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Archive for July, 2007

Biotech vs. High Tech: Opposing Views on Patent Reform

Written by on Tuesday, July 24th, 2007

The International Herald Tribune ran an interesting article last week on the clash between biotech and high tech over patent reform.

The International Herald Tribune reported:

Both industries depend on patented inventions, but high-technology firms have been pushing for changes to lower the risk of expensive patent-infringement lawsuits. And much of what they want is reflected in a bill making its way through Congress.

Biotechnology companies, however, argue that such changes would make it harder to protect new discoveries. . . .

The biotechnology industry. . . . foresees damaging consequences. Biotechnology firms, major drug companies, and universities all stand to earn millions, sometimes billions of dollars on inventions that can be as small as a single molecule.

They attract financing based largely on the potential value of their inventions, whose profits may be many years in the future. If those inventions were more vulnerable to patent challenge, with decreased penalties for infringement, they would become far shakier foundations on which to build a company. 

The article raises an interesting question: is patent reform a bad idea for the biotech industry?

While clearly a case can be made that patent reform is not favored by the industry, I think it is a bit leap to say that patent reform is actually going to harm biotech companies.  Sure, proponents for patent reform are largely members of the high tech industry, which has increasingly had to worry about the phenomenon of "patent trolls" and high litigation damage awards, but that does not mean that patent reform is going to actually have a detrimental effect on biotechnology.  Isn’t it possible that, despite the gap between the industries on this issue, that in the end any patent reform measure passed will ultimately affect both industries to a similar degree? It is not as though the patent reform measures will be industry specific, although I am not so sure that the industries wouldn’t prefer otherwise.

 

 

 

 

 

   

 

 

 

 

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Case Study For Potential Impact of New Generics Legislation?

Written by on Thursday, July 19th, 2007

Pfizer may serve as a good case study for the potential impact of new generics legislation, in light of its reports today of plunging profits due to generic competition.

Dow Jones Marketwatch reported:

Pfizer Inc. said Wednesday its second-quarter profit fell 48%, largely due to generic competition for its top-selling drugs Zoloft, Norvasc and Lipitor. . . .

Pfizer’s top line has been under pressure in recent quarters because of the loss of patent protection for several of its once-popular products, such as Zoloft, Zithromax and, most recently, Norvasc.
Once a patent expires, other drugmakers are legally permitted to make generic versions of the drug, which are often sold at considerable discount.
Pfizer has said that it expects revenue to be largely flat until 2009, when it sees sales of newer products compensating for those lost to patent expirations.
Could the example of Pfizer serve as a case study for how new generics legislation could affect the biotech industry?
Certainly, drugs are patented today and will eventually go off patent, opening up the marketplace to generic competitors, which will of course affect the company’s bottom line, as in the case of Pfizer. However, this is the normal course of a patent.
If new generics legislation is implemented, though, could it be possible that we will see these kinds of profit drops across the industry?  Could the profits of the whole industry be slashed in half?
I think the example of Pfizer should yet again make us all stop and think about the potential impact of new generics legislation on the biotech industry across the board.

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USPTO to reconsider Patents on HIV Drug Viread

Written by on Thursday, July 19th, 2007

The United States Patent and Trademark Office (“USPTO”) has agreed to reconsider patents on Gilead’s HIV drug Viread, according to a report by The Mercury News.

The Mercury News reported:

The Public Patent Foundation, a consumer advocacy group, claimed in a petition filed with the agency in March that the patents shouldn’t have been issued because key facts about the makeup of Viread – generically dubbed tenofovir – had been made public previously. . . .

Invalidating the patents would let other companies seek federal permission to sell the same drug, which could make Viread more widely available and lower its price, said Daniel Ravicher, the foundation’s executive director. Retail prices for drugs vary, but a 30-day supply of Viread can easily cost more than $1,000.

Viread sales were nearly $690 million in 2006, so it goes without saying that the invalidation of these patents could potentially be very costly for Gilead.  Moreover, Viread is a key component of two other Gilead drugs, Truvada and Atripla.  Thus, the invalidation of the patents could potentially impact the sales of those drugs as well.

Should Gilead be concerned?  The USPTO agrees to reconsider a large number of patents each year and only a small percentage of those patents are actually invalidated, so the odds of these patents being invalidated are probably relatively small.  Still, Gilead has to have some concerns, since the invalidation of these patents is likely to have a very real impact on the company’s bottom line.

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Biotech Exit Strategy Dependent on Mergers & Acquisitions Over IPOs

Written by on Monday, July 16th, 2007

Biotech companies continue to rely on mergers & acquisitions over IPOs as a primary exit strategy, according to a new report by the San Diego Business Journal.

The San Diego Business Journal reported:

Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs" . . . .

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Despite the continued trend toward reliance on mergers & acquisitions to cash out, the biotech industry has seen some IPO activity in the last year.

The San Diego Business Journal further reported:

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two [San Diego] biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million — making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

The San Jose Business Journal’s report is consistent with what I have always seen in the biotech industry–that the ultimate plan of most biotech companies is to sell the company.   Of course, in recent years, high tech companies have been following a similar strategy.  IPOs in the Silicon Valley have been few and far between, but there have been many transactions by merger or acquisition.  So, for many companies across the board, mergers and acquisitions rather than IPOs have become the preferred manner by which to raise capital or exit the business. 

Will this trend continue?  My prediction is a definite "yes."  While I think IPO activity is starting to pick up and there may be more IPOs in the biotech industry as well as other industries in the coming year, I predict that mergers and acquisitions will continue to be the primary exit startegy for biotechs for many years to come. 

 

 

 

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Biotech Exit Strategy Dependent on Mergers & Acquisitions Over IPOs

Written by on Monday, July 16th, 2007

Biotech companies continue to rely on mergers & acquisitions over IPOs as a primary exit strategy, according to a new report by the San Diego Business Journal.

The San Diego Business Journal reported:

Normally, we can get a better valuation by doing a trade, sale or merger than an initial public offering,” said Ivor Royston, managing partner and founder at Forward Ventures. “We get better returns. I see a continuation of mergers and acquisitions that has been so dominating over the last two years. We just don’t see that many IPOs" . . . .

Royston, who was a founding partner of the former Hybritech, the first San Diego biotech, said large pharmaceutical companies are increasingly interested in acquiring startups as their pipelines run dry.

“Drugs are going off patent, and there is stifled innovation,” Royston said. “There are good relations now going on between private biotech and large pharmaceutical companies.”

Despite the continued trend toward reliance on mergers & acquisitions to cash out, the biotech industry has seen some IPO activity in the last year.

The San Diego Business Journal further reported:

The value of IPOs in the biotech industry in 2006 was $944 million, up 50 percent over 2005, according to the Ernst & Young 2007 Global Biotechnology Report.

But just $80 million, or 8.4 percent, of the total raised by companies going public in 2006 came from the San Diego region. Cadence Pharmaceuticals Inc. and SGX Pharmaceuticals Inc. were the only two [San Diego] biotech IPOs in 2006.

The San Francisco Bay Area had twice as many in 2006, according to the report, raising a total of $211 million — making up 22 percent of the amount raised by biotech IPOs in the nation last year.

IPOs in the Mid-Atlantic region and New England each made up 20 percent of the nationwide total raised from stock offerings in biotech.

The San Jose Business Journal’s report is consistent with what I have always seen in the biotech industry–that the ultimate plan of most biotech companies is to sell the company.   Of course, in recent years, high tech companies have been following a similar strategy.  IPOs in the Silicon Valley have been few and far between, but there have been many transactions by merger or acquisition.  So, for many companies across the board, mergers and acquisitions rather than IPOs have become the preferred manner by which to raise capital or exit the business. 

Will this trend continue?  My prediction is a definite "yes."  While I think IPO activity is starting to pick up and there may be more IPOs in the biotech industry as well as other industries in the coming year, I predict that mergers and acquisitions will continue to be the primary exit startegy for biotechs for many years to come. 

 

 

 

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ViaCell Wins Infringement Suit Over PharmaStem

Written by on Friday, July 13th, 2007

A new biotech infringement decision as issued this week by the U.S. Court of Appeals for the Federal Circult, which ruled in favor of ViaCell against Pharmastem in PharmaStem Therapeutics, Inc. v. Viacell, Inc. (Fed. Circuit 2007).

The press release issued by ViaCell following the ruling stated as follows:

The Federal Circuit upheld an earlier decision by the U.S. District Court for the District of Delaware that ViaCell, through its marketing of ViaCord®, a product offering through which families can preserve their baby’s umbilical cord blood at the time of birth for possible future medical use, does not infringe PharmaStem’s U.S. Patent No. 5,192,553 (‘553) and U.S. Patent No. 5,004,681 (‘681), which relate to certain aspects of collection, cryopreservation, storage and use of hematopoietic stem cells from umbilical cord blood. The court also found the ‘553 and the ‘681 patents invalid based on prior art.

Peter Zura’s 271 Patent Blog discussed the infringement issues:

One of the sticking points in the litigation was language in the claims that required that the recited composition contained stem cells “in an amount sufficient to effect hematopoietic reconstitution of a human adult.”

Each of the defendants are in the business of servicing families with newborn infants in which blood from the infant’s umbilical cord is collected and cryopreserved for possible later use. The problem was that PharmaStem could not show enough evidence that the defendants’ cord blood contained a “sufficient” supply of stem cells to effect successful reconstitution of an adult. An expert provided testimony based on the defendants’ marketing materials, but did not consider any data regarding the composition of the cord blood units. Accordingly, the expert’s testimony was excluded.

In a more interesting move, the CAFC also determined that the method claims could not be infringed because all the steps were not performed by the same party – the defendants were responsible for collecting and cryopreserving cord blood samples, while transplant physicians unrelated to the defendants thawed the cord blood and used it for transplanting. Also, since the defendants never “owned” the blood, there was no contributory infringement. . .

Patent Docs further addressed the obviousness issues:

In finding there was not substantial evidence, the Federal Circuit stated that the obviousness standard required a “reason” the skilled worker would make the claimed device or carry out the claimed process, and have a reasonable expectation of success in doing so.  The Court found strong evidence in the prior art that the first prong of this test was satisfied.  As to the second prong, the Federal Circuit was not persuaded by evidence that it was unknown in the art that cord blood contained hematopoietic stem cells.  The Court cited portions (as characterized by Judge Newman’s dissent, by “simply reweigh[ing] selectively extracted evidence”) of the art to show that cord blood was known to contain such stem cells.  It appears that the Federal Circuit interpreted the art based on its understanding that the existence of progenitor cells in the blood was evidence for underlying stem cells, although elsewhere in the opinion the Court appears to conflate the two cell types.  The Federal Circuit’s explication of the biological underpinnings suggests that it believed that a production of such progenitor cells was accompanied by persistence (and thus the presence of) stem cells in the blood.  In discounting PharmaStem’s expert testimony, the Court relied upon what it considered contrary statements made by the inventors, and refused to credit the expert’s explanation that the cited art used the term “stem cell” inaccurately.

Patently O described the rationale for the decision:

Invention is Obvious: When asserting obviousness based on a combination of prior art references, the patent challenger must show that a PHOSITA “[1] would have had reason to attempt to … carry out the claimed process, and [2] would have had a reasonable expectation of success in doing so.”

Reason to attempt: In view of the prior art references, the first part of that test is plainly satisfied here. The idea of using cryopreserved cord blood to effect hematopoietic reconstitution was not new at the time [of filing]. Two of the prior art references…suggest using cord blood for that purpose. Two others…suggest cryopreservation and storage of the cord blood until needed. Accordingly, this is not a case in which there is any serious question whether there was a suggestion or motivation to devise the patented composition or process.

Expectation of Success: The inventors appear to have conclusively proven that umbilical cord blood is capable of hematopoietic reconstitution.  Unfortunately for them, completing a proof is not necessarily inventive. Rather, prior scientists strong suspicion of the capability creates an expectation of success so strong that “no reasonable jury” could find the patent valid.

While the inventors may have proved conclusively what was strongly suspected before—that umbilical cord blood is capable of hematopoietic reconstitution—and while their work may have significantly advanced the state of the science of hematopoietic transplantations by eliminating any doubt as to the presence of stem cells in cord blood, the mouse experiments and the conclusions drawn from them were not inventive in nature. Instead, the inventors merely used routine research methods to prove what was already believed to be the case. Scientific confirmation of what was already believed to be true may be a valuable contribution, but it does not give rise to a patentable invention.

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House Declines To Address Generics Provisions of FDA Legislation

Written by on Thursday, July 12th, 2007

The House has passed legislation that will overhaul the Food and Drug Administration, but has declined to address the provisions of the legislation dealing with generics, which previously passed in the Senate.

The Wall Street Journal reported:

The House FDA bill, approved 403-16, mostly parallels a bill that passed the Senate in May. Both versions would devote more money to monitoring the safety of marketed drugs and increase the agency’s authority over medications that raise safety concerns. The agency would have the clear ability to order follow-up studies, restrict distribution and enforce changes to the medications’ labels. The bills don’t grant the FDA the power to force a moratorium on direct-to-consumer advertising, a tough restriction that was discussed earlier, though the agency would be able to levy fines for false and misleading promotions.

The conflict between the House and Senate legislation means that we can expect more debate over generics in the coming months.

According to The Wall Street Journal’s Health Blog, house leaders appear to be “cooler on biogenerics than their counterparts in the Senate.”

Does the House’s action signal the death knell for generics legislation this year?  It may be too soon to say for certain, but it is clear that the legislation still has a rocky road ahead.

Of course, even if the House ends up passing the legislation ultimately, it’s unclear whether it will be supported by President Bush.

The Los Angeles Times reported:

It’s unclear how the White House will react to the finished product. Before the Senate voted in May, the administration said it agreed with the goals of the legislation but had serious concerns about aspects of the risk plans.

So, if the generics provisions of this legislation were not passed by the House, what did make it through?  The Los Angeles Times explained as follows:

The House bill follows the same basic approach to safety as the Senate version, but consumer groups said it would give the FDA stronger regulatory powers in some areas.

Both bills would set up a computerized network to scan medical insurance and pharmacy records for patterns that could signal problems with new drugs. The FDA now relies on anecdotal reports submitted by doctors and drug companies, which are believed to capture only a small fraction of bad drug reactions.

A computerized system could take several years to deploy. The Senate bill sets some benchmarks for the FDA; the House version does not. . . . .

The House bill also includes stiffer fines for drug companies that violate FDA requirements and tighter rules to reduce conflicts of interest among outside scientists who advise the agency.

There is little doubt that we are in for a long battle ahead on the generics issue.  The biotech world will be following this issue closely over the next few months to see how it unfolds.

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California Stem Cell Agency Funds Controlled By Conflicts of Interest

Written by on Tuesday, July 10th, 2007

California Stem Cell Report provided more enlightening coverage today on how funds are being disbursed at the California Stem Cell Agency.

California Stem Cell Report reported as follows:

About ninety percent of the $209 million handed out so far by the California stem cell agency has gone to institutions that have “representatives” on the board that approves the funding. . . .

The group that approves the money is the 29-member Oversight Committee. Fourteen members of that committee have close links to the institutions that have received about $190 million in grants.

None of this is illegal but it illuminates the nature of the built-in conflicts of interest on the board. Prop. 71 created the situation. Nearly all the institutions in California that could be suitable recipients of stem cell research have some sort of representation on the decision-making board. The measure spelled out, for example, that five executive officers from University of California medical schools have seats on the board. It also stipulated that four executive officers from California research institutions sit on the Oversight Committee. . . .

Isn’t it comforting to know that millions of California’s taxpayer dollars have been entrusted to an entity, which is plagued by so many conflicts of interests?   Did voters unknowingly create just another bloated bureaucracy when they voted in favor of Proposition 71?  It is difficult not to think that this is exactly what has happened when you read these reports.

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Strategy Examined on How Patent Holders are Delaying Market Entrance by Generics

Written by on Saturday, July 7th, 2007

The National Law Journal ran an article yesterday, which examined the strategy that patent holders are using to delay the entrance of generics on the market.

The article focuses on the controversial use of  “citizen petitions” brought before the Food and Drug Administration (“FDA”) to temporarily delay the approval of a generic drug as a patent is about to expire while the FDA investigates safety challenges raised in the petitions.

The National Law Journal reports:

“For a relatively small amount of money, a company can inflict substantial harm on a competitor,” said David Balto, a Washington attorney and former assistant director in the Federal Trade Commission’s Bureau of Competition.

“It becomes attractive to keep rivals off the market and there is no better example than the citizen-petition process,” Balto said. . . .

It is clear the objective of many petitions is delay for financial advantage. The petitions arrive for FDA review as the brand-company drug expires, and they are based on information available much earlier, according to Balto.

While the new legislation proposed last week specifically addresses the issue of curbing these delaying tactics, The National Law Journal suggests that this will not necessarily provide a real solution to the issue, and may in fact just generate litigation, which could have the effect of generating even more delays than what are currently being caused by the petitions.

The National Law Journal explains as follows:

The U.S. Senate last week inserted petition reforms in a major FDA overhaul bill. The measure would not allow a petition to delay FDA approval of a generic unless delay is necessary to protect public health. As a check on competitors, petitioners must verify who is making the challenge and whether they expect to be paid for filing the petition. Congress must get annual reports on delays to generics based on the petitions.

[Scott Lassman, senior assistant general counsel for Pharmaceutical Research and Manufacturers of America (“PhRMA”)] said  PhRMA opposes the citizen-petition reforms and predicted that, if the measure becomes law, it may produce even more litigation. “These new requirements are so onerous, companies may decide to go to court to seek whatever they are seeking currently in petitions,” he said.

As I have indicated in prior blogposts, there are no easy answers to the tug of war between generics and brand-name drugs.  While there certainly is a push by the insurance industry and certain members of the left to make generics more available faster, there is very real tension on the part of biotech and pharmaceutical companies to prevent this from happening, so that they have an opportunity to fully realize the value in their investment.   The National Law Journal article highlights one specific aspect of this generics-brand name controversy, particularly with respect to how both sides are using  legal maneuvering to promote their cause.

However, what I think we should take away from this article, is the idea that the new legislation, which purports to end the legal maneuvering may actually result in only creating more problems for both sides of the dispute.   Is that really what is intended?  It is ironic to think that at a time when Congress is busy debating patent reform, which is in part intended to curb patent litigation, the same legislative body is simultaneously considering legislation that could have the effect of generating even more patent-related litigation.  What is wrong with this picture?

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The Latest on Biotech Valuations

Written by on Saturday, July 7th, 2007

To follow up on a post we ran in February 2006 on Biotech Valuations, I wanted to alert you to a recent series of postings on biotech valuations on sizz’s biotech blog

Sizz’s biotech blog says that in making valuations of biotech companies, a good valuation method is risk-adjusted net present value, which is described as follows:

Risk-adjusted net present value (rNPV) attempts to value a company by taking into account not only the future cash flows, but also the probabilities that those cash flows will even take place. This is especially useful for small biotechs that have not yet obtained FDA approval for a product. In using rNPV, we are able to find a company’s value while taking into account significant events that could affect the stock price (like moving from Phase II to Phase III trials).

NPV is the same as a discounted cash flow analysis. It finds the present value of a firm’s future cash flows. rNPV is similar. It is the present value of future cash flows, but those cash flows are adjusted by the probability of effect.

In a follow-up posting, sizz’s biotech blog states:

Risk-adjusted net present value is most useful for biotechs because it can place a value on an individual drug. This helps us out for small biotechs because most of these firms’ value is derived from drugs in their pipelines. With rNPV, we can find the value of each drug in a company’s pipeline, add them up, and get a value for the whole company. This could also be applied to larger biotechs, but rNPV really only values the pipeline, so we would also have to find a value for the drugs that are already marketed using a traditional discounted cash flow method.

Sizz’s biotech blog also provides in subsequent postings a specific example of how this valuation can be put into practice using GenVec, Inc.  In GenVec: Profile, sizz’s biotech blog profiles the company, discussing its risk factors and drugs.In GenVec: Potential Markets and Financials, Sizz’s biotech blog examines the potential markets for GenVec, which are the foundation for the valuation.

This series of postings provides a very informative overview to the art of biotech valuations, along with specific examples to show how the formulas can be applied in practice.   All in all, these entries are definitely worth checking out.

 

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