Laws of uncertainty

By David Binning
Tuesday, 19 November, 2002


While scientific discovery is often regarded as absolute, the rules of law seem much more fluid, governed by a mish-mash of regulations and precedents across myriad jurisdictions ensuring that even success in gaining patents or defending intellectual property in court is no long-term guarantee in biotech.

"It's a lawyer's job to find uncertainty where there is none," says Karen Sinclair, patent attorney with Watermark, Australia's oldest patent and trademark attorney firm.

And while it seems a fair and reasonable principle for legal professionals to adopt, it is not one that scientists often fully appreciate or understand, she says. "Like no other industry or other before it, biotech has been based on intellectual property (IP). In this age of mass communications it is difficult to keep things secret, which means that measures must be taken to ensure that it is protected.

"Unfortunately scientists are usually the ones that find the process frustrating because they feel they are being sidetracked from truly blue sky work to satisfy patent attorneys."

Mervyn Jacobson, chief executive of ASX-listed company Genetic Technologies (GTG), spends a great deal of his time negotiating with organisations around the world that appear to be infringing on the company's patents for non-coding DNA. The non-coding DNA areas of the human HLA gene complex, previously known as 'junk' DNA, had until recently been overlooked by biotech companies in the genetics space but are now, thanks to the patented discoveries made by Jacobson and his team, considered an essential part of the genetic make-up of not only humans but all living things.

"There is the normal scientific process first but once something comes out of the lab it goes to the legals, who are charged with understanding the standards and then playing the game," Jacobson says. "Most scientists have no idea about how patenting works." There has been a massive surge of interest in non-coding DNA as biotech companies look for commercial opportunities in the new area.

Many of these companies now find themselves in infringement of GTG's patents and GTG is currently in direct negotiations with at least 50 companies, which, in Jacobson's words, would "benefit greatly" from a licence, with a possible target-group numbering in the thousands. Thanks to the foresight of a few talented patent attorneys, GTG succeeded in gaining an extremely broad definition for its non-coding DNA patents after it initially restricted its own imagination to humans -- an important lesson for biotech groups, Jacobson believes.

"Often it's the things you don't expect to happen which are most important -- proving that something people say can't be done can be done," Jacobson says. "People, with our cooperation, developed things for everything from cattle to cats and plants to show that what was discovered in HLA was not the exception but the paradigm. "It was a very visionary patent attorney who recognised how to use the rules of the patent process to apply our work to all genes in all species."

Watermark's Sinclair warns, however, that broad claims carry their own risks. She emphasises that biotech groups must strive for the right balance between narrower claims -- which are quicker to prepare and often simpler to enforce -- versus very broad claims which, while they offer the possibility of broader coverage if properly planned, can also represent a serious drain on resources and even cause scientists to drop the ball -- a major disappointment for all concerned if it turns out that rivals are able to sidestep the patent.

"Most corporations would like as broad a protection as possible, but what they start drafting is not always commensurate with what can be actually proved. It's real Catch-22 for some groups," Sinclair says.

Patent problems

A classic example of patenting gone horribly wrong is the sorry tale of Nasdaq-listed genomics company Hyseq Pharmaceuticals. Hyseq was the biggest US IPO of 1997, possessing what was at the time a novel technique for DNA sequencing which allowed it to find rare genes much faster than any of its rivals. No doubt encouraged by the enthusiasm of its patent attorneys, Hyseq was swift to gain a large number of patents over full-length gene sequences. Unfortunately for Hyseq, though, since the success of the Human Genome Project (HGP), unless a gene is a recipe for a protein that can itself be used as a drug such patents are now worthless.

While pharmaceutical giant Amgen managed to get it right with its blockbuster drug Epogen, Hyseq has failed to produce any drugs and is now running out of money with its share price now at around one-seventieth of its previous high. Ironically, Hyseq chairman George Rathmann was the founding CEO of Amgen as well as rival pharmaceutical giant ICOS.

Equally tricky, according to Bill Pickering, partner at Blake Dawson Waldron patent services, is the process of licensing, which also demands that biotechs are represented by legal professionals who have a firm grasp on the technology. It is common, he says, for license agreements to have been written by a group of advisers who don't understand the technology, which invariably means that the terms of the original agreement don't serve the long-term interests of any of the parties. "It is not uncommon to see license agreements that have been around for a few years with overly broad terms used, leaving the door open for them to be challenged further down the track," Pickering says.

"I suppose it's really a question of both the licenser and licensee understanding the finer points as they relate to the bigger picture." It is especially important for smaller biotech companies to get a firm grip on the law as it relates to patenting and licensing agreements or other factors arising from due diligence or other kinds of industry interaction. In fact, many legal professionals now consider biotech as having the highest density of law-savvy executives and scientists of just about any industry.

One of Pickering's clients, listed Australian biotech group Peptech has seen its fair share of litigation as it sought to gain patents for its tumour necrosis factor (TNF) antibodies technique which has proved successful in treating diseases such as rheumatoid arthritis and Crohn's disease. Peptech was recently awarded the first of three patents by the US Patents Office and has succeeded in licensing its TNF technology to large pharmaceutical companies, including Johnson & Johnson and Abbot Laboratories. But the path wasn't so clear in Europe, where Peptech was forced to defend its patent claims, which, under the terms of the European Patents Office (EPO), remain open to objection for nine months. And US-based company Centacor last week announced that it had stopped paying European royalties to Peptech. The announcement related to the US company's arthritis drug - Remicade -- and caused Peptech's shares to drop dramatically, showing how changes in patenting and royalty agreements can affect a company.

Peptech has also recently fended off a legal challenge to its IP by an Adelaide-based biotech group and is now pursuing damages.Company managing director Stephen Kwik says his experiences in managing patenting and licensing issues has necessitated hiring dedicated staff to look after that side of the business. "I don't think we had a very dedicated patent section at first but now I employ a patent manager," Kwik says.

According to Dr Trevor Davies of Allens Arthur Robinson, one of the major challenges facing Australian biotech groups is finding the resources to ensure protection of their intellectual property in a rapidly growing global market. "When you develop new technology a patent is there to protect others from working your invention, but the problem for smaller biotech companies long term is whether they are going to be in a position to defend themselves," Davies says.

World court canvassed

Currently there is talk of a world court which would provide a simpler and fairer framework for individuals or smaller organisations to resolve disputes relating to IP, although most believe that the time, money and logistics required to do so ensure such a utopia is many years away. Until then the laws of the jungle will prevail."One thing that is certainly facing Australian biotech companies," Davies continues, "is trying to balance funding for protecting IP together with funding to grow."

The upshot of all this is that as litigation continues to bloom in biotech, companies are now having to face up to the reality that they must allocate adequate funds and form serious strategies to protect major innovations.

"What is important is the technology," Davies explains. "You must have a legal service provider understanding the technology -- that will ensure the best patent protection. If you understand the business you can also assist in predicting potential legal problems in the growth of that company."

As with many industries, there are several areas of law that biotech companies must be aware of but one where problems seem to flare up more frequently relates to that of material transfer agreements. "Often I have had the situation where someone has come to me and says they've found this wonderful new application for a technology they have a licence for," Davies relates. "I say 'when they gave you the drug what did you sign off?' and often they dust off the original agreement and discover they have committed to all manner of restrictions."

It's understandable that individuals or smaller companies get into trouble because they haven't taken the time to source the right legal advice in their enthusiasm to finalise a deal. "But without the right scrutiny at the start they could be sacrificing revenues or even what they do in the future," Davies says. GTG was extremely careful and thorough to avoid a Hyseq-type nightmare when it sought protection for its non-coding DNA methods.

"We said we think we know how to find the useful information in the non-coding region and then undertook a three-step process to demonstrate it," Jacobson says. Jacobson and his team used the simple hypothesis that non-coding DNA is or isn't junk. Firstly they showed that it wasn't. Secondly, they showed that it had a use in medical diagnostics. And finally they showed that it was indispensable, a finding which was supported by the protagonists of the Human Genome Project.

"There are plenty of people who have failed to get patents or even if they have succeeded, have failed to commercialise them," Jacobson says.

In other areas, such unfortunate stories, coupled with the growing impetus for joint ventures and collaborative projects, is forcing participating parties to shine a brighter light on the specifics of agreements. "Typically, licences cover a field of activity, but defining the edges is extremely important so that both parties know that they are getting," says Blake Dawson's Pickering. Even non-commercial research groups are finding themselves having to scrutinise the legal consequences of their initiatives far more carefully then even before, despite their often genuine philanthropic aims.

Slipping away

While commercial organisations rarely suffer from simply not patenting their inventions, rather they approach it the wrong way, Universities and research institutes have a history of letting valuable IP slip through their fingers.

One such famous case occurred in the mid-1970s when a joint initiative between Cambridge University and a leading UK research organisation published, but did not patent, their work on monoclonal antibodies which form the basis of pregnancy kits. Lawyers have estimated this little oversight to have cost the group several billions of dollars in forfeited licensing revenues.

"There is the need for great care in describing inventorship because it is based in law rather than patronage, and can result in invalidation of patents if mishandled," says the Garvan Institute's director of business development, Dr Jonathan Izant.

Determined not to become another empty shell in the junkyard of what might have been, Prof William Hart and three other leading Victorian neuroscientists have spent the last 18 months or so in intense consultation with Allens to form the non-profit organisation Neurosciences Victoria (NSV).

NSV is a collaborative joint venture -- originally between Monash University, Melbourne University, the National Stroke Research Institute, and the Howard Florey Institute -- which aims to pool its neuroscience research and IP in a bid to woo local and international investors to fund their own work. Already the group has amassed over $60 million made up of Victorian and Federal grants and commercial investment from groups, including German pharmaceuticals giant Schering.

Legal framework

According to Hart, NSV's chief executive, the process of establishing a legal framework that was acceptable to the research institutes but that would also satisfy the concerns of commercial organisations was a valuable learning experience. "There was a huge legal input in structuring the agreement with the member institutes which is where Allens really came into their own," he says. "We had a vision that if we could bring these institutes together we would have a compelling story to bring to international investors -- thanks to the careful legal structure of the groups we have now achieved that united front."

Two of the biggest hurdles to overcome in setting up NSV, according to Allens lawyer Jeff Bergmann, was determining who would control the IP and who would control the money: "What we had to do was recognise that these people were representing their respective institutes rather than as individuals. And given that the research was being done within the institutes we needed the institutes to become stakeholders."

Ensuring that NSV remained an 'agent' for the institutes was also extremely important to ensure that an effective tax structure was achieved. In all it took Allens several months to get all the parties to agree to the terms. "It took our lawyers a while to get their heads around the fact that no one was looking to make any money, but on the other hand I was surprised at times by their naïveté of what was required from a legal point of view," Bergman says. "Good will and cooperation played a big part in all of this, which made our role a little unpleasant at times because we were constantly having to say 'what if?'. It's a bit like working out how you are going to organise a divorce before going to the altar".

Clash of cultures

While biotechs generally have a greater awareness that they must undertake action to secure their inventions, be it for commercial reasons or otherwise, scientists and lawyers traditionally find it hard to see things through the other's eyes, GTG's Jacobson has found.

"You are talking about two separate laws," he says. "You have the laws of science, which are absolute, where you can prod and pursue in the search of truth. Then you have the rules of law, which, especially in the case of patenting, are a hodge-podge of man-made rules to create a workable procedure".

Many scientists, he believes, would have great trouble understanding what those rules are, likewise attorneys often don't understand the science. Yet the two must work together. "I know of scientists who have 'secret inventions' that they don't consider to be patentable -- but quite often they are wrong. "The final patent may be much more powerful than he or she would ever have understood."

The Australian mosaic

Changes to Australia's patenting position in April of this year have received a glowing endorsement from local industry figures and lawyers who believe that the new system will further stimulate innovation and raise Australia's world standing amongst analysts and major investors.

The so-called 'mosaic' amendment brings Australia into line with patent systems in the US and Europe by allowing examiners assessing the inventiveness of an invention to combine prior art documents with significantly less restrictions than previously.

This was an important change for Australia, especially given the lack of funds generally available for patent applications and protection, as it effectively raised the threshold for inventiveness providing both greater stringency and certainty for applicants bringing Australia more into line with the major jurisdictions.

While the US, Europe and Japan are seen to be the most important patent systems, Canada and then Australia follow close behind in the minds of many foreign applicants, which, considering the size of Australia, appears to be a fairly strong endorsement of the local patenting framework.

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