IP Due Diligence in a Psychedelics Transaction: An Evolving Rulebook
By Jayashree Mitra, Ph.D., Partner, Fox Rothschild LLP
The market for psychedelic substances is projected to grow rapidly, potentially outpacing the legal US cannabis market. But evaluating the promise, and the risk, of a psychedelics IP portfolio is still mired in unknowns. What should investors be looking for in this nascent industry?
Unlike novel chemical compounds that are synthetically produced in the pharmaceutical industry through drug development programs, psychedelic compounds have a long and established history. Whether derived from the plant or developed in the lab, the bare-naked molecule is unlikely to be eligible for patent protection. For example, compounds such as psilocybin, mescaline, ibogaine, and LSD are being evaluated in clinical trials, but the compounds themselves are unpatentable because their existence is well documented in the prior art.
However, that does not mean that the path to patents is closed off. Companies seeking to build IP portfolios have adopted several strategies. If the molecule itself cannot be patented, can a novel form be patented? Compass Pathways has put it to the test by obtaining patents on crystalline forms of psilocybin. While some of their patents are currently being challenged, the question remains an open one. Other strategies include filing patents on synthetic pathways, extraction protocols, novel formulations, methods of use, and methods of treatment in various disease conditions. As we see more data emerge from clinical trials, we are likely to see patent applications covering stability, pharmacokinetic, and pharmacodynamic data. Given that the compounds are Schedule I substances, there is also a keen interest in innovative packaging and drug delivery devices.
In this storm of activity, what should the investor be looking at when engaging in IP due diligence in the psychedelic industry? While the usual caveats typical in IP due diligence are applicable, it is helpful to have additional guidelines in mind.
If the portfolio relies on provisional and pending patent applications, the analysis should take into consideration the patentability and marketability potential of the pending claims, as well as the timeline and costs to obtain granted patents. Not all pending claims will be issued, and the granted claims may not cover the desired scope, or can be designed around by competitors, which could reduce the commercial value of the patents. Patent prosecution, especially if there are international filings, can be expensive, may not be practicable for psychedelic compounds, and it may be cost-prohibitive to fight a long-drawn out battle to obtain claims that cover the desired subject matter. Thus, a portfolio that relies mainly on pending and/or provisional applications should be scrutinized to evaluate the projected costs and anticipated claims,
The due diligence must also evaluate whether the patent owner has a clear chain of title and the ability to assign rights and obligations to the patent portfolio. This is especially critical in early-stage companies where patent assignments and transfer of ownership may not be clearly documented, leading to disputes later. Questions to ask with regards to patent applications include who the inventors are, have their rights be properly assigned, are there governmental or third-party rights arise from funding of the underlying research, and what is the risk of third-party challenges to the patents and applications at issue.
A critical part of due diligence is to evaluate the enforceability and validity of the granted claims. This is particularly at issue in the psychedelics industry where there is a substantial amount of historic knowledge that is still being disclosed, with new information emerging every day. Furthermore, many players in the psychedelics industry have adopted the North Star Ethics pledge, which is grounded in a strong commitment to sharing of knowledge, especially where the knowledge is derived from historic roots in indigenous communities. Considering the principles articulated by leaders in the industry, due diligence should also consider how to mitigate the risk of opposition from committed activists who may seek to invalidate key patents.
In summary, psychedelic patent portfolios require an understanding of the unique characteristics of the industry. While the traditional due diligence strategies apply, a sophisticated understanding of the distinctive challenges is required to optimize outcomes for the client.