Intellectual property: rising infringement risk as life sciences booms

The life sciences sector is an increasingly prolific producer of intellectual property (IP). As it continues to attract investment in the UK and abroad, this trend is likely to continue. But for life sciences firms, and for their investors, the protection of IP is not without risk, be it the cost of defending that IP, the danger of committing an IP infringement, or otherwise.

Protecting value through intellectual property

Referring to ‘creations of the mind’, IP within the life science and tech sector may include anything from inventions and designs, to symbols, names, and images used in commerce. For life sciences firms hoping to earn recognition and financial benefit from that IP, it’s crucial for them to take out legal IP protection, through one of four methods: patents, registered designs, trademarks, or copyright.

A vital intangible asset, IP not only protects innovations from potential theft or use by competitors, but serves in many cases as one of the primary drivers of a company’s market valuation. This is particularly true of the life sciences sector, whose firms are typically positioned at the cutting-edge of new research. A new drug, biological research tool, or agricultural product, to biofuels, food, and cosmetics are all examples of potential life-sciences IP.

In the example of the patent rights, eligible inventions must be novel, non-obvious given previous public knowledge, and useful. Patent rights can give life sciences firms a legal monopoly of their inventions, including exclusive manufacturing and distribution rights. This in turn provides a crucial incentive for potential investors, who may demonstrate greater willingness to fund costly research and development (R&D) in pursuit of ground-breaking products, and lucrative rewards.

Patents also enable firms to licence their patented technology to others – or, in cases where firms rely upon others’ technology to bring their product to market, patents may serve as a useful bargaining tool.

All signs point to growth

The production, and protection of intellectual property is often regarded as a useful measure for innovation within sector – and in this regard, according to Cipher, a strategic patent intelligence provider, the life sciences sector is prolific. As detailed in the company’s ‘A Global View of Innovation’ report, examining all patents published globally (excluding those registered only in China), the global life sciences sector published 550,00 patents between 2019-2022, the largest of any sector.

This reflects the accelerating effect of the COVID-19 pandemic, which prompted a wave of innovation, especially in the fields of cleaning, absorbent materials, and infection and disease therapy – and correlates with overall growth within the sector. In the UK, turnover in the life sciences sector has been on an upward trend since 2013, but has risen more sharply in recent years, and between 2020-2021 increased from £86.2bn to £94.2bn. Meanwhile, 2021 also saw a record £2.5bn of venture capital (VC) investment into the sector, a 79% increase compared to 2020. The US market, meanwhile, attracted record VC funding of £28.6bn, with turnover of more than £600bn.

For the most part, the effects of the COVID-19 pandemic have receded. Nevertheless, investment in life sciences is set to continue. In 2021, the UK Government published its Life Sciences Vision, reiterating the strategic importance of the sector to the UK economy, and setting out its ambition to become a ‘science superpower’ by 2030. More recently, this has been followed with the publication, in March 2023, of the UK Science and Technology Framework, which sets out strategies for translating this ambition into reality.

As life sciences continues on its upwards trajectory, so it will continue to produce valuable IP. But while rewarding, this also poses considerable risk to firms, as transformative discoveries invite heightened competition for access, ownership, and control.

With reward comes risk

Traditionally, IP risk is categorised from two perspectives: a first party risk, and a third-party risk.

First parties refer to individuals and firms who create and own IP. In this case, IP risks include:

• The legal costs of defending IP in court

• Loss where the IP is no longer considered a valuable asset

• Decreased product or licencing revenues where the IP has been deemed invalid or unenforceable.

• The third-party perspective, meanwhile, is that of individuals or firms accused of committing IP infringement. Here, risks include:

• The legal costs and time of defending against an IP infringement lawsuit

• In the event of a legal defeat, any resulting settlement or damages

• Decreased revenues where it is not possible to continue with commercial activities, or work-around costs required to continue activities

• Reputational damage to customer relationships, partners, or shareholders

Although IP risk will often arise between competing firms, it can also arise through collaboration, especially where commercial agreements do not adequately address IP issues. One recent case observed within the market included a biotech company working with a number of universities and other third-party suppliers. One of these suppliers was a protein technology provider, who licenced its technology patents and services to the biotech.

After working together for a few months, the supplier began to have concerns about the biotech working with some of their competitors. They believed this conduct amounted to a breach of exclusivity provisions stated in their contract, while the biotech maintained the contract language was ambiguous on this point. Despite trying to reach an amicable resolution, the biotech decided to terminate the contract, so the protein technology supplier alleged patent infringement against the biotech.

The implications of IP risk also extend to mergers & acquisitions (M&A) and investments. In order to confirm the value it places on the selling company, VC firms or other investors will typically conduct extensive due diligence into the selling company’s IP, including the rights and obligations the company has in that IP, to what extent that IP deters competition, and whether the company infringes on the IP of others.

For the selling company, any complications arising as to the ownership of, or right to use, IP could jeopardise any sale. Alternatively, where a sale or investment has been completed, and it becomes apparent that the selling company misrepresented its IP, the investor may be entitled to recover damages. For investors, meanwhile, failure to carry out adequate due diligence could lead to loss where the value of the IP is overestimated, or where there is a failure to identify an IP infringement.

The importance of IP risk management

To mitigate the risk associated with IP, it’s necessary to have in place appropriate IP management and control protocols. Achieving this requires an understanding of IP, so that potential risks can be identified, assessed, and action taken.

Recommendations for managing IP risk include:

• Ensure all bases are covered when protecting IP, including registering multiple types of protection if applicable

• Seek out professional advice to ensure help identify required types of protection, such as lawyers, insurers, or specialist investors

• Implement a standard contract to safeguard your IP, clearly stating the rights of ownership – avoid outsourced contracts where possible

• Establish an inventory of IP owned, including all applicable deadlines

• Regularly assess IP, including whether irrelevant IP can be sold, licensed, or abandoned

• Educate R&D teams to identify and internally disclose innovations so that protection can be taken out as soon as possible

• Bolster IP protection through strong brand marketing, such as ensuring company names are attributed to a new invention wherever it is advertised

• Implement strong protocols to prevent theft or leaking of IP

• Take out IP protection abroad if likely to trade overseas, bearing in mind typical 1-year timing requirements from public disclosure

• Take out mandatory IP protection requirements abroad where required prior to commencing commercial activities

• Maintain strong and clear communication with financial backers regarding potential sources of IP infringement and likely costs

For further information on our products and services, please visit our Lockton Life Sciences page, or contact:

Darci Edwards, Business Executive of Life Sciences

E: darci.edwards@lockton.com

T: +44 (0) 117 906 5016