Navigating 2024: the Italian venture capital biotech market and the crucial role of intellectual property assets as a deal maker or deal breaker

Francesca Ellena
Portolano Cavallo, Milan
fellena@portolano.it

Luca Gambini
Portolano Cavallo, Milan
lgambini@portolano.itm

Simona Siciliani
Portolano Cavallo, Milan
ssiciliani@portolano.it

Elisa Stefanini
Portolano Cavallo, Milan
estefanini@portolano.it

The current background on venture capital transactions in Italy and the attractiveness of Italian biotech companies

The evolution of the biotechnological, pharmaceutical and medical devices sector has experienced an extraordinary rise in business volumes, as well as in the proliferation of venture capital (VC) transactions closed in Italy.

Life sciences sector has shown sustained growth, ranking among the top-funded verticals for VC, with cumulative investments totalling over €1.3bn throughout the last decade in regard to the Italian market.^[1]

In 2024, 11.4 per cent of the entire Italian innovative ecosystem was made up of life sciences startups and the life sciences sector was one of the top three most funded industries by VC, with approximatively €300m raised through VC, leading to an increase of around 60 per cent when compared to 2023 and a triplication of the results when compared to the amount of VC deals closed in 2020.^[2] Biotech and pharma startups continue to be the most funded segment. The ENEA Tech and Biomedical Foundation has been instrumental in supporting innovative startups and small and medium-sized enterprises (SMEs) and their investments have focused on biotech (€29m), med tech (€17.75m) and digital health (€15m).^[3]

Considering the top ten VC deals in Italian startups by size that were closed in 2024, four targeted life sciences companies operating in the following sub-segments: oncology, gene therapy, health tech and robotics in medical devices.^[4]

Lombardy turns out to be the leading region in Italy for therapeutics and Milan remains the main hub, accounting for 18 per cent of all life science startups registered in Lombardy between 2019 and 2024. Central Italy leads in terms of vaccines, while Tuscany leads in regard to immunology product research. Other important science areas are located in Lazio and Piemonte.

Some of the most prominent hubs in Lombardy are the OpenZone (Bresso) campus, a centre of excellence, uniting innovation- and research-oriented companies, and the San Raffaele Hospital (Milan), where the business development unit acts as a startup incubator, having raised €80m for health-related startups. Other notable centres in the Italian territory include SISSA (Trieste), the Biotech Center of Excellence Plant (Parma), 2i3T (Turin) and the Paediatric Hospital Bambino Gesù (Rome), each contributing to the Italian biotech landscape through research, incubation activities and collaboration.^[5]

Indeed, Italian biotech companies have successfully emerged onto the market by generally presenting highly valuable technological assets and by affirming their status as companies boasting high levels of innovation and robust scientific know-how and research and development (R&D) capabilities.

IP assets as the fil rouge of a deal

In regard to the intricate tapestry of biotech VC investments, the intellectual property (IP) portfolio is not merely one of several assets involved in the deal, but the pivotal ‘engine’ of the deal itself. IP assets qualify as the very fil rouge, weaving through every phase of the transaction in this sector. The biotech’s arsenal of patents (whether pending the application process or registered), proprietary technologies, scientific protocols and innovative know-how enshrines the magnetic pull, capable of influencing the allure of the deal, as well as becoming one of the most price sensitive issues. It’s undeniable that IP assets in life science transaction can qualify as a ‘deal maker’ or ‘deal breaker’, determining the structure of the deal and the enterprise value on which investors often ground their economic offers (for the biotech’s equity).

Legal advisors are, therefore, often called to ensure that investors fully comprehend IP-related matters and the company’s IP strategy during the due diligence phase. They assist investors in structuring the deal, addressing and negotiating all IP-related issues within the contractual framework to effectively counter and mitigate technical risks. However, this is only achievable if the legal advisors possess a deep understanding of the industry and its legal challenges and opportunities, as demonstrated in the following paragraphs using several examples.

Structuring the deal: the impact of the abolition of the professor’s privilege in Italy

The IP assets owned by a firm and the applicable legal framework can be some of the drivers in defining the structure of a deal, as exemplified by the reform of the so-called abolition of the ‘professor’s privilege’, which has been capable of impacting Italian life sciences transactional trends since the adoption of the 2023 reform to Article 65 of the Industrial Property Code.

Article 65 of IP Code has been amended and a Copernican revolution occurred in the field of inventions developed in the context of activities carried out by universities and research institutions (namely universities or legally recognised non-governmental universities, public research institutes or scientifically recognised hospital and care institutes, the ‘institutions’).

Indeed, whereas before the reform, the inventive results generated within the context of universities belonged to the researchers, based on the abolition of the so-called ‘professor’s privilege’ through Law no. 102 of 24 July 2023, whereas now IP rights related to inventions currently belong to the institutions involved.

The previous version of such provision can be traced back to Law No. 383 of 18 October 2001, which was contrary to the trend in most Western countries. The aim of the reform was to align Italy with such jurisdictions and to entrust institutions, due to their financial capabilities and organisation, with the monetisation and practical implementation of such inventions.

The reform opened up new scenarios for the exploitation of inventions: lawyers are called in to handle deals in which newly incorporated startups or spin-offs enter into licensing agreements with the institutions governing the usage of IP rights or to negotiate the transfer of the ownership of IP rights.

The investor’s attention is shifted to these agreements in the due diligence process, as such agreements will influence the life and worth of the startup and determine the profitability of the investment.

Such agreements often fall under the scrutiny of investors in regard to the detection of ‘poison pills’, for example, tricky terms and termination clauses (eg, the university’s right to terminate the agreement if the national validation of the patent is abandoned), unclear call option rights (eg, call option rights that split the payment over time but do not transfer ownership until the last instalment) and transfer of ownership clauses (clauses that might allow the institution to transfer the IP to third parties without startup/licensee consent).

Following the enactment of Article 65 of the IP Code, investment transactions will necessarily be structured around target companies whose core business relies on IP assets licensed for use in R&D activities by the original owner (ie, institutions), while before the enactment of this reform it was common for startups to be incorporated with contribution in kind in terms of the IP assets.

Conducting due diligence on IP assets

When conducting due diligence on a biotech’s IP portfolio in the context of a transaction, it is of paramount importance to meticulously examine the target IP portfolio, which may include patents, trade secrets, trademarks and copyrights, etc.

To do this properly, the key questions are ‘what is the exact scope of the business?’, ‘who owns the IP?’ and ‘on what grounds does the company exploit IP?’, as well as ‘what is the IP strategy’?

IP lawyers will investigate the origin of IP asset ownership first and the title on which basis the company is using such assets, identifying any encumbrances and restrictions that might affect the company’s ability to fully exploit them. To this aim, legal counsel must also work side-by-side with patent and trademark lawyers to conduct a deep dive into patentability issues, scientific procedures, the freedom to operate and all the inherent risks.

Legal counsel will also be able to analyse the company’s IP strategy. By way of example, in the biotechnology sector, many biotech firms are adopting hybrid IP strategies, leveraging both patents and trade secrets as complementary protection. In regard to this approach, companies may keep early-stage R&D confidential during development, then file patents once the innovation is mature and commercially ready or choose to patent certain features of the invention, while preserving the confidentiality of other aspects (eg, a firm might patent a therapeutic compound, while maintaining the manufacturing process as a trade secret). Companies using hybrid strategies often achieve higher levels of innovation and are better equipped to handle technological and regulatory uncertainty. Deep knowledge of the industry and all its nuances is necessary to help investors navigate the potential and the risks arising out of such strategies.

Addressing IP-related issues: contractual solutions to better protect investors’ rights

The most common closing conditions in VC deals

Certain conditions precedent at closing (CPs) are included within VC deals. By way of example, based on our experience, typical CPs can include:

• signing an addendum to employment or consultant agreements to make such employees or consultants waive any claim related to the inventive activity carried out in favour of the target. In fact, further to the examination of such contracts during the due diligence process, it can emerge that the target did not properly govern the scope and remuneration of the inventive activities carried out  in its favour, thereby exposing the target to disputes or claims brought by employees or external consultants regarding ‘fair compensation’ (ie, equo premio) or even ownership of the IP generated in regard to the performance of the agreement;
• renegotiation of the licence agreement in place between the target and the IP owner (often, an institution pursuant to Article 65 of the IP Code) to make it more attractive to the investor. Indeed, a licence agreement between institutions and spin-offs might have been negotiated at a time before the investment by the target with little negotiation leverage against the institution, also due to the conservative and protective approach taken by some institutions with respect to their IP compared to the VC market’s longer and more developed history and experience in this regard;
• that the transactions receive approval or clearance from the Italian government pursuant to Article 2 of Italian Law Decree No. 21 of 15 March 2012, as subsequently amended and integrated (the ‘FDI Regulation’), by requiring the parties to submit a joint notification. Indeed, the FDI Regulation also applies to VC investments targeting Italian companies operating in the biotech sector, since it refers, among other strategic assets, in a very broad sense, to: (1) any critical technology for the delivery of healthcare services; (2) any critical technology aimed at data analysis and the use of biological know-how for health, diagnostics, prognostics, therapy and related follow-up; (3) any critical bioengineering technologies and nanotechnologies used in pharmaceutical and medical devices, diagnostics and the prognostic and therapy sectors; and (4) other economically strategic activities carried out involving the above sectors, including related R&D activities, within specific thresholds.

IP R&Ws as fundamental warranties

Given the pivotal importance of all IP-related issues in life sciences transactions, the representations and warranties relating to the IP assets are generally structured as corner stone representations and warranties (R&Ws), with the same degree of protection as so-called ‘fundamental R&Ws’ (ie, those related to the company and its corporate capital), whereby investors are held to be harmless and protected against any loss suffered by the target company in the field of incorporation, organisation, valid existence and the good standing of the company, under the applicable laws.

IP R&Ws are negotiated not only to affirm the target company’s compliance with the applicable laws in regard to all IP-related issues, but also to significantly enhance the investor’s assurance regarding the sustainability of its investments in the target and its hardcore ‘deal maker’ assets, providing, for example, that: (1) all the scientific studies carried out by the target are conducted in all technical and material respects in accordance with all the applicable laws, and all the protocol, standard professional, ethical, medical and scientific research standards and procedures are adhered to; (2) all the IP resulting from the target’s activities are valid and legitimate ensuring that no hidden liability may arise that jeopardises the business’s continuation; and (3) the company’s rights related to the IP portfolio is secured, protected, maintained and enforceable.

It is necessary to point out that it is common market practice that in Italian life sciences deals, the limitations (whether material and/or temporal) of the indemnification obligations negotiated by the parties (ie, the de minimis clause, threshold and cap) will not apply with respect to any loss incurred in regard to the R&Ws released and set forth on the relevant IP assets. In conclusion, it is necessary to properly cover critical areas in regard to IP-related matters in the VC transactional context in the life sciences industry, ensuring that the target company functions properly in the field of legal compliance, in regard to validity of the relevant IP rights, the absence of litigation (whether pending or threatened) and in regard to the correct ownership/assignment of the IP rights.

Notes