term of IP exclusivity by claiming relevant methods determined in the clinic that may ultimately be used on the approved label. A single patent term extension under 35 USC §156 is usually available in cases where relevant patents have been issued prior to regulatory approval. In many cases, deciding which patent to extend (with a maximum extension of five years) requires careful evaluation.

Jurisdiction. Business focus is on the largest commercial markets, i.e., U.S., Europe, and Japan.

Ownership. The chain of title to each patent must be complete and exclusive to the target company. Facts to present issues and concerns of inventorship should not be present.

Validity and Enforceability. Claimed relevant subject matter must be patentable under the current and prospective authoritative interpretation of the statutory requirements for patentability (Title 35 of the United States Code). The inventors or applicant(s) must have cited all presentation materials relevant to the patentability of the claimed subject matter. These factors are comprehensively evaluated in the diligence process.

Third-Party Agreements

Many target companies have collaboration or exclusive in-licensing agreements in place concerning origination of the target entity. All agreements concerning the target entity are closely evaluated to confirm that the target company has exclusive and transferable rights to make, use, sell, offer for sale, and import the entity. The ultimate focus of this evaluation is to comprehensively confirm that no residual rights may exist wherein a third party could commercialize the entity.

Regulatory Exclusivity

Small molecule compounds and biopharmaceuticals each have their own attributes that ultimately contribute to market exclusivity. For example, NCEs obtain five years of initial regulatory exclusivity in the U.S. compared to biopharmaceuticals, which currently enjoy the fact that no regulatory tool yet exists for an abbreviated BLA. We are, however, at a similar crossroads today with respect to follow-on biopharmaceuticals legislation as we were in 1984 (Hatch-Waxman Act) with respect to generic small molecule compounds.

The key aspect of market exclusivity in the drug-discovery industry to keep in mind is that everybody will want a piece of the pie when the therapeutic entity commands $1 billion in annual sales. As a corollary, target companies that emphasize their understanding of market exclusivity and are able to present and address issues raised with clear relevant facts, indeed exude value and appeal most to cautious suitors in the industry.