Now that President Obama signed the patent reform bill into law on Sept. 16, 2011, it is only fitting to ask whether the passage of this bill was a win for the biotech industry?

According to Roy Zwahlen, manager of intellectual property and technology transfer policy at BIO, the answer is a clear “yes.” He posted a blog posting on the BIO website, in which he articulated a number of reasons why he thought the bill was good for biotech:

1) Greater resources and operational flexibility for the PTO;
2) New and improved proceedings for patent quality review;
3) Will end the abuse of a loophole in false patent marking litigation;
4) Change America’s first to invent system to a first to file system;
5) Make it easier for inventors to file a patent; and
6) Eliminate the “best mode” requirement in patent litigation.

I thought Mr. Zwahlen’s apparent support for the patent reform bill was interesting in light of the industry he represents. Like many of my Bay Area counterparts, I have a completely different take on the issue.

While I am all in favor of making government agencies work better, as someone who regularly works with start-ups, I simply fail to see how changing our prior first to invent system in the U.S. to a first to file system could possibly have been good for the biotech industry. There is no question that the rest of the world has been using a first to file system and that our system was out of sync with the system adopted by the rest of the world. Yet, I would argue that our first to invent system was beneficial to cash-strapped start-ups and small businesses, which often do not have the budget when they first launch their businesses to immediately file patents to protect their inventions. As a lawyer working with start-ups, I frequently get the question “how much time do I have to file?” Particularly in the current times, when start-ups and small businesses are arguably more cash-strapped than they have ever been and investment money is so difficult to come by, patent prosecution costs are a huge concern. It’s hard to see how it can be in the best interests of a start-up to have to race to file a patent on an invention or to risk losing the opportunity to own the rights on the invention altogether.

Moreover, I can’t help but ask the question: in light of the challenges posed by the current economy, why in the world did Congress and the President choose now to impose yet another burden on start-ups and innovators?

Stepping back from this issue a bit, as a small business owner myself, I’ve been very vocal in my criticism over what I think is our country’s recent misguided financial support for so-called too-big-to-fail businesses at the peril of small businesses, which I would argue are the backbone of our country and of our country’s future. The average small business in this country (with a few notable exceptions such as the scandal-ridden and bankrupt Solyndra) has not been able to so much as pay a financial institution to loan it money in this environment. Yet, all kinds of taxpayer money has been handed out to large institutions since the recession started. This is not a criticism of any particular administration, as both the Bush and Obama administrations have taken this approach, as well as the past few Congresses. Moreover, while I’ve listened over and over again to the arguments in support of why these decisions have been made, I continue not to agree with them. My position is that the innovation we are all seeking to give our economy a much-needed boost is just not going to come from a large business, and that starving small businesses of capital and funding instead the largest businesses in this country is just a very misguided policy approach. So, this is the perspective I come from as a small business myself, whose business is largely comprised of working with start-ups. And that is the perspective from which I approach this issue.

The bottom line: I would argue that the decision to move to a first to file system in a bad economy is yet another example of enacting policies that hurt the little guy in tough times. And I think that it ultimately is bad for the biotech start-up out there who is trying to come up with cash to fund a patent program, or for the inventor who is trying to do something productive with his or her invention.

Billionaire Carl Icahn is at it again.  Icahn, who has a history of engineering board takeovers and initiating corporate sales at the corporations in which he invests, now has focused his efforts squarely on the Genzyme board.

Various media outlets are reporting that Icahn plans to nominate four new board members, including himself, when Genzyme’s nine director seats open up for election at the 2010 annual meeting scheduled for May.   This move would allow parties friendly to Icahn to control just under 50% of the Genzyme board.

What accounts for Icahn’s new interest in assuming control of the Genzyme board?

First of all, as Mass High Tech reported,  Icahn owns 4.8 million shares, which as of December, 2009, amounted to just under 2 percent of Genzyme.  This obviously is enough of a stake in the company to have a strong interest in its future.

Second of all, as Fierce Biotech reported, Genzyme has recently been plagued by some fairly serious problems, and Icahn seems to have lost confidence in the leadership of the company.  Its Allston Landing facility in Boston has suffered a series of setbacks resulting in shortages of Genzyme’s durgs Cerezyme and Fabrazyme.   Moreover, Shire and Protalix are close now to finalizing development of several competing drugs, which will likely give  those companies the opportunity to take over a significant portion of Genzyme’s existing market share.

According to Reuters, Genzyme has taken actions lately designed to fend off an Icahn move and to address investor sentiment generally, but it may very well be “too little too late.”

Reuters reported:

[Genzyme] recently announced an overhaul of its compensation system and added Robert Bertolini, previously chief financial officer at drugmaker Schering-Plough Corp, to its board.

The company also hired new managers to oversee quality control and agreed to appoint Ralph Whitworth of Relational Investors, another activist shareholder, to its board. In return, Whitworth agreed to support Genzyme’s slate of nominees.

So what is next for Genzyme? It seems likely that some significant changes are in its future.

The California Biotech Law Blog will continue to watch this story and keep you posted.

Biotech companies are facing the new reality of having to contemplate bankruptcy filing in the bad economy.

Bloomberg.com is reporting that five biotech companies have already had to seek bankruptcy protection in the last month, and that more bankruptcies are likely on the way.  According to Bloomberg.com, the companies most at risk have less than six months of cash on hand, only a few drugs in development, and no "definitive" clinical data.  Bloomberg.com reports that a quarter of biotech companies currently fall into this category.

Bankruptcies have in the past been rare in the biotech world.  Troubled biotech companies have historically been acquired or have entered into licensing and other types of deals to survive.  However, the scope of this particular financial crisis is making bankruptcy filings more likely for biotech companies, since no one is available to bail them out from their current financial situation. 

Bloomberg.com reports on the reasons for this new biotech reality as follows:

The amount raised this year by biotechnology companies fell by $9.7 billion through September, or 54 percent, compared with the same period in 2007. . .  Biotechnology companies in the U.S. are raising less cash than they have in a decade. . . .Financing fell to $8.2 billion through September, from $17.9 billion last year. Venture capital funding fell 16 percent, to $2.9 billion. . . .

So what can biotechs in this situation do to survive?

Well, if they are lucky, they will be acquired by a pharmaceutical company.  Otherwise, they can try to just go into hibernation until the economy is better–a strategy that many businesses out there will likewise be doing.

The biotech community can only hope that this will be a short-lived crisis.  But isn’t that what we all are hoping for right now?

The biotech industry is beginning to assess what the impact of the new Obama administration is likely to mean for individual biotech companies.

A key concern for the industry is the likely financial implications of the Obama presidency on biotech companies, according to an article by SFGate. 

What financial concerns are at issue?

While biotech companies are definitely concerned about the bad economy and the credit crisis, they are also  concerned about an anticipated push for cheaper drug prices, which could potentially have a very detrimental impact on biotech companies, since any such increase could negatively affect the profits that biotech companies could potentially achieve on their drugs and would perhaps impact companies’ valuations as well.

Another concern for the industry is what will happen to the Food and Drug Administration under an Obama presidency, accoding to the SFGate.  During the Bush Administration, Congress criticized the Administration for how the Food and Rug Administration was run–in particular, they viewed it to be "underfunded" and "ineffective." As Adam Feuerstein of the Street.com reported: "The agency is in turmoil. Morale is low, resources are scarce and too many drug approvals have been delayed at best, or worst, have become politicized."  President-Elect Obama will presumably sink some money into the organization and try to take it in a new direction, which he may begin by choosing new leadership.  According to SFGate and  Feuerstein, a few of the names being considered include: Dr. Steven Nissen, a cardiologist for the Cleveland Clinic;  Dr. Scott Gottlieb, who worked directly under Mark McClellan when he was FDA commissioner; and Janet Woodcock, a veteran agency official who is the favored choice of drug manufacturers.

One highly anticipated change by the new administration is the likely adoption of a new view on stem cell research, reported Yahoo News, which reported that  Obama’s Transition Chief John Podesta indicated this weekend that Obama is currently reviewing President Bush’s executive order on stem cell research and may reverse that order fairly quickly.

As for other changes that might be in the works which would affect the industry, the Patent Baristas have provided an extended list of potential changes that we may see under the new administration, including but not limited to doubling federal funding for basic research over the next ten years, making the research and development tax credit permanent, and reforming the Patent and Trademark Office.

All in all, it seems clear that the new administration will bring "change" to the biotech industry; however, the jury is still out as to whether any such "change" will be for the better or for the worse.   The industry is hoping–like the majority of Americans that voted for Obama on election day–that the "change" Obama will bring will be for the better.

The recent plunge in the stock market is not just affecting the investments of the average investor–it is apparently also affecting the investment portfolios of some biotech and pharmaceutical companies such as Genentech, reported the San Francisco Business Times.

According to the San Francisco Business Times, Genentech held preferred stock in Fannie Mae, Freddie Mac, and Lehman Brothers Holdings, and had to take a $67 million third quarter charge for these investments. Genentech’s investment income for the year will reportedly be 50% of what it was in 2007, which was $197 million.

The San Francisco Business Times reports that other biotech and pharmaceutical companies which have been affected by investment losses include Biogen Idec. Inc. and Lexicon Pharmaceuticals, Inc.

While most in the industry would expect that biotech stock prices would be affected by a plunging stock market, it may very well come as a surprise to many to discover that any of these biotech and pharmaceutical companies are so heavily invested in the market themselves.  The San Francisco Business Times article explains that cash-rich companies like Genentech are invested largely in short-term investments due to the high cost of drug development and the need to manage all the cash that is required for the drug development effort.

Upon reading this article, the question comes to mind: how, if at all, will the drop in Genentech’s investment portfolio affect Roche’s acquisition talks with Genentech?  Could a drop in cash on hand could make a new acquisition offer more attractive to Genentech?

In my opinion, the industry expectation is that there will at some point be a Roche acquisition of Genentech, so perhaps this market downturn will not have much of an impact on any deal.  At the same time, it seems likely that Genentech’s investment losses will have some impact on how the talks progress, as a 50% portfolio loss is certainly not inconsequential to any investor–even Genentech.

The IRS has launched an effort to review universities’ tech transfer office activities, reported Biotech Transfer Week.

The IRS began mailing out compliance questionnaires last week to four hundred (400) colleges and universities.  According to the IRS website, these compliance questionnaires will explore the following:

• report revenues and expenses from taxable trade or business activities on Form 990-T, Exempt Organization Business Income Tax Return;
• classify activities as exempt or taxable activities;
• calculate and report income on losses on Form 990-T;
• allocate revenues and expenses between exempt and taxable activities;
• invest and use endowment funds; and
• determine types and amounts of executive compensation.

Biotech Transfer Week reported on the IRS review as follows:

It seems apparent that the IRS believes that it is currently losing taxable revenue from technology transfer activities that is going unreported by universities around the country, and that perhaps all universities with a technology transfer office–whether they received a questionnaire or not– would be wise to conduct their own review in parallel to the IRS review, in order to determine what, if any, mistakes in reporting are currently being made by their institutions.

Of course, given the fact universities are typically nonprofit organizations, you might wonder what kind of taxable income exactly could arise at a university.  The IRS website explains this dichotomy as follows:

Even though an organization is recognized as tax exempt, it still may be liable for tax on its unrelated business income. Unrelated business income is income from a trade or business, regularly carried on, that is not substantially related to the charitable, educational, or other purpose that is the basis of the organization’s exemption. An exempt organization that has $1,000 or more or gross income from an unrelated business must file Form 990-T. Form 990-T. . . .

The IRS defines “unrelated business income” as follows:

For most organizations, an activity is an unrelated business (and subject to unrelated business income tax) if it meets three requirements:

• It is a trade or business,
• It is regularly carried on, and
• it is not substantially related to furthering the exempt purpose of the organization.

IRS Publication 598 explains the issue of tax on the unrelated business income of tax exempt institutions.

It will be interesting to watch how the IRS review of technology transfer offices pans out.  As we have previously reported on the California Biotech Law Blog, technology transfer offices often generate tremendous revenue for universities.  Apparently the IRS has been watching the growth of technology transfer offices around the country and wants a larger piece of the action.

The California Biotech Law Blog  will be following this issue as it develops and will keep our blog readers posted on those developments.

Both Roche and Genentech are continuing to remain silent on the status of the Roche-Genentech acquisition talks.  For now, employees and investors are left hanging as Genentech’s future continues to be uncertain.

Analysts apparently had hoped to get an update this week during Genentech’s earnings call about the status of the acquisition,  but they were unsuccessful, according to Seeking Alpha’s Mike Huckman.

Huckman wrote regarding the earnings call as follows:

[Roche officials would] only say they remain “totally committed” to the Genentech offer and wouldn’t make any comments or answer any questions about a “negotiated agreement” or its ability to finance the deal. . . .

So many analysts, investors and reporters dialed into the Roche call yesterday morning after it had started that one company official later repeated for the benefit of the latecomers that it wasn’t going to show its hand. Some analysts and investors were banking on a new treatment to force Roche to come back with a much higher offer, but it didn’t pan out Sunday night when Genentech announced the test of Avastin as an add-on drug for colon cancer will continue through the end.

Analysts were similarly unsuccessful in the case of the Genentech earnings call earlier this month, although the subject of the acquisition was at least raised there.  Following the Genentech call, at least one analyst, Eric Schmidt of Cowen and Co., still decided to upgrade Genentech shares from an equivalent of “Buy” to a “Hold.” Schmidt stated in the Genentech call as follows:

While management refused to discuss the Roche situation, we believe a deal is inevitable, and that an agreement would be facilitated by a recovery in the credit markets. We believe large-cap investors seeking economically resilient growth at a reasonable valuation will find Genentech shares attractive.

So, the question remains: will they or won’t they do the deal?

I personally agree with Schmidt that the deal is going to eventually happen–that Roche will come up with a share price that will make it worth Genentech’s while to sell.  It is not so much a question of if but when. . . .

The California Biotech Law Blog will continue to keep you posted as any new developments regarding the deal emerge.

Medical identity theft is on the rise, according to a report by the Chicago Tribune.

What exactly is medical identity theft?  Well, it is when someone steals your identity in order to either submit fraudulent claims or to obtain otherwise unaffordable medical care. 

The Chicago Tribune reported on this issue as follows:

In many cases the crimes are not discovered until a collection agency begins calling. Often, the thief will arrange to have the insurers’ billing documents sent to a false address. . .It’s common for thieves to create fraudulent driver’s licenses and insurance cards, which are all most medical centers ask for before they provide care. . . .

Even if the victim does not end up paying the bill, he will have to deal with false information in his medical and health insurance records.

Having someone else’s information mixed in your medical record could compromise your own care. What if the test results or physical findings are those of someone else, but doctors use them when you have a medical emergency?

So, given the increasing prevalence of identity theft in the medical area, what can Americans do to protect their information?  Well, the most obvious ways to protect ourselves would be to take better care of our insurance cards and destroy all medical data before disposing of health-related records.  And, of course, we can check our credit reports frequently to ensure that no collections activity has been taken against us by medical clinics, etc.   Beyond these obvious courses of action, however, it is a bit unclear what can be done to stop medical identity theft, since most of us are not even privy to our health records, which are often scattered all over a number of healthcare facilities.  Given the fact that many of these records are not even stored in a centralized database to date, it seems highly unlikely that we are going to be able to start monitoring our health records in the near future in the same way that we currently monitor our FICO scores. 

All in all, the issue definitely raises cause for concern.   In my opinion, privacy experts need to start grappling with these issues now before they can become a more significant problem down the road..

Genentech has launched an employee retention program aimed at retaining employees following the recent bid by Roche to acquire Genentech.

The Mercury News reported that Genentech’s plan is to spend $371 million in cash on retaining its personnel, which the company had planned to spend instead on its employees in a previously established stock option program.  The prevailing wisdom is that spending the money now on cash will be much more attractive than spending the money on stock options to be cashed out in the future.

Will this program help to discourage the departures of personnel who would otherwise choose to leave the company, in light of the uncertainty now about its future?

In all likelihood, the answer to this question is “no.”  Given the current state of the economy and the collapse of the housing market, the average Genentech employee will probably be concerned enough about his or her future to start looking for a new salaried position.  Also, many of Genentech’s employees are already well enough off as a result of the company’s successes over the years to not be swayed by a retention package.  Moreover, the conventional wisdom is that Roche will ultimately be successful in its bid to acquire Genentech, which means that many employee jobs may prove to be on the cutting block wiithin the very near future.

Still, you have to admire Genentech’s attempts to slow down the flow of departing employees out the  company doors.  I feel confident that most observers would agree that spending $371 million on retaining employees in the face of a likely acquisition is an impressive effort to ensure that the company can continue to operate, regardless of what happens with the acquisition effort.  And, of course, such an effort may have the other important effect of maintaining the company’s value as the acquisition talks move forward.  The California Biotech Blog will continue to watch this issue as it unfolds and will report on whether or not these efforts by Genentech prove to be successful.

Following up on our previous postings regarding California’s issuance of cease and desist letters to thirteen (13) genetic testing companies doing business in California, two DNA testing companies are now set to resume business in California, after having received new licenses to do business in the state.

According to The Mercury News, the California Department of Health has issued licenses to Navigenics of Redwood City and 23andMe of Mountain View, which will enable them to resume business operations.  Both companies had always argued that they were lawfully doing business in the state, and the fact that the state issued them both licenses seems to be a validation of their positions.

International Herald Tribune reported on the development as follows:

The companies had argued that they were not offering medical testing but rather personal genetic information services, and that consumers had a right to information from their own DNA. The companies also said they did not need a license because the actual testing of the DNA samples was being done by outside laboratories that did have licenses.

But the two companies do their own interpretation of the raw genetic data. Now, after reviewing the procedures used by the companies, the state is satisfied that the companies’ interpretation is based on the scientific literature. . . . the companies also satisfied the requirement for a doctor to be involved.

Navigenics already was paying a physician to review customer orders and now it appears that 23andMe might be doing something similar.

There is no word yet as to whether or not the other eleven (11) genetic testing companies, which also received cease and desist letters, will likewise receive licenses to resume operations in the state of California.  Today’s move should at the very least be viewed as encouraging by the similarly affected companies.  The action should also help to calm fears as to the state’s ulterior motives in attempting to regulate genetic testing companies.

Having said this, direct-to-consumer genetic testing has been virtually non-existent in the state of California for the past two months, and it is very likely that all of the genetic testing  companies have suffered at least some financial consequences as a result.  We have yet to see what the long-term impact of this incident will be on all of the affected businesses.

For now, however, concerned Californians can rest easy knowing that direct-to-consumer genetic testing will live to see another day in this state.