Pharmaceutical Due Diligence Practice Tips for New Drugs


New Jersey Law Journal

October 3, 2022

The Food and Drug Administration (FDA) has approved on average 38 new drugs per year from 2010 through 2019, with a peak amount of 59 drugs approved in 2018. Congressional Budget Office, Research and Development in the Pharmaceutical Industry (April 2021). By the time a new drug is available to consumers, an extensive development process has taken place. This process, from drug candidate to FDA-approved drug and subsequent market release, is both time-consuming and expensive. It often takes a decade or more and has been estimated to cost more than $1 billion dollars. Id. Within this decade, it is important to perform due diligence on the drug and its related processes of making and using it. The same is true when contemplating an acquisition during this time period, whereby the drug and its development transfers to a new owner. Transfer of ownership of the drug is a common occurrence. In fact, about one-fifth of drugs in the development process have been acquired by another pharmaceutical company for commercialization. Id.

There are two important due diligence items to examine before bringing a new drug to market or acquiring it prior to market launch. The first item is a freedom to operate (FTO) assessment to determine whether the commercialization of the drug would infringe any third-party patents. The second item is identifying any market exclusivity that the drug is expected to receive after obtaining FDA approval.

Freedom to Operate (FTO)

FTO is a legal determination. The objective of the FTO due diligence assessment is to determine if the drug can be marketed without infringing another’s patent. As a first step, the assessment typically involves determining the exact drug product that is to be commercialized following FDA approval and preparing a search strategy around it. This search strategy should include any product or processes that will be practiced by a company commercializing the drug. It can also include searches related to the drug substance and its method of manufacturing; the drug formulation and its method of manufacturing; and the treatment methods including information projected to be included in the prescription label.

Once the search strategy is prepared, a professional patent search firm should be retained and tasked with performing the search and providing the results to the patent lawyer for analysis. Patent search firms have the expertise and specialized tools to efficiently and accurately perform prior art searches to locate patents or patent applications that might present an FTO risk. The relevant patents and patent applications identified by the patent search firm should be carefully reviewed by the patent lawyer to determine the level of FTO risk of each of the patents or patent applications.

The FTO assessment typically takes the form of a written legal opinion that quantifies the risk presented from each patent and patent application identified in the search and provides de-risking strategies. For example, if the FTO risk is deemed to be significant, a recommendation may be made to purchase the patent or obtain a license to practice the patent. Alternatively, a recommendation may be made to design around the patent. This can include making changes to some aspect of the commercialization of the drug to avoid infringement. For example, a drug formulation or method of manufacturing may be changed to avoid infringement. An additional de-risking recommendation typically made is to assess the validity of the encumbering patent, which involves stress-testing the patent for novelty, obviousness, enablement, written description, indefiniteness, and other statutory requirements for patentability.

If a pending patent application is identified to be an FTO risk, then the legal opinion should recommend that the patent application be monitored during prosecution in the Patent Office. If the patent application issues as a patent with, for example, claims covering the drug to be commercialized, de-risking actions can be taken as outlined above.

Market Exclusivity

Another important due diligence item is determining the potential for market exclusivity. Two types of market exclusivity in the pharmaceutical field are FDA exclusivity and patent exclusivity.

• FDA Exclusivity. FDA exclusivity refers to certain delays and prohibitions on the approval of competitor drugs.  Examples of this FDA exclusivity include New Chemical Entity Exclusivity, Orphan Drug Exclusivity, Generating Antibiotic Incentives Now Exclusivity, New Clinical Investigation Exclusivity, and Pediatric Exclusivity. Thus, due diligence requires determining if the drug will qualify for any of these FDA exclusivities.

• Patent Exclusivity. Patent exclusivity is often the most time-consuming and frequent due-diligence item performed if acquisition of a drug is contemplated. After all, patents often are relied on by pharmaceutical companies to earn a return of investment on drug development costs.

A company performing due diligence on its own product will readily have access to all patent information. In the case of an acquisition, however, a company looking to sell a drug will typically provide a potential purchaser with a list of relevant patents and patent applications covering the product and/or methods of making or using the product. If the potential purchaser wishes to perform due diligence of a drug de novo, then patent searches, patent assignment searches, orange book listings, and other publicly available information (including information from the company developing the drug) may be used to compile a list of patents and patent applications for assessment.

Ownership of the patent right is of critical importance. Care must be taken, for example, to ensure that all the inventors have assigned their rights in the invention to the correct assignee. This is important because all owners of a patent are required to maintain a patent infringement action, and thus a single inventor or owner can prevent the enforcement of a patent by not joining the litigation. See STC.UNM v. Intel Corp., 754 F.3d 940, 942 (Fed. Cir. 2014). Moreover, if any inventors have been employed by more than one entity during periods of time relevant to the patents at issue, a careful review of all employment agreements and assignments should be performed to ensure that purported assignments are valid. See Omni MedSci, Inc. v. Apple Inc., 7 F.4th 1148, 1149 (Fed. Cir. 2021).

Once ownership is accounted for, the commercial relevance of each patent should be determined. This can often be simplified as what the likelihood is that a generic company that wishes to sell the same drug would infringe the patent. This information, when combined with the patent term of each patent, can provide a projection of the patent exclusivity. The same analysis should be performed on each patent application, except that the likelihood and scope of a patent resulting from such a patent application should also be determined.

Also important to this analysis is determining if the commercially relevant patents are valid. This includes assessing the patent for novelty, obviousness, enablement, written description, indefiniteness, and other statutory requirements for patentability.

As a practice tip, it is prudent to create a table listing all the relevant patents, their expiration dates, commercial relevance, and validity conclusions. This table, together with a timeline graph showing all possible FDA exclusivity and patent exclusivity, provides some of the most relevant due diligence items in a simplified manner for client review.

  • Future Patent Filings Pitfall Related to Patent Exclusivity. One important due diligence item not discussed above is the on-sale bar under 35 U.S.C. § 102(a). Under U.S. law, any “invention” that is “on sale” starts a one-year period in which a patent application should be filed, directed to that invention. If a patent application is filed claiming an “invention” that was “on sale” more than one year from filing, then any patent resulting from such a patent application may be invalid under current U.S. Supreme Court precedent. See Helsinn Healthcare S.A. v. Teva Pharms. USA, Inc., 202 L. Ed. 2d 551, 139 S. Ct. 628, 630 (2019). In Helsinn Healthcare, the Supreme Court invalidated a patent issued to a pharmaceutical company because its commercial activities with a third party triggered the on-sale bar even though the details of the invention were not made public. Id. Thus, any entity acquiring a drug or commercializing a drug should determine if the acquisition or any other activity might trigger the on-sale bar and advise or proceed accordingly.


The primary goal of a patent practitioner performing due diligence of a new drug should be to identify all risks associated with commercialization of the drug product and to determine the potential for market exclusivity. By no means does this article present a complete list of all due diligence items nor the nuances inherent in a due diligence assessment. However, armed with the practice tips provided herein, a patent practitioner can provide value to pharmaceutical decision-makers and stakeholders in advance of market launch.

Reprinted with permission from the October 3, 2022 issue of the New Jersey Law Journal. © 2022 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved. For information, contact 877-257-3382 or or visit