Why are patents so important for early stage life science companies?

Hello!  Well, a change of pace for my blog posts.  I have been talking a lot about the business of patent attorney firms.  It is time to talk about the business of companies for whom patents are their core assets.  In this case, I have decided, dear reader, to chat about early stage life sciences companies.

Early stage life sciences companies are where much of the magic happens in terms of developing new therapies and diagnostics.  However, in Australia, it is extremely difficult to obtain funding for these companies (as compared say to the US and Europe).  I have a particular fascination with this space because I have invested heavily in a number of early stage life sciences companies and I am starting an investment fund in this space to help remedy this lack of support for these companies:  Kobold Ventures.

I plan to write a number of posts on this subject, but thought I’d begin with the big reason why I have been so exposed to early stage life sciences companies over the course of my career as a patent attorney.  It’s because patents are a core asset of most, if not all, life sciences companies and are particularly important in the therapeutic space.

For many early stage life science companies, the patent rights are their products.  It is common for these companies to develop innovative therapies or diagnostics and file for a patent to protect their intellectual property rights over the invention. Companies may then license or sell the patent rights to others, generally larger pharmaceutical companies that have the resources to commercialise and take the therapies or diagnostics covered by those patents to market.  Therefore, early stage companies may never sell a product in the traditional sense of the word; instead, their value is based on their ability to develop and protect, though intellectual property rights, innovative therapies and diagnostics – and it is these intellectual property rights which may then be licensed or sold.

Why are strong patent rights so valuable for the larger pharmaceutical companies that licence or purchase the rights to innovative therapies and diagnostics?  Because the costs of developing a therapy or a diagnostic and taking it through the regulatory process to market are very high but the costs of reverse engineering an already-approved product and taking it through the regulatory process to market are relatively very low[1].  Patents are important because they grant exclusive rights to the holder, which enables it to stop others from taking this low-cost option (for a time). Patents are thus an important defensive tool often used by large pharmaceutical companies to secure a return on their investment in developing a new product.

The flipside of the use of patents as a defensive tool is that it is just as valuable for the early stage company to have an understanding of the patent landscape in its field, so that it will know whether or not its innovations will infringe another’s patent.  A company that has a clear freedom-to-operate position has a more valuable asset.  Despite the value of this perspective, it is not common for an early stage company to have an understanding of the patent landscape due to the significant costs associated with undertaking the assessment, which are often too high  for early stage companies and their relatively constrained resources.

[1] Medicon Valley Patent Guide, 2002 http://www.mva.org/media(3,1033)/Medicon_Valley_Patent_Guide.pdf.


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