GENE WARFARE : Battle Over Patents Held by Biotechnology Companies Heats Up as the Stakes Get Higher

The phone call that changed Thomas Glaze’s life came from his attorney in September, 1986.

Monoclonal Antibodies, Glaze’s biotechnology company in Mountain View, Calif., had unexpectedly lost a patent case at the U.S. Court of Appeals in Washington. A rival biotech company, Hybritech, sued Monoclonal Antibodies for infringing a Hybritech patent by selling biotechnology-produced diagnostic kits used in pregnancy tests.

The tests rely on a “sandwich” of antibodies--the body’s disease fighters--which latch onto telltale molecules in blood or urine samples and can detect everything from cancer to hepatitis.

Glaze’s attorneys argued that the tests were a commonplace technology that had been on the market for years, and all Monoclonal Antibodies or Hybritech was doing differently was tinkering with how to produce the antibodies.

Because patents are supposed to reward only truly innovative discoveries, Glaze figured, Hybritech never deserved a patent in the first place.

A U.S. District judge in San Francisco agreed and invalidated Hybritech’s patent. But on the appeal, Hybritech won it back. “Disbelief mixed with outrage,” is what Glaze remembers feeling when his attorney called.

Losing that case was like taking a bullet to the body. Monoclonal Antibodies, which was doing about $7 million in sales a year, would later be prohibited from selling 80% of its products because they infringed on Hybritech’s patent.

Losses piled up, investors worried about Monoclonal Antibodies going bankrupt, and Glaze laid off 25% of his workers. He finally agreed to pay Hybritech $2.25 million in damages, plus a 15% royalty on every product his company sells that infringes Hybritech’s patent. “Highway robbery,” Glaze calls it.

Justice is the idea preferred by Douglas E. Olson, a Los Angeles patent attorney whose firm, Lyon & Lyon, won the patent case for Hybritech. Olson remembers his first visit to Monoclonal Antibodies.

“It was one of the typical, yuppie, Silicon Valley companies, with everybody looking very prosperous,” Olson said. “And after we had won the appeal . . . the change was dramatic. We walked into the company. None of the furniture was left. It was in wintertime, and they had turned off the heat. People were walking about in ski jackets and stocking hats.”

Glaze doesn’t remember it that way and says some of his workers had been transferred to another plant. But Olson got the mood right, Glaze says. “We got screwed and everybody’s faces showed it.” Attorney Olson, Glaze says, “doesn’t have anything to be proud of.”

Welcome to the biotechnology patent demolition derby. About $1 billion worth of biotechnology-produced drugs and medical tests will be sold this year, from human insulin and growth hormones that treat dwarfism in children to blood clot dissolvers that can save the lives of heart attack victims.

With nearly 100 biotech drugs and vaccines in advanced stages of development, some financial analysts optimistically project annual sales of all biotechnology drugs and medical products to hit $5 billion by 1993 and $10 billion a decade from now.

Still unclear, however, is whether a victory in the laboratory will translate into victory in the courtroom. “It will be 10 years before enough patent cases come down the pike” to establish trends in biotechnology law, said Irving Kayton, professor of patent law at George Mason University School of Law in Arlington, Va.

In the meantime, biotech companies face “abject, unpredictable terror,” he said. “Today in a patent case in this technology, you’re spinning the roulette wheel. The premium is on who has the most persuasive lawyers. Pray you get a judge with at least a dim perception of the case. Most do not even have a dim perception.”

There are about 10,000 patent lawyers in the country, but only about 250 have a working knowledge of biotechnology, Kayton reckons. As dozens of biotechnology patent cases move through the legal pipeline, that small pool of lawyers, along with some federal judges, will establish precedents that will help decide the ultimate winners and losers in a multibillion-dollar industry.

Legal Questions Raised

Biotechnology is the science of re-splicing genes that contain the hereditary instructions for life. The key molecule for these blueprints is deoxyribonucleic acid, or DNA, which is found in most living things from human beings and elephants to blades of grass.

In the past 15 years, scientists have figured out how to splice together bits of DNA from different organisms--the gene for insulin, for example, which is then inserted into a bacterium. By doing that, the “engineered” cells keep copying, or cloning, substances that can be collected, processed and used as therapeutic drugs.

Because biotech drugs are often copies of proteins found in the body, they raise several legal questions. Some companies hold patents on purified natural forms of the proteins found in tiny amounts in the body, even though not enough of those can be produced to make them commercially available for drug therapy. Other companies hold patents on the gene-spliced versions that can produced in commercial quantity. Which patent takes precedence? And how broad should biotech patents be?

Major patent squabbles are relatively rare in the $50-billion pharmaceutical industry. One reason is that conventional pharmaceutical drugs stem from chemical compounds whose scientific properties and patents “have been tested and shaken down over 40 or 50 years. The rules of the game have been established,” says Gabriel Schmergel, chief executive with Genetics Institute, a Cambridge, Mass., biotech company.

There aren’t any such rules in biotech. James D. Watson, a major figure in the development of biotechnology, says biotech companies face “a terrible uncertainty” because of patent lawsuits. They “can’t make sensible business decisions” because of that uncertainty,” he added. Watson, along with Francis Crick, discovered the twisting molecular structure of DNA in 1953 and later shared a Nobel Prize for their work.

Stringent Standards

Watson says the U.S. Patent Office isn’t helping to reduce the confusion. About 6,900 biotech patent applications have piled up at the Patent Office, and, he says, thus far the government has granted some bewildering and undeserved patents.

The first American patent law was written in 1790 by sometime inventor Thomas Jefferson. Today, a patent grants a 17-year exclusive ownership and any economic benefits from an invention if it meets various standards. For example, the patent must be for a discovery that is new, useful and not obvious to a person of ordinary skill in the field.

Most of the 1,000 or so biotech companies are tiny, struggling enterprises in the development stage, and most are losing money. A shakeout is inevitable. Meanwhile, some major pharmaceutical companies are buying their way into the biotech industry--Eli Lilly, for instance, owns Hybritech.

For small biotech companies, the first line of defense for survival remains patents. “Patent laws prominently exist to protect Davids so they can grow to be Goliaths,” says Thomas D. Kiley, former general counsel at Genentech, the largest U.S. biotech company.

But taking a patent fight to a final decision can be costly. It takes years for a case to move through U.S. District Court and on to the U.S. Court of Appeals in Washington. Monoclonal Antibodies spent nearly $2 million in legal fees unsuccessfully fighting Hybritech.

Or consider Genentech, based in San Francisco, which has 13 patent disputes brewing on three continents. The company employs six in-house patent attorneys and uses eight outside law firms on patent cases.

Genentech is mum on its legal expenses, but an attorney with a rival biotech company estimates Genentech’s cost in 1988 for patent disputes and patent filings at $10 million, a hefty sum given Genentech’s likely $300 million in sales this year.

One possible landmark biotech lawsuit centers on who owns the rights to a likely blockbuster anti-anemia drug called erythropoietin (EPO). The bitter combatants are Amgen, a Thousand Oaks biotech company, and Genetics Institute.

Amgen is also suing Genetics Institute’s partner, Chugai Pharmaceutical Co., a $1-billion Japanese pharmaceutical company that has been licensed by Genetics Institute to sell EPO in the United States. Four patent infringement lawsuits have been filed, and the U.S. International Trade Commission is reviewing the case as well.

Lawsuit Called Blackmail

Why all this legal squabbling? Sales for EPO are expected to reach $1 billion a year worldwide. EPO is a hormone that circulates in the blood stream and triggers production of red blood cells. But the drug exists only in small concentrations in the body, and, until biotechnology, not enough EPO could be collected for use as a therapeutic drug.

The Amgen-Genetics Institute case figures to answer some important legal questions because both companies have patents relating to EPO. Amgen’s covers a gene-spliced method that produces, for the first time, enough EPO for commercial use. Genetics Institute’s patent covers a purified, naturally occurring type of EPO found in urine, but not enough of the drug can be produced this way for commercial use. Genetics Institute essentially argues that no matter how the drug is produced, it falls under the coverage of its patent.

“Blackmail” is what Amgen Chairman George Rathmann calls Genetic Institute’s lawsuit. “That’s totally uncalled for,” answers Schmergel, G.I.’s chief executive.

EPO is not a new substance; it was discovered by scientists in 1906. The problem has been how to get hold of enough of it. In 1983 Amgen’s scientist, Fu-Kuen Lin, figured out how to isolate the EPO gene. By some clever gene-splicing with hamster cells, he was able to clone it in large amounts.

Lin, on behalf of Amgen, was awarded a patent on his gene-splicing technique in October, 1987. Genetics Institute, meanwhile, came up with a way to purify EPO that can be separated from urine. More than a year after Amgen, it, too, filed for a patent.

Genetics Institute, however, won its EPO patent first, in June, 1987, apparently because the Patent Office was processing biotech patents in two separate groups. Genetics Institute’s scientists also figured out how to manufacture EPO through gene-splicing, but they never filed a patent application on that technique. And so, the legal fireworks began.

In the race to market EPO in the United States, Amgen looks to be a year ahead. Financial analysts expect Amgen, who filed for Food and Drug Administration approval to sell EPO last year, to get the go-ahead within a few months. Chugai filed for approval only in September.

To complete its required human clinical tests, Chugai imported EPO that it manufactured in Japan. Amgen argues that if Chugai made EPO using this gene-spliced technology in the United States, it would violate Amgen’s patent. So Amgen has asked the ITC to block Chugai’s imports of EPO and, in effect, uphold Amgen’s patent. The ITC must rule on the case by February.

May Help Against AIDS

One of the few things Amgen and Genetics Institute agree on is that EPO is worth fighting for. Amgen’s human clinical tests with EPO won rave reviews from the New England Journal of Medicine.

Patients suffering from kidney disease undergo frequent kidney dialysis. Their kidneys don’t produce enough oxygen-carrying red blood cells, so the patients are chronically anemic, requiring frequent and expensive blood transfusions. But, when given EPO, the patients regain much of their lost zip and don’t need blood transfusions.

EPO also looks as if it could help others with anemia, including patients undergoing chemotherapy and those with rheumatoid arthritis. In addition, EPO is being tested as an adjunct to AZT, a drug used to inhibit the acquired immune deficiency syndrome virus that, as a side effect, causes anemia.

The Amgen-Genetics Institute legal fight touches raw nerves in two men who left secure jobs with huge medical companies to start biotechnology companies. Schmergel left Baxter Travenol after 14 years to help start Genetics Institute in 1981. Rathmann had been in charge of research and development with Abbott Laboratories when he quit in 1980 to help organize Amgen.

Rathmann, usually an affable sort, is dogged when he talks about EPO. He notes that Amgen spent $50 million developing EPO, that it cloned EPO first, and that the only procedure that produces enough EPO to treat human beings incorporates the teachings of Amgen’s patent.

“We obviously have a very possessive attitude,” Rathmann said. He dismisses Genetics Institute’s EPO patent as having “no . . . benefit for society.”

Nonetheless, Genetics Institute won the first legal skirmish last February when a federal judge in Boston decided that Amgen infringed Genetics Institute’s patent.

But that ruling isn’t final. The first of the EPO lawsuits won’t go to trial until late 1989, and thus far Genetics Institute made it plain that it might be willing to settle out of court, presumably for a deal where both companies could sell EPO.

“Being prudent businessmen, we are willing to sit down and discuss things,” Schmergel said.

But Rathmann refuses: “People fight very hard when they have a lot to lose, like us.”

Watson, who knows Rathmann and is familiar with the EPO dispute, said: “He’s just mad. He’s confusing his anger with good business sense.”

Indeed, Amgen company’s stock has a total market value of about $525 million, making it the second most valuable biotech company after Genentech, largely due to the anticipated bounty from EPO. Rathmann acknowledges that financial analysts have been pressuring him to settle the case.

Great Expectations

Another possible landmark case centers on tissue plasminogen activator, or TPA, a drug sold by Genentech that has saved the lives of some heart attack victims by dissolving blood clots. Genentech’s scientists were the first to clone TPA, a protein produced in the body. Last November, the FDA approved Genentech’s sale of the drug.

This year, Genentech’s sales of TPA should hit $180 million. Unfortunately, Wall Street expected $400 million, and Genentech executives didn’t discourage that idea. The stock has since taken a beating, falling from about $47 to below $16. One problem is that TPA costs $2,200 per dose, 10 times the price of other, older drug therapies.

Still, TPA is the biggest biotechnology drug so far, and, with several companies hurrying to get their own versions of TPA to market, Genentech is fighting patent battles with would-be rivals in the United States, Britain and Japan.

Unfortunately for Genentech, it lost the first two rounds in Britain. In 1986, Genentech was awarded a TPA patent in Britain on its gene-spliced version of the drug. Its patent was promptly challenged by Wellcome PLC, a $1.7-billion London-based pharmaceutical company that is developing its own version of TPA. Wellcome claimed, among other things, that Genentech’s patent was so broad it would prevent other gene-spliced versions of TPA from being sold.

In July, 1987, Britain’s High Court of Justice revoked Genentech’s patent, ruling that Genentech’s research was not an inspired discovery but more like the laboratory equivalent of grunt work. It noted that five other laboratory teams were working on similar projects. Last month a British appeals court upheld the lower court verdict. Genentech hasn’t decided whether to appeal.

A similar legal joust is under way on this side of the Atlantic. Wellcome hopes to file next year for American approval to sell TPA, so Genentech is suing Wellcome’s American subsidiary for patent infringement. Wellcome has countered that Genentech’s patents are invalid.

Genentech may bring more weight to the American courts because it has two TPA patents in this country, one on a purified, naturally occurring version of TPA, another on a gene-spliced version. “Genentech, I think, has a pretty good case,” said Albert Halluin, chief patent counsel for Cetus, an Emeryville, Calif. biotech company.

‘Major Revolution’

Not surprisingly, biotech has the makings of a boom industry for patent attorneys. “The business is there, the people are not,” law professor Kayton said. Traditionally, patent attorneys had backgrounds in engineering or the physical sciences, not molecular biology. To overcome the talent shortage, Pennie & Edmonds, a New York law firm, is sending scientists to law school, hoping they blossom into skilled biotech patent attorneys.

One of the first patent attorneys to latch onto biotech was Kiley. In 1976, when Genentech founder Robert Swanson was the company’s only employee, he visited Kiley for some patent advice. Kiley soon became absorbed in the subject.

Kiley rates biotechnology as the third major technological development in the second half of this century, after nuclear power and computers. “For the first time in my life, a piece of the law has intersected a major revolution in technology,” he said.

Biotech and patent law make a snug fit. Discovering a new biotech drug and then satisfying all the FDA’s requirements is a slower, more regulated and costlier process than, say, developing a new personal computer. Genentech spent $200 million developing and bringing TPA to market, and Kiley figures that patent protection is a necessary reward to ensure a decent return on such a big up-front investment.

As biotech patent cases move through the courts, a pattern of verdicts is likely to emerge, and, with it, some lawyers expect the number of lawsuits to subside.

It wouldn’t hurt, Kiley says, for a biotech patent case to match the scope of Polaroid versus Kodak. In that 1985 patent case, Polaroid won decisively, knocking Kodak out of the instant camera market. Another trial to determine damages hasn’t begun, but analysts figure Kodak will eventually have to pay Polaroid between $1 billion and $2 billion.

A similar biotech case, Kiley said, “would send a message to non-lawyer chief executives that there are real penalties for predatory actions.”

In the meantime, the path is to litigate and hope. Amgen’s Rathmann remains convinced that justice will do him right. Otherwise, “those of us who have invested the best parts of our career have made a mistake. We don’t like to think that is our destiny,” he said.

But Glaze, an early loser in the biotech patent wars, says: “Counting on winning because you’re right is idealistic, but not realistic.”