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NeoPharm Inc. has all of the characteristics of a typical biopharmaceutical company — it has no products, it’s losing money and it enlisted a big drug maker to help develop its medicines. And like many biotech companies, Lake Forest, Ill.’s NeoPharm Inc. ended up dissatisfied with its large pharmaceutical development partner, in this case, Pharmacia Corp. But that’s where the similarities between NeoPharm and its biopharmaceutical brethren end. NeoPharm is doing what very few biotech companies have done before — it’s suing its giant partner. The company alleges Pharmacia — now a subsidiary of Pfizer Inc. — failed to deliver on its promises to help develop two cancer drugs. It wants arbitrators to award it lost royalties and payments that would have been due under the 1999 contract with Pharmacia. If NeoPharm prevails, the case may provide a road map for other disgruntled biotech companies looking to take on the elite of the pharmaceutical industry. The fight could help illustrate how to value patents for drugs that are still being tested and how to get information out of a big pharmaceutical company. Such legal actions are extremely rare, life sciences lawyers say, because most companies can’t afford to take on the industry’s giants and damages are hard to prove. NeoPharm, for example, has spent about $9 million arbitrating its case against Pharmacia, according to securities filings. It also poses other financial risks for the company taking legal action: Big pharmaceutical companies provide much of the funding for drug development. Without that cash, many biotech companies would dry up overnight. “It’s difficult for a small company to take on a large company,” said Michael Plimack, a life sciences partner at Heller Ehrman White & McAuliffe. “They have the economies of scale, the resources; and the biotechs partner with them for a reason. Now you’re in the situation that David is taking on Goliath.” Plimack also said “case law is not clear, and there is a surprising lack of clarity” on how to make the case that a large company failed to do everything it should have done in the research process. That means David Steuer, the Wilson Sonsini Goodrich & Rosati partner representing NeoPharm, has his work cut out for him. “I haven’t done a case quite like this, and in my experience of reviewing cases, there are few reported where a licensor has sued a drug developer,” Steuer said. “I didn’t have much by way of templates.” One of the toughest issues Steuer has struggled with is how to value his client’s work. He’s putting a price tag on the five years Pharmacia had a license for NeoPharm’s cancer drug technology by determining how other companies have valued comparable drugs. Pharmacia’s size is also an issue. The company — valued at $60 billion when it was acquired by Pfizer earlier this year — has been a leading supplier of cancer drugs and other medications, including a growth hormone and an arthritis drug it developed with Pfizer. Steuer had to trace a circuitous corporate path to track down how Pharmacia handled the research at issue in the arbitration. His efforts led him to a subsidiary in Italy, where in April he deposed a group of scientists who had worked with NeoPharm’s technology. Despite the size and scope of the fight, NeoPharm Chief Executive Officer James Hussey said his company had no choice but to sue. It’s tough for a biotech company to survive after a pharmaceutical partner stops developing its technology, no matter what the reason, he said. And he’s challenging the longstanding dynamic between biotech and pharmaceutical companies, where one serves as a research arm to fill the other’s product pipeline. “Wall Street is a better source of capital than big pharma,” Hussey said. “Pharma needs biotech more than the other way around.” Pharmacia responded by filing its own arbitration claim alleging NeoPharm misrepresented its technology, according to company securities filings. Pharmacia’s lawyer, Stephen Scheve, a Shook, Hardy & Bacon partner in Houston, did not return calls for comment. Biotech companies often partner with so-called big pharma because they can’t afford to develop and market the drugs themselves. Estimates of bringing a compound to market are as high as $1 billion, and not many companies can afford that, much less a court battle. Hussey estimates NeoPharm will spend at least another $1 million on the arbitration by the time it’s complete. The cost has already taken a toll on the company. NeoPharm reported a loss in the second quarter due in part to the legal fight, which cost the company $6.1 million during that three-month period, according to a company release. NeoPharm filed for arbitration in April 2002, and the case got under way in May of this year in Washington, D.C. The three-judge panel includes two former directors of the Federal Bureau of Investigation, William Sessions and William Webster. Webster also was director of the Central Intelligence Agency. The third arbitrator is Eugene Pfeifer, a King & Spalding partner in Washington, D.C., who spent 10 years in the general counsel’s office at the Food and Drug Administration. The matter has piqued the interest of life sciences litigators. Heller’s Plimack has counseled biotech executives who think they have a claim but fear they don’t have much leverage against a deep-pocketed partner, he said. “It presents a problem for startups who are at the mercy of the business partner,” Plimack said. Drug technology “is sort of the crown jewel of the startup, and the large company has a license arrangement to develop it.” Alan Mendelson, a Latham & Watkins life sciences partner, said many large pharmaceutical companies are unloading projects unlikely to generate enough revenue to justify the expense of research. “If it’s a product that doesn’t seem to meet that hurdle, most pharmaceutical companies say you could have it back or ‘we’re just not interested,’” Mendelson said. Rarely, though, have such situations turned into full-blown legal battles, he said. Most small biotech companies back down, Mendelson said. “The smaller companies generally perceive that it’s going to be a difficult thing to prove that the pharmaceutical company hasn’t been diligent.” The arbitration broke for the summer but resumed Monday with a handful of dates scheduled through October, when all evidence must be entered. Whatever happens, it’s clear that biotech companies are putting more heat on their large, corporate partners. Mendelson said some of his large clients have been hit with complaints similar to those between NeoPharm and Pharmacia. “The reality is, in the pharmaceutical business there’s a small percent of products that make it,” Mendelson said. “No matter what the promise, there will be some disappointments.”

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