Value of FTO in biopharma investment, financing

The biopharmaceutical industry will see continued growth in investment and financing this year, not least fuelled by continuing global demand for pandemic vaccines. In the tug-of-war between return and risk, both experienced investment giants and emerging capital players invariably cast their sights on investment return rate and risk control.

In particular, due diligence becomes an important means of investment risk control, and freedom to operate (FTO) is the most important step of due diligence in such high-tech fields.

In essence, FTO means investigating whether there is a risk of infringing others’ patent rights when the object of due diligence operates in a specific region or country.

Some key words and trending topics for FTO investigation in the biopharmaceutical industry in 2021 include liposome, mRNA, antibody, Antibody-Drug Conjugates (ADC) and Chimeric Antigen Receptor T-Cell Immunotherapy (CAR-T) – echoing currently trending fields in the industry itself such as cell therapy, gene therapy, regenerative medicine, nucleic acid drugs and macromolecular drugs. This highlights the significance of FTO investigation as a risk deterrence in the biopharmaceutical industry.

Risk warning

Value of FTO in biopharma investment, financing Wu Lili
Wu Lili
Associate
Han Kun Law Offices

Taking liposomes, the critical delivery technology for covid-19 vaccines, for example, FTO demonstrates a strong argument for risk warning.

Well-known patented technologies of liposomes are held by just a few companies. Ian MacLachlan and Thomas Madden, who worked together in liposome R&D at Inex Pharmaceuticals in Vancouver over 20 years ago, continued to develop liposomes either independently or co-operatively in companies they later served at or founded.

Consequently, patented technology of liposomes is now held by only a few companies, including Arbutus (formerly Tekmira), Acuitas, Protiva, Alnylam and Genevant. For downstream pharmaceutical companies wishing to use liposome technology but lacking the capacity for independent in-house R&D, obtaining a licence from upstream companies with patented technology seems a sound option. Moderna and Pfizer, developers of mRNA vaccines, have adopted such licences in commercial strategies.

However, these patent owners have technological overlaps due to historical reasons, have mutual licences, and also compete with one another, resulting in certain pharmaceutical companies being sued for infringement by source technology companies other than the licensor, forcing them to suspend clinical trials or fight back with patent invalidation.

According to incomplete statistics, a total of 14 patents concerning liposomal drug delivery technology have been subject to litigation or invalidation among these companies, the most recent being the patent infringement case of Alnylam v Moderna and Pfizer on 17 March 2022.

The key lesson is that while discussing licensing of a patent portfolio with source technology companies, the licensed company should first conduct an FTO search to verify whether the technology in the licensed portfolio suffers any risks of infringing patent rights of other source technology companies – and take effective measures to prevent the history of above-mentioned pharmaceutical companies from being re-enacted.

Adoption of FTO for risk warning is expected to reduce the number of patent infringement cases between upstream liposome technology companies and downstream pharmaceutical companies.

Value measurement

Value of FTO in biopharma investment, financing Li Ying
Li Ying
Manager for Life Sciences and Chemistry
Han Kun Law Offices

FTO can be very helpful in measuring the technical and commercial value. Taking CAR-T as an example, Novartis, Juno Therapeutics and Kite Pharma are currently the three giants ranked in the first echelon of this cell therapy technology.

In June 2021, Fosun Kite’s Axicabtagene Ciloleucel became the first CAR-T cell therapy drug approved in China for the second-line or subsequent treatment of lymphomas, with a proposed online procurement price of RMB1.2 million (USD181,000) per dose. In September 2021, the National Medical Products Administration (NMPA) announced that Relma-cel, a CAR-T product targeting CD19 of JW Therapeutics, was officially approved for the treatment of relapsed or refractory large B-cell lymphoma in adult patients, after second-line or subsequent systemic treatment with a proposed online procurement price of RMB1.29 million per dose.

According to the statistics of EqualOcean Intelligence, about 20 CAR-T enterprises received investment and financing successively in 2021, with announced financing exceeding RMB7 billion.

In these investment and financing transactions, FTO has provided in-depth technical support for the value evaluation of CAR-T cell therapy and its commercial valuation. Given the complexity and diversity of CAR-T elements, coupled with heated competition, it is inevitable that new competitors refer to prior technologies. In addition, new structural elements are constantly introduced into the construction of CAR-T, and a high degree of target overlap and repeated reference of elements have become commonplace.

In FTO investigations, infringements of another’s prior patent rights are often found. Investors will evaluate the commercial and technical value of investment projects based on the level of infringement risk, and the difficulty of resolving the risk by means of patent invalidation, licensing or assignment.

Therefore, FTO will, to some extent, assist investors in bargaining for investment projects, such as adding conditions to the delivery terms or adjusting the allocation amount in the milestone payment.

Market judgement

FTO can be used to assist in judging the future market for launching the object of due diligence. For example, there are currently 408 ADC drugs approved worldwide, but only 15 launched on the market.

In 2005, Pfizer’s Mylotarg, the world’s first ADC drug, was marketed for the treatment of CD33+ adult acute myeloid leukemia. The most recent ADC drug, DS8201, jointly developed by AstraZeneca and Daiichi-Sankyo, was officially approved by the NMPA for the treatment of breast cancer in China on 21 March 2022 (breast cancer is currently the world’s most commonly diagnosed cancer). The global market size for ADC drugs is expected to exceed USD40 billion by 2026.

Since ADC has a triple structure of antibody, linker and payload, it is extremely difficult for a single R&D company to own the proprietary technology in all three fields. At present, common practice in the industry is joint development between an antibody R&D company and a linker-payload R&D company.

FTO investigations can reveal whether the parties’ prior patent layouts are inconsistent ‒ and whether there is occasional reference to prior technologies of others ‒ and subsequently help investors identify any future risk of patent infringement, or locate a low-risk region or country. Thus, investors will be able to rationally choose the market for future launch, and avoid any region or country with a dense patent layout.

Wu Lili is an associate at Han Kun Law Offices. She can be contacted on +86 10 8516 4266 or by email at lili.wu@hankunlaw.com

Li Ying is manager for life sciences and chemistry at Han Kun Law Offices. She can be contacted on +86 10 8524 5882 or by email at ying.li@hankunlaw.com


Protecting corporate business data under IP legal norms

Corporate business data generally refers to the compilation of historical and real-time information on each important link in the value chain of an industry, including internal data, distribution channel data, consumer market data and other commercially valuable data.

In April 2020, the State Council issued its Opinions on Improving the Market-based Allocation Mechanism of Production Factors, proposing to accelerate cultivation of the data factor market, enhance the value of social data resources, and strengthen the integration and security protection of data resources. For the first time, data were listed alongside land, labour, capital and technology as the five major factors.

“Research on the establishment of protection rules for data intellectual property (IP)” and “strengthening IP protection in the process of production, circulation, utilisation and sharing of data” were included in the National Plan for Protection and Application of Intellectual Property Rights in the State Council’s 14th Five-Year Plan period, issued in October 2021. From the perspective of corporate development, relevant business data is the key object of data IP protection mentioned in the plan.

Case analysis

Ethan Zhang, Joint-Win Partners, Protecting corporate business data under IP legal norms
Ethan Zhang
Senior Partner
Joint-Win Partners

China has not yet issued a specific law on protection of IP rights in business data – and therefore the boundaries of data, scope of rights and interests, and other related issues remain unclear.

At present, enterprises generally adopt system norms in the Intellectual Property Law as the legal basis for protection of rights and interests of business data, of which the main circumstances and legal response measures include: (1) business data constituting a piece of work can be protected by the Copyright Law; (2) business data meeting the conditions of confidentiality, commercial value and security measures can be protected similarly to trade secrets; and (3) business data can be protected by the Anti-Unfair Competition Law.

Upon researching recent disputes over protection of rights and interests of “business data” via public channels, the authors found that due to the special attributes of business data, the number of data-related unfair competition disputes accounted for 74% of the total ‒ much higher than other types such as infringement of trade secrets (12%) and counterfeiting disputes (6%).

In terms of industry, data-related unfair competition disputes are mostly concentrated in manufacturing (23%), followed by scientific research and technology (21%), wholesale and retail (17%), and software and information technology (16%).

Disputes over the protection of rights and interests of business data also indicate annual growth peaking in 2020, and declining slightly afterwards due to the pandemic.

It can be seen that the healthy development of business digitisation depends on free and fair competition of the data industry and platforms, and the good order of competition has become an important topic for the digital economy. Competition norms on business data have also become a significant topic relating to data security laws.

Court considerations

Nea Liang, Joint-Win Partners, Protecting corporate business data under IP legal norms
Nea Liang
Associate
Joint-Win Partners

Compared to the requirements of originality for compilation works and confidentiality and secrecy for trade secrets under the Copyright Law, in practice, the business data of enterprises are often unable to meet the above-mentioned higher standards for various reasons, and cannot be protected through the Copyright Law, or as trade secrets.

Under such circumstances, it is a good strategy to protect business data on the grounds of the legitimate rights and interests under the Anti-Unfair Competition Law. In judicial practice, courts often decide that business data can be protected by this on the basis of examining the scope, attributes, sources and other factors of business data.

Based on the above-mentioned analysis on related judicial cases – and practical experience – it can be seen that in disputes over unfair competition involving business data, courts generally judge whether competition involving corporate business data constitutes unfair competition through the following aspects.

Whether the plaintiff has competitive rights and interests in the business data. In practice, data types claimed by enterprises mainly include raw data provided by users or collected by enterprises, and derivative data formed by enterprises after data collection, processing and analysis. Whether the acquisition of such business data is legitimate and has potential for economic benefits and competitive advantages, thus commercial value, are the main factors considered by the courts.

Whether the conduct involved is improper. Whether it violates the principle of good faith and recognised business ethics is the first step in determining the properness of an accused’s conduct. In cases involving corporate business data, competitive conduct may often be determined improper if it breaks technical restrictions set by the plaintiff, or the Robots Agreement in the process of data collection due to lack of consent of the relevant data subject, or use of data beyond reasonable scope or manner.

Whether the conduct causes substantial damage to the rights and interests of the plaintiff. Whether the data competition conduct causes damage to the competitive rights and interests of the plaintiff is one of the main criteria considered by most courts in determining whether it constitutes unfair competition. Since such conduct may fall under either articles 2 or 12 of the Anti-Unfair Competition Law, the court will also have different criteria in the determination process.

In view of the above-mentioned cases, main considerations include whether it: reduces the commercial interests or trading opportunities of the plaintiff; produces a substantial substitution effect on the plaintiff’s products; disrupts normal operation of the plaintiff’s products; increases the plaintiff’s operating costs; or threatens the plaintiff’s data security.

Whether it disrupts the market competition order and infringes the rights and interests of consumers. Since competition conduct involving business data usually occurs on the internet, courts will also regard any damage to the market competition order as factors that constitute unfair competition – such as violation of business ethics of the internet industry, and destruction of the market competition order of data resources or data products.

In addition, consumers’ rights and interests such as the right to know or the right to choose, or their personal data security, may sometimes also be among factors determining damage results.

Ethan Zhang is a senior partner at Joint-Win Partners. He can be contacted at +86 136 6169 8075 or by email at zhangyichen@joint-win.com
Nea Liang is an associate at Joint-Win Partners. She can be contacted at +86 181 1711 1357 or by email at liangnaihan@joint-win.com


Data competition compliance in online platform economy

Data is a core productive factor of the online platform economy and data resources underpin the core competitiveness and competitive advantages of many enterprises. Platform data resource competition usually involves protection of user personal information, data security, inter-platform data disputes, and legal use of data resources.

In this article, the author analyses data competition compliance involved in the development of the platform economy based on several cases.

Personal information protection

Li Yu, Jincheng Tongda & Neal, Data competition compliance in online platform economy
Li Yu
Partner
Jincheng Tongda & Neal

Platforms should process personal information pursuant to the basic principles of legality, legitimacy and necessity – not to be done excessively. In principle, they should obtain user consent, disclose the rules, purpose, method and scope of processing information, and should not violate laws, administrative regulations or agreements between both parties.

In Ling Moumou v Douyin (2020), the platform collected personal information such as user’s geographic location and social relationships without the user’s consent when scanning QR codes to order food at a hot pot restaurant. The collection of plaintiff’s personal information was ruled neither legal, legitimate nor necessary – and thus constituted infringement.

In weather app Moji’s IPO, the China Securities Regulatory Commission (CSRC) queried its collection, use and processing of data, and data compliance eventually became a major reason why the IPO was rejected.

In addition, criminal cases involving protection of personal information have also emerged frequently in recent years, with lawbreakers sentenced for using the dark web to sell personal information, or providing technology and data services for illegal loans.

Evidently, a platform’s processing of personal information should comply with legal provisions, lest it materially affect its business development. Enterprises may also be unable to use data resources due to the illegality of data source. Moreover, they cannot claim protection for “rights and interests” by using such data, and may even bear criminal responsibility.

Data security

When processing data, platforms should abide by laws and regulations, respect social and business ethics, be honest and trustworthy, and duly perform data security protection obligations. Platforms should establish and improve data security management systems, take technical and other necessary steps to ensure data security, and conduct data security risk assessments on a regular basis.

The listing reviews of Ucloud Information Technology, Das Security and MRTech all attracted the attention of regulators due to data security issues. Notably in MRTech’s ChiNext listing, the CSRC closely queried compliance issues involving almost its entire lifecycle of data protection, demonstrating the importance of data security compliance to platforms, especially when it comes to cross-border data transactions.

Additionally, in the case of social e-commerce platform juketool’s group control system, the court held that although it did not have exclusive right to use data involved, it did have legal obligation to ensure security of the platform data and thus had the right to file a claim on such basis. Its claim for anti-unfair competition was eventually upheld by the court.

So it is clear that platform data security is not only a legal obligation of enterprises and focus of administrative law enforcement and supervision, but can also become the basis for enterprises’ claims relating to competition.

Inter-platform data disputes

Disputes over data competition between platforms have occurred frequently at home and abroad in recent years, with many cases worthy of study – such as hiQ Labs v LinkedIn and the competition and anti-monopoly dispute between public monitoring network Yingji and Weibo.

Since “right to data portability” was added in article 45 of the Personal Information Protection Law, the protection and competition over data resources on Chinese platforms face greater challenges.

China’s judicial authorities consider three main factors in data disputes between platforms – data ownership, source legality and legitimacy of collection – and judge comprehensively on the trinity of interests between platform operators, consumers and the social public. The success rate of data capture litigation disputes is relatively high, with average support rate for damages at about 97%, and average

awarded damages about RMB9.7 million (USD1.4 million) per case, according to a judicial big data report on the Anti-Unfair Competition Law published by the author on this year’s World Intellectual Property Day.

Since there are still uncertainties in trial experience and standards of such cases, if platforms wish to have exclusive rights to data, it is recommended they set out explicit clauses in their user agreements, and pay attention to their construction of data anti-monopoly compliance systems.

To the author’s knowledge, there have been only two domestic data anti-monopoly cases – Wei Yuanma v WeChat, which lost its case due to erroneous definition of the relevant market, and Yingji system v Weibo, which is still under trial.

Use of data resources

With the development of new internet technologies, new issues have emerged regarding the re-use of data resources, such as big data-enabled price discrimination, algorithm recommendation, plug-ins and pop-up windows. The technology itself is neutral but its use, which should be legal and compliant, is not.

At present, domestic supervision at different levels has negated big data-enabled price discrimination, and also required that algorithm recommendation should respect users’ right to know and choose.

Regarding re-use of data via plug-ins, pop-up windows and other technical means, current opinion is to encourage free competition and allow development of new products based on existing platforms.

For example, in Taobao v B5M, the court held that the price comparison plug-in installed on Taobao did not constitute unfair competition when certain conditions were met – but also emphasised that it should: not substantially substitute the platform products; respect users’ right to know and choose; comply with the principles of business ethics and good faith; have substantial non-infringing purposes; and be beneficial to improvement of the general welfare of consumers and society.

Li Yu is a partner at Jincheng Tongda & Neal. She can be contacted on +86 10 5706 8560 or by email at liyu@jtn.com


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