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The biotech industry has been given new life, and the drug pipeline can keep flowing. In a case of first impression closely watched by the biotech and pharmaceutical industries, the U.S. Court of Appeals for the Federal Circuit held on June 6 in Integra LifeSciences v. Merckthat pre-clinical use of a patented research tool for drug discovery is patent infringement and is not protected under the “safe harbor” of 35 U.S.C. §271(e)(1). After a series of cases that steadily expanded Section 271(e)(1), this is the first Federal Circuit opinion to significantly rein in its scope. The case arose when Integra, the holder of several patents covering RGD peptides, discovered that Merck had used the peptide in developing a new drug. Integra could not persuade Merck to take a license on its terms, so it sued. A San Diego federal court found that Section 271(e)(1) did not protect Merck’s activities, and the jury awarded Integra $15 million in damages. In affirming the infringement ruling, the Federal Circuit observed that the text of Section 271(e)(1) limits the safe harbor “solely” to activities “reasonably related to the development and submission of information” to the Food and Drug Administration. Extending it to new drug development, said the court, “would not confine the scope of §271(e)(1) to de minimis encroachment on the rights of the patentee.” Indeed, the Federal Circuit found that extending §271(e)(1) to cover Merck’s activities “would effectively vitiate the exclusive rights of patentees owning biotechnology tool patents.” Particular patent tools can be used both to help identify candidates for further drug research and to conduct safety-related experiments on the resulting new drugs. As the court noted, “Because the downstream clinical testing for FDA approval falls within the safe harbor, these patented tools . . . only supply some commercial benefit to the inventor when applied to general research. Thus, exaggerating §271(e)(1) out of context would swallow the whole benefit of the Patent Act for some categories of biotechnological inventions.” The Integradecision is critical to biotech companies that rely upon patents on early research tools to survive. Prior district court decisions in Delaware and New York had encouraged companies to ignore such patents, or at least to heavily discount them, as long as the companies were working to develop new drugs. Now this decision makes clear that, while the development of generic drugs falls within the exemption, anything else will be suspect and probably infringing. COSTS UNCLEAR The Federal Circuit did vacate and remand the $15 million damage award. According to the court, the uncertainty at the time the peptide was being used as to whether any useful drug would be developed should have been factored into the damages calculation. Specifically, the jury failed to conduct a royalty analysis using a hypothetical negotiation as it might have occurred at the time of infringement. Instead, the damages calculation was apparently influenced by the fact that a valuable drug candidate emerged later in the process. The Federal Circuit said that the first step is to ascertain the date on which the hypothetical pre-infringement negotiation should have taken place. The court observed: “The value of a hypothetical license negotiated in 1994 could be drastically different from one undertaken in 1995 due to the more nascent state of the RGD peptide research in 1994. Indeed, factoring in the rapid development of biotechnological arts, a year can make a great difference in economic risks and rewards.” As a consequence of this part of the Integradecision, companies that need licenses for patented research tools may be emboldened to push for lower rates. And without the in terroremthreat of asserting the value of a blockbuster drug in later litigation, patent holders may be forced to accept lower valuations in licensing negotiations. Because companies don’t normally publicize their drug discovery strategies, the normal weapon of choice when a patent licensing agreement is not reached — an injunction — may prove useless. Often, screening with a research tool is performed just once to identify drug candidates, and thereafter the research tool isn’t even needed again. To avoid paying for a license, companies might also move their research offshore. But if there’s no other way to perform the work to get to valuable new drugs, they will have to make the deal. It’s unclear precisely how narrow the safe harbor is in the wake of Integra.The decision refers to “pre-clinical” activities (i.e., before human testing) as being outside the harbor. But the Federal Circuit did not draw a bright line for determining when experimentation becomes so related to FDA approval that the safe harbor will apply. For now, it is only safe to assume that development of generic drugs is protected under the statute. Stephen B. Maebius and Richard J. Warburg are partners at Foley & Lardner. Maebius focuses on biotech, pharmaceutical, and nanotechnology clients in the D.C. office. Warburg focuses on the biotech, pharmaceutical, and chemical industries in the San Diego/Del Mar office. They can be reached at [email protected]and [email protected], respectively.

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