Emerging Growth In The Biotechnology And Pharmaceutical Industries

Monday, March 1, 2004 - 01:00
Michael Heller
Mark DeLuca
Mark Gallant
John Washlick

Editor: What is the current climate in the biotech/pharma industries as far as capital?

Over the last year, we have seen more deal flow and venture funding. I attribute this to more optimism in the public markets, venture funds wanting to get off the sidelines as they have been for a couple years, recent successful closings on capital raises for venture funds and the emergence of a number of new life science funds.

Editor: How does the IPO market affect life sciences?

The IPO market is definitely opening up. A number of life science IPO's have been issued in past few months. More are in the pipeline, including some on track for later this year. Of three IPO's I've recently seen, one is up, one is down and one is flat, but at least they came out, and all the deals aren't getting killed. There's reason to be optimistic as far as the IPO market in life sciences, especially in the New York, Philadelphia and Princeton areas - all hotbeds for pharmaceutical and life sciences companies. The venture capital community wants to be out there funding companies in advance of activity in the market, which is good news on the life science side, which has been dry for a lengthy period of time.

Editor: How are biotech/pharmaceutical companies securing funding for R&D?

A variety of capital sources are out there. For example, the Ben Franklin fund, monies that have grown from a trust Ben Franklin established in 1790, are available through grant application to fuel new enterprises. Others are state established funds like BioAdvance and the Biotechnology Greenhouse of Southeastern Pennsylvania, a $20 million fund that grew out of tobacco money distributed across the state. This fund, and others like it, was designed to help biomedical entrepreneurs move commercially promising therapeutics, medical devices and discovery technologies from the laboratory to the open market. Federal grants are another funding option.

Editor: What do VC firms look for when they provide funding?

They are really looking for the same thing regardless of industry. That is solid management, great patentable technology and a company that has the ability to generate significant profits.

Editor: Please identify a few important issues that in-house counsel should consider in this environment.

The most important area of due diligence in the life science fields for venture capital is the technology - making sure the patents are appropriately filed and all possible patents are obtained. Depending on the type of company and the maturity of its R&D, revenue producing contracts should be secured and in full force.

Editor: When is the best time to begin the funding process?

Funding is really a product of capital. The key is to anticipate your need for capital down the road. For example, if a company anticipates running out of capital in a year, the fund raising process should be started immediately. Several years back, it was not out of the ordinary for it to take less than 60 days to secure funding. Now, from start to finish, it can take between four and nine months. So, it's a good idea to get a head start - and not expect to close a deal in a couple of months.

Editor: What major challenges do life science manufacturers face today?

A number of decisions over the last couple of years have affected issues of patentability, scope of rights and enforceability, particularly with respect to life sciences inventions. For example, the patent office is applying stricter standards when examining broad claims, in some cases requiring much more data than previously required. Claims found by the patent office to be too broad must be written more narrowly in order to have a patent granted. Under another recent decision, not only does the inventor end up with a patent having narrower claims more so than before, the act of narrowing the claims during prosecution surrenders significant rights when asserting that the patent has been infringed. As a result of these developments, in trying to obtain the broadest possible claim and protection of the invention, the patent applicants must choose between two strategies which each carry with them a degree of risk that did not previously exist. If the invention is claimed too broadly, rights must be surrendered by narrowing the claims in order obtain a patent, resulting in a patent that cannot be successfully used to exclude others who under the previous law would be excluded. On the other hand, if the invention is claimed too narrowly, the inventor may not get the patent rights for the full scope of their invention for which they are entitled, perhaps making it easier for someone to avoid infringement while still making use of the invention.

One of the greatest challenges facing the life sciences' industry is the drop in earnings upon the expiration of patents and entry on the market of generic drugs. Companies that market patented drugs expend a great deal of effort to sustain patent protection for a product as long as possible in order to preserve market exclusivity. In addition to using patent term extension provisions allowing companies to reclaim some of the patent term essentially lost during the regulatory approval process, companies are continually seeking creative strategies to maintain patent protection. The most effective ways to do so involve ongoing efforts to continually identify and protect new innovations.

Editor: What does a patent attorney contribute to this process?

A good patent attorney helps identify and protect all aspects of an invention as broadly as possible. To do so, being able to converse with the inventors in their technical discipline is critical. This includes being familiar with the current climate of their particular industry and to know its latest trends. In addition, a thorough understanding of the field, with respect to both the compositions to be patented as well as their uses, allows a patent attorney to fully capture the inventor's entitled rights. This will enable the company to obtain the full benefit of the legal rights. Different clients have different needs and the patent attorney should recognize those needs and serve the client accordingly. For a company proceeding towards an IPO, or otherwise endeavoring to raise capital, the importance of establishing a strong and credible patent position can't be underestimated. Taking proactive steps to try to expedite the examination of a patent case is part of that overall strategy. Assisting clients in developing their global patent strategy is another important role. For all clients in the life science industry, patents that cover products and their uses are among a company's most valuable assets. Building a strong patent estate around products is a fundamental role of the patent attorney. With the need to maintain patent protection on products for as long as possible in order to preserve market exclusivity, patent attorneys work throughout the process from drug discovery through product development and marketing to ensure that the discoveries and inventions made during the process are protected.

Editor: What tactics can be put in place to ensure protection?

Besides a detailed understanding of patent law and the patent process, a patent attorney must also understand the relevant industry and be technically proficient in every aspect of the invention technology. By collaborating closely with the inventor, and fully understanding the invention, the patent attorney can identify all aspects of the invention and appreciate them in their broadest applications, with an eye toward building a patent estate consistent with a company's business plan. Making a bridge between the law, business and science ensures that the client will be in the best possible position to successfully achieve their business goals by obtaining strong patents to protect their innovations in a way that provides them with maximum competitive benefits available under the law.

Editor: What can be done after a patent expires?

Once a patent expires, it can no longer be used to exclude others from exploiting the claimed invention. To avoid losing market exclusivity, when possible, a product can be protected by multiple patents, which may have different expiration dates. Thus, patent coverage for a product may extend beyond the term of a single patent.

Editor: What are best practices to keep trade secrets internal?

Some trade secrets never get let out of the bag - the formula for Coca-Cola and the recipe for Kentucky Fried Chicken are two notable examples. But most trade secrets cannot be kept completely secret and numerous people may have access to them. In such circumstances, the company must take reasonable steps to prevent it from being made public including requiring employees to sign confidentiality agreements.

Editor: Any other hot industry issues you'd like to mention?

The U.S. Patent Office continues to suffer from high turnover, resulting in a shortage of experienced examiners and too many novice examiners. As you might expect, experienced examiners are more efficient and generally provide thorough examinations that result in stronger patents.

On the positive side, patent attorneys much more readily appreciate the need for global strategies for protecting inventions and are in much better positions to assist clients in assessing their options and developing their international positions. By bringing thoughtful foreign filing strategies to the table, they can save the client money and operate within existing financial constraints while making sure that critical patent rights are secured to provide the client with protection, achieving the best competitive position available.

Editor: What are the top regulatory and privacy issues facing the biotech industry?

The Health Insurance and Portability and Accountability Act (HIPAA) has already had a profound effect on the ability of biotech companies to access the health information necessary to facilitate new R&D projects. The privacy rules under HIPAA were not intended to impede clinical research but, rather, to require patient authorization, notice and some reasonable assurance of privacy. Research has been impacted as many Independent Review Boards (IRB) and investigators have struggled to comply with the complexity of the new privacy rules. It used to be that representatives of companies involved with medical devices and products would have direct access to patients, by observing in surgery, talking to the patients with their physicians, etc. HIPAA no longer permits that kind of contact without the patients' written authorization. Without that direct access, the R&D process may be extended, taking more time and more money to fund, hampering the clinical evaluation of a new medical product or treatment.

Editor: What about the new Medicare Act's impact on life sciences?

On the pharmaceutical side, the new Medicare Act, for the first time, permits the reimbursement, through a pharmacy benefits manager, for demonstration projects. This adds a funding source that will aid in recruiting for clinical trials, with the changes in the Medicare drug plan to be phased in between 2006-2010.

On the other hand, the change in Medicare regulations dramatically complicates the reimbursement for drugs. In general, the government has been extremely focused on pharmacy profit levels, and the regulatory scrutiny is getting more complicated and stricter.

Editor: Some physician practice groups are spinning off R&D ventures, either doing the research in-house or subbing it out. What legal concern does this raise?

All clinical trials are subject to the protocols established by IRBs and subject to restrictive federal regulations dealing with human research. Also, prior to September 2000, Medicare strictly prohibited reimbursement for medical services that were provided to a Medicare beneficiary participating in a clinical trial. Former President Clinton changed all this when he issued an Executive Memorandum to the Department of Health and Human Services directing Medicare to reimburse certain routine patient costs for qualifying clinical trials. While this new law creates a new source of funding, physicians now must adhere to strict billing protocols so they do not run afoul of the Federal Civil False Claims Act. For example, if a pharmaceutical company is sponsoring a research trial and the physician is billing Medicare for certain routine costs that may have been included in the payment from the pharmaceutical company, the physician could be billing Medicare for services already paid for and thereby subject to a civil false claims charge. The federal laws, including FDA and Medicare, are mine fields that have to be carefully navigated.

Please email the interviewees at mheller@cozen.com, mdeluca@cozen.com, mgallant@cozen.com and jwashlick@cozen.com with questions about this interview.