Following up on our February 4th report on the debate regarding the future of the SBIR Program,  the House Committee on Small Business held a hearing on March 13th to consider changes to modernize the program, according to a press release issued by the House Committee on Small Business.  SBA Administrator Steven Preston was subpoenaed to appear before the Committee.

The chief items up for consideration by the Committee were as follows: (i) increasing size limits on SBIR grants during the first two phases of the program, potentially doubling the size of the awards, and (ii) changing the definition of small business to include businesses majority-owned by venture capital firms, reported Kent Hoover for the Dallas Business Journal. 

Hoover reported on the second topic of consideration:

The committee also wants to change the SBA’s rules defining what types of companies qualify as a small business in order to allow small companies that are majority-owned by venture capital firms to receive SBIR awards.

These types of companies routinely received SBIR awards until 2003, when the SBA ruled that venture capital firms don’t qualify as individuals under the agency’s eligibility rules for the SBIR program. . .  . Many biotech companies contend the ruling ignores the realities of their industry, where small businesses must get outside capital in order to research and develop new drugs and other treatments. The Biotechnology Industry Organization and the National Venture Capital Association have been lobbying Congress to overturn the SBA’s ruling. . . . .

The House overwhelming passed legislation last September to allow small companies majority-owned by VC firms to be eligible for SBIR awards as long as no single VC owned more than 50 percent. The Senate didn’t act on the bill, so the House is taking another stab at it this year.

BioOptics World ran an article this month on the SBA reauthorization battle.  I was actually interviewed for the article, but my interview did not make it into the published article.  Anyway, Author Susan Reiss reported as follows on the status of SBA reauthorization:

One Hill observer says that the venture-capital issue will boil down to whether Congress wants to emphasize the “S” or the “B” in SBIR. At this point the House and Senate don’t agree on whether they should change the program to address the venture-capital issue. A bill introduced last fall by John Kerry (D-Mass.), chairman of the Senate Committee on Small Business and Entrepreneurship, and ranking member Olympia Snowe (R-Maine) that tried to bridge a middle ground passed in the Senate but failed in the House. An alternative bill was approved in the House, but failed in the Senate.

This year the Senate has yet to hold hearings on SBIR reauthorization, although an aide to Kerry on the Small Business Committee says Kerry is committed to reauthorizing the program. . . .

Reiss further noted:

To lessen impact of the venture-capital issue, some observers have suggested creating a separate program for innovation development at NIH. “NIH is concerned about the path to commercialization. Instead of trying to fit a square peg in a round hole, let’s look at a commercialization program,” suggests James Morrison, a senior advisor for the Small Business Technology Council.

But the chance that someone will devise an entirely new program that addresses the needs of NIH is unlikely. At this point it’s unclear where on the spectrum the House and Senate will meet to reauthorize SBIR, but as Brown notes, “it would be devastating to have a gap in the program.”

Video of the hearing and and copies of written testimony by witnesses are available for review at the Small Business Committee website.

I am interested to hear any comments on the current proposal to the House Committee.  It is a well-established fact that BIO strongly supports the idea of changing the SBIR rules to allow venture-backed companies to recieve SBIR grants.   But the Dallas Business Journal article suggests that some biotech companies may actually oppose BIO’s position.  Is there any truth to this?  If you oppose the changing the rules to allow venture-backed companies to participate, I would like to hear your argument.  Please write us and let us know your position. 

Also, what about the idea of developing a new program at NIH?  Is this a workable or even advisable solution?  Why or why not?  Any comments we receive on this issue will be shared with blog readers, so we welcome the feedback.

VaxGen announced the termination of its merger agreement with Raven in a press release issued last Friday.  As a result, liquidation may be in the company’s future, reported Steve Johnson for the San Jose Mercury News. 

According to Johnson, VaxGen had planned to have its shareholders vote on the merger Monday morning, but it became clear that the deal was not going to be approved by VaxGen’s investors.

Johnson reported on the "troubled" history of VaxGen as follows:

Founded in 1995, it labored for years to develop a vaccine for the AIDS virus, HIV, but was forced to give up that quest in 2003 after its vaccine proved ineffective. In subsequent years, the company disclosed that its financial records were in disorder, resulting in it being delisted from the Nasdaq Stock Market in 2004.

The government provided a brief salvation. Following the Sept. 11, 2001, terrorist attacks, federal officials in 2002 and 2003 gave VaxGen $101.2 million to begin developing a new anthrax vaccine. The government followed that up in 2004 with $877.5 million more to provide 75 million doses of the vaccine.  It was the biggest contract ever awarded under President Bush’s anti-terror program, Project BioShield, but it was short-lived. The government revoked the contract in December 2006 when the vaccine failed a key test. .  . .

In the interest of full disclosure, VaxGen was a client of my previous employer, Pennie & Edmonds, LLP and I did some work for the company during the term of my employment at the firm.  It has been sad to see the company fall on hard times, and I am sorry now to see this report of the company moving toward liquidation.  I remember a time when VaxGen’s future seemed very full of promise, and when the management team’s enthusiasm for its work was quite infectious (no pun intended).  While the nature of the biotech business model is inherently risky and some companies will inevitably fail while others will be wildly successful, it is still sad to see VaxGen come to the end of its road under these circumstances.   I had hoped that the company would enjoy a very different fate: that its AIDs vaccine would prove to be the answer to preventing AIDS that we hoped it to be.  Hopefully the work of VaxGen–despite all of its "troubles"–has nevertheless brought us one step closer to finding that answer. 

Gilead Sciences has now overtaken Amgen as the world’s second most highly valued biotech company after Genentech, according to Seeking Alpha.

Seeking Alpha reported:

Investors now think that a biotech company with less than one-third the revenue of Amgen (AMGN) is worth more than the former sector king. . . .

Genentech (DNA) is the commanding number one with a market cap of more than $83 billion. It’s a little nip and tuck between GILD and AMGN, but as I write this Amgen’s market cap stands at approximately $43.5 billion and Gilead’s at $45.5 billion. Amgen is still tops when it comes to revenue: $14.8 billion in 2007 versus Genentech’s $11.7 billion and Gilead’s $4.2 billion.

While Gilead Sciences’ ascension to the number two slot has little if any bearing on the biotech legal landscape, it undoubtedly will have some impact on the negotiating power of Gilead Sciences in future commercial negotiations. 

Canadian drug company Biovail Corporation has agreed to pay $10 million to settle federal regulators’ charges of civil accounting fraud and deceiving investors and analysts, reported Marcy Gordon for Associated Press.  SEC charges remain pending against Biovail’s founder and former chairman and CEO, Eugene Melnyk; former Chief Financial Officer Brian Crombie; and two current executives: Chief Financial Officer Kenneth Howling and Controller John Miszuk. The Ontario Securities Commission also has charges pending against the four executives.

Gordon reported on the charges as follows:

Biovail and senior executives "engaged in a pattern of systemic, chronic fraud" that distorted its quarterly and annual reports filed over four years, Mark Schonfeld, director of the SEC’s New York regional office, said in a statement. To conceal the fraud, the executives "intentionally misled the company’s auditors and the investing public, showing their complete disregard for their responsibilities to shareholders," Schonfeld said.

In October 2003, the SEC alleged, Biovail and several executives deceived investors and analysts by falsely attributing nearly half of the company’s failure to meet its third-quarter earnings target to a truck accident involving a shipment of Biovail’s antidepressant Wellbutrin XL. The accident in fact had no effect on earnings for the quarter, the SEC said.

The agency also accused the company of three fraudulent accounting schemes between 2001 and 2003: Shifting around $47 million in expenses for drug research and development onto the books of a "special purpose entity," concocting a phony transaction to record $8 million in revenue, and intentionally misstating losses from foreign currency transactions to understate a quarterly loss by some $3.9 million.

As part of the settlement, Biovail has agreed to refrain from future securities violations and to hire an independent accounting firm to oversee its books.

Attached is the SEC Press Release issued following the settlement agreement and the Complaint filed by the SEC in this case.

According to an Associated Press report, Harvard researchers have been reviewing the recent rash of problems with approved drugs and have come to a "disturbing" conclusion: drugs that were approved by the FDA in a rushed timetable have had more problems than drugs that were approved on a more leisurely timetable.  The results of this research have just been published in Thursday’s New England Journal of Medicine and provide support for the researchers’ conclusion.

The Associated Press explains as follows:

Deadlines were first imposed on FDA by a 1992 law that allowed drug makers to pay millions of dollars in fees directly to the cash-strapped agency so it could hire more reviewers and clear a backlog of pending drug applications. In return, FDA had to make a decision — either approve or reject — on 90 percent of all drug candidates within 12 months of their application, or lose money. The deadline was 6 months for drugs so novel or potentially lifesaving to be classified high-priority.  Congress tightened the deadline for most drugs to 10 months in 1997.

Amid concern about risky drugs, Harvard professor Daniel Carpenter took a closer look at the impact. First, he found approval is 3.4 times as likely in the two months leading up to the user-fee deadline as at any other time.  Drugs approved in that just-before-deadline period had a four-to five-fold higher rate of later being withdrawn or requiring serious safety warnings, compared with drugs approved faster — presumably slam-dunks — or those that miss the deadline, Carpenter concluded.

While the FDA is denying that an accelerated review timetable is responsible for the recent wave of problems with approved drugs, the New England Journal of Medicine report certainly suggests that the contrary may in fact be true. 

In light of this evidence, what should be done to protect the public? 

Two possibilities quickly come to mind: first, there is the option of bulking up the FDA staff to more effectively deal with accelerated review timetables, and second, there is the option of lobbying Congress to loosen the tight deadlines, so that the FDA has more time to do a more thorough review of new drugs.  Given the current budget deficit, the second option is likely more realistic.

Perhaps patients who are pursuing class action suits against Merck and other companies who have sold these problem drugs should redirect their efforts towards lobbying for new legislation in Congress to relax the current FDA approval deadlines.  Taking this action–rather than pursuing class actions suits–may very well be the step most likely to produce real change in order to best protect the public. 

The In Vivo Blog ran an interesting posting today, which asserts that  investors dislike biotech alliances.

The In Vivo Blog explains this argument as follows:

Since November 2007, there have been nine deals by public biotech companies with upfront payments (equity and cash) of greater than $20 million – to us a reasonable proxy for a biggish deal. Among them: Isis Pharmaceuticals’ mipomersen deal with Genzyme ($325 million upfront); Merck’s with GTx on its Phase II SARM and two backups ($70 million upfront); and Sanofi Aventis’ multi-antibody arrangement with Regeneron ($85 million upfront).And yet, with all this mostly undilutive capital flowing in, the market’s reaction has been distinctly negative. The median share price among these nine biotechs is down 15% from the day the deal was signed. . . .

[Y]ou’d expect better from companies with pretty darned good news. Regeneron, for the third time non-exclusively monetizing its VelocImmune antibody production system and this time adding a rich co-development deal on a series of programs, with spectacular downstream economics, has nonetheless lost 16% of its value since it announced the deal.

What is the explanation for the investors’ behavior? The In VIVO Blog concedes that the "entire decline cannot be blamed on the deals" but gives three possible explanations for the dislike of biotech alliances:

At one time, a Big Pharma deal was the required validation for an IPO or additional public round. But now it’s clear that the market no longer gives a damn about such imprimaturs. Big Pharmas’ frequent missteps in development haven’t shined up their product-picking reputations. More importantly, biotech’s institutional investors now have the teams to do their own scientific and clinical homework.

Second, the M&A-based logic of the market leads investors to the conclusion that any product-based deal subtracts value. We’re not aware of any data that actually supports that conclusion (we’ll look into it, of course). But as long as acquirers are willing to pay a nearly 100% premium to what IPO investors are willing to pay, investors are hardly willing to jeopardize a potential merger windfall by selling off rights to a key product.

And finally, investors just don’t like some of the deals biotech is signing, despite the big dollars attached to them. One reason, noted Bill Slattery of Deerfield Partners at the opening BIO-Windhover panel in New York: deals often give Big Pharma development control.

The In Vivo Blog raises some interesting arguments.  As an IP transactions attorney myself, I cannot help but wonder if there is some truth in their arguments: is it possible that biotech companies are just making bad deals–perhaps due to inexperience or poor negotiating? or due to running low on cash?  Or is it the case that recent alliances just have not been as successful as anticipated on signing?  On the other hand, is something more going on, and alliances are just little by little becoming disfavored by the investing community?

I am interested in what California Biotech Law Blog readers have to say on this issue. What do you think: do investors dislike biotech alliances in 2008?  Why or why not?   We will let you know what  kind of feedback we get on the issue and share it with the readers, as I am confident many biotech companies would benefit from the insight, and those of us in the legal community advising such companies would likely benefit as well.

Following up on our blog posting last week about the indictment of the former Intermune CEO on fraud charges related to allegedly marketing off-label uses of a drug, an unrelated class action suit has been filed in the state of Pennyslvania against Pfizer and Warner-Lambert alleging neglience and negligent and intentional misrepresentation for allegedly conducting a marketing campaign to promote off-label uses of its Neurontin drug and its generic equivalent, gabapentin, reported Amaris Elliott-Engel for Law.com.  These claims have survived a partial summary judgment ruling by Philadelphia Common Pleas Judge Mark I. Bernstein.

This case is reported to be the first case to hold that a brand name manufacturer can be held liable for money spent to promote a drug manufactured by a third party.

Elliot-Engel reported on the case as follows:

During the class certification hearing, the plaintiffs produced evidence that the defendants unlawfully promoted Neurontin to physicians for off-label use, despite the lack of scientific proof that the drug was effective in treating those conditions. . . . A $40 million promotional budget was devoted to those efforts, including the insertion of anecdotal articles in medical journals, paying physicians considered to be opinion leaders and sponsoring continuing medical education conferences that actually were paid promotional events, Bernstein said. At least 200,000 prescriptions for Neurontin were written in Pennsylvania, and the defendants earned between $53 million and $64 million on the drug per quarter in the state, Bernstein said. . . .

Neurontin was approved to treat epilepsy in 1993 and neuralgia in 2002. . . .Bernstein granted class certification last June. The class involves all people who purchased Neurontin and gabapentin between 1995 and the present for medical conditions other than adjunctive therapy for epilepsy and management of pain associated with herpes zoster rash outbreaks.

Each class member has damages worth less than $75,000; the class action members seek a refund for the amount they spent on Neurontin/gabapentin prescriptions given to treat off-label medical conditions not approved by the FDA, according to court papers.

This case and the recent indictment of Dr. W. Scott Harkonen raise some interesting public policy questions about off-label uses of medications and the promotion of such uses.  Have drug companies and the medical community been too quick to embrace off-label uses of drugs that are approved for other medical conditions?   Should there be greater regulation of off-label uses of drugs than what currently exists?   Do patients really understand when they take an approved drug for an off-label medical condition the full ramifications of what "off-label" really means? 

I am interested in hearing what the blog community thinks about this issue, so I welcome any comments on the topic.  We will continue to follow these two cases here at the California Biotech Law Blog as they unfold.

The Pharma Marketing Blog ran an interesting column today on the new proposed legislation, which would require doctors to disclose gifts received from drug companies. 

Introduced by Rep. Peter DeFazio (D-OR) and Ways and Means Health Subcommittee Chairman Pete Stark (D- CA), the new legislation is called The Physician Payment Sunshine Act  and is a companion bill to S. 2029, which was introduced by Senators Chuck Grassly (R-IA) and Herb Kohl (D-WI).  According the the press release issued by U.S. Congressman Peter DeFazio, the purpose of the bill is as follows:

The legislation builds on existing laws in Minnesota, Vermont, Maine and West Virginia to require prescription and medical device manufacturers to publicly report any gifts with a value of $25 dollars or more provided to doctors in connection with their marketing activities.  Under the new legislation, this information would be made widely available to the public. . . ."Americans are being gouged by pharmaceutical companies that spend more on marketing than they do research and development." DeFazio said.  "They enjoy generous subsidies from the government, but have no accountability when it comes to the billions of dollars they spend promoting high priced drugs.  I am proud to introduce this legislation which would shine a light on the marketing practices of drug companies and give patients the information they need to make an informed decision about their healthcare."

The question, of course, being debated is whether it is a good idea to enact The Physician Payment Sunshine Act.  The Pharma Marketing Blog argues that this legislation goes too far in attempting to curb the potential for conflicts of interest, stating:

This "sunshine" bill also has a few dark clouds associated with it. I have to agree with Bob Ehrlich of DTC Perspectives that "this bill seems overly onerous" and "is meant to discourage payments to doctors by outing them and the drug company on a public site". . . .
Do I agree with this? I hate to sound like a Clinton, but it all depends on what "large" means. Is "large" more than $100? This is the cutoff amount specified in PhRMA’s voluntary guidelines on gifts to physicians. Usually, these types of bills attempt to codify such voluntary guidelines and I’m not sure where the $25 limit came from other than the idea of setting the bar so low that it would put the pharma "tchochke" industry out of business.

What is our view at the California Biotech Law Blog on the proposed legislation?  In my opinion, there is a definitely a need for legislation to regulate potential conflicts of interest in the medical profession.  Lawyers certainly receive close scrutiny on potential conflicts of interest, and I see no reason why physicians should not receive the same treatment.  I certainly would think twice about taking any drug recommended by my physician if I knew that the physician making the recommendation had received compensation of any nature from the drug company, and as a lawyer, I would expect any doctor to disclose such an association.  I’m frankly surprised that rules are not already in effect to require this type of dislosure.

As far as the issue of whether the $25 limit is reasonable, this does sseem a bit ridiculous and arbitrary.  Is receiving $25 really a conflict of interest, when it is only a fraction of the doctor’s total earnings? The standard on legal malpractice applications for weeding out potential conflicts of interest is typically ownership of more than 5% of the company at issue.   Perhaps a more reasonable conflict of interest standard would be 5% of the doctor’s total earnings in the year.  Or even 3% of the doctor’s total earnings. But $25? 

What are your thoughts on the new legislation?  Please let us know your thoughts on the issue and we will share them with our readers.

California, the District of Columbia, and seventeen other states have filed suit against Abbott Laboratories for allegedly entering into a scheme to block the generic version of the cholesterol lowering drug TriCor, reported the East Bay Business Times.

The East Bay Business Times reported on the suit as follows:

The prosecutors are suing Abbott as well as two subsidiaries of Brussell-based Solvay — Fournier Industrie et Sante SAS and Laboratoire Fournier SA — in federal district court in Delaware. The prosecutors say the pharmaceutical companies illegally attempted to monopolize the market for drugs containing the ingredient fenofibrate, which regulates cholesterol and triglyceride levels. Abbott licenses from Fournier American rights to the drug and Solvay sells the drug on the European market. . . .

According to the AG’s office, the companies made trivial changes to the formulations of TriCor, and marketed those while withdrawing the original drug from the market. The companies deleted references to the original forms of the drug from national drug databases, according to prosecutors, making it more difficult for a generic version of TriCor to obtain generic status. Meanwhile, the prosecutors say, Fournier obtained patents covering the variations of TriCor, and then filed patent infringement lawsuits against generic companies that tried to compete. The litigation triggered mandatory 30-month periods in which the Food and Drug Administration could not approve generic versions of TriCor.

The companies intend to fight the charges, according to the East Bay Business Times, and argue that they have not engaged in any wrongdoing.

The California Biotech Law Blog will be following this story as it unfolds.

Fraud charges were filed this week against the former CEO of Brisbane-based InterMune, reported AP writer Paul Elias for SF Gate. 

Elias reported as follows:

Dr. W. Scott Harkonen served as the Brisbane-based company’s top executive from 1998 until 2003. During that time, he is accused of making false and misleading statements about how effective the drug was in combatting the fatal lung disease idiopathic pulmonary fibrosis, known as IPF.

A press release Harkonen wrote touting the benefits of Actimmune to treat the lung disease in August 2002 is at the heart of the government’s case. The press release stated that a large-scale scientific test of Actimmune showed it helped IPF patients live longer, prompting many doctors to start prescribing the drug for IPF even though it wasn’t approved for that disease. . . . Doctors are allowed to write so-called "off-label" prescriptions for drugs, but companies are prohibited from directly marketing those uses. Prosecutors allege that the test Harkonen cited in the press release was a failure and that there’s no proof the drug played any role in extending life. .. ."

According to Elias, Dr. Harkonen, who is now the CEO of CoMentis, Inc. in South San Francisco, intends to plead not guilty. 

According to the Wall Street Journal Health Blog, the government does on occasion come down on a company for off-label marketing, sometimes even naming individuals; however, it is unusual for the investigation to focus on a single executive and file criminal charges against him rather than the company.  In this case, Harkonen is being indicted on charges of wire fraud and for violations of the Food, Drug and Cosmetic Act.