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The U.S Federal Trade Commission (FTC), in conjunction with the Antitrust Division of the Department of Justice (DOJ), conducted public hearings in February for the purpose of re-evaluating its enforcement policies regarding the use and licensing of intellectual property. In particular, one of the issues FTC and the DOJ chose to examine was whether “patent thickets” and “innovation markets” raise significant anti-competitive concerns in the pharmaceutical and biotechnology industries. Patent thickets have been described as “a dense web of overlapping intellectual property rights that a company must hack its way through in order to actually commercialize new technology,” requiring innovators to obtain multiple licenses from multiple patentees. See Timothy J. Muris, chairman, FTC, “Competition and Intellectual Property Policy: The Way Ahead,” address before the American Bar Association, Antitrust Section Fall Forum, Washington, D.C., Nov. 15, 2001, www.ftc.gov/speeches/ muris/intellectual.htm (quoting Carl Shapiro, “Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting,” http://haas.berkeley.edu/ ~shapiro/thicket.pdf). Innovation markets consist of the research and development directed to particular new or improved goods or processes, and the close substitutes for that research and development. No consensus was reached at the hearings as to the widespread existence of patent thickets or controlling patents that grant market power within the biopharmaceutical industry, partly because the problem has not yet created significant antitrust concerns that warrant censure or investigations. In 1995, the DOJ’s Antitrust Division and the FTC issued detailed guidelines describing their enforcement policy regarding IP licensing. See U.S. DOJ & FTC, Antitrust Guidelines for the Licensing of Intellectual Property (1995), www.usdoj.gov/atr/ public/guidelines/ipguide.htm. These guidelines indicated that the FTC and the DOJ recognized the importance of applying current economic thinking to antitrust enforcement in the area of intellectual property rights. After six years of experience in applying these guidelines, the FTC decided publicly to re-evaluate its policies with regard to issues such as patent thickets and innovation markets. The problem of patent thickets became a matter of concern in the wake of highly publicized antitrust cases involving Microsoft Corp. The major anti-competitive concern with respect to patent thickets is whether they restrict competition by creating barriers to entry for prospective market entrants. Similarly, innovation markets have raised antitrust concerns at the FTC. See Licensing Guidelines at � 3.2.3. The dependence of biopharmaceutical research and innovation on patent protection and the practice by the U.S. Patent and Trademark Office (PTO) of granting patents on whole and partial genes have raised anti-competitive concerns at the FTC. Furthermore, the practice of seeking patent protection for commonly used gene-based research tools, such as expressed sequence tags, DNA-chip and microarray technology and single nucleotide polymorphism (SNP) based technology, have led to concerns that the process of cumulative innovation in the biopharmaceutical industry may be stymied by protective patent thickets that could result in barriers to entry by firms that would be prevented from using the technologies protected by such patent thickets. COMPETITION VS. INNOVATION The promulgation of the licensing guidelines marked a significant formalization of efforts by the FTC and the DOJ to focus on the relationship between competition and innovation in industries that are highly technology dependent. One viewpoint is that monopolistic entities help promote innovation through the creation of monopoly profits, which in turn grant greater security, and, thus, the freedom to innovate. The other viewpoint is that innovation is best served when competitive forces provide incentives for research and development. Currently, there is a growing concentration in the form of research collaborations, vertical integration and horizontal mergers in the biopharmaceutical industry. The FTC has addressed these trends, for example, with respect to the development of gene-therapy products resulting from the horizontal merger of Ciba-Geigy and Sandoz. Although there were no gene-therapy products available at the time of the merger, the FTC applied a prospective market analysis to determine that the market could grow to $45 billion by the year 2010. In doing so, the FTC also determined that the combined firms would have monopoly power in this market through their combined control of vital IP assets. Thus, the merger was finally allowed with an imposed remedy that required the merged firm to grant gene-therapy researchers nonexclusive licenses to certain essential gene-therapy technologies that would otherwise have served as barriers to market entry by others. See, generally, Novartis A.G., C-3725 (April 10, 1997) (consent order), www.ftc.gov/os/1997/9704/ c3725.do.htm But regardless of such mergers, few biopharmaceutical firms enjoy the level of monopoly power present in the software industry. Currently, the biopharmaceutical industry is facing major changes in the way research is conducted, quite unlike the bifurcated research conducted in the 1970s and 1980s. Back then, during the emergence of the biotechnology industry, biotechnology companies focused on the use of recombinant DNA methods to produce proteins such as insulin for therapeutic purposes, while the larger and more established pharmaceutical industry generated “small molecule”-based drugs using pharmacological methods. Current research on therapeutic drugs and biologics, however, is increasingly based on genetic information, irrespective of whether the users are traditional pharmaceutical companies or biotechnology companies. This increasing dependence on gene-based research has led to an increasing interdependence between pharmaceutical and biotechnology companies. In some cases, there is complete vertical integration as in the case of Pfizer Inc. and the Global Research and Development Center established by it in 2001. In other cases, well-established biotechnology companies have created separate corporate entities for the generation of vital gene-based technology — for example, Human Genome Sciences Inc. and The Institute for Genomic Research. Yet many genetic research tools are owned by relatively smaller biotech companies and boast extensive patent protection. For instance, research on SNPs — variations in single base-pair positions in genomic DNA — has primarily been conducted by a biotechnology company, Curagen Inc. SNP research is important in biomedical research today because it helps determine small genetic variations that may result in the prediction of adverse effects caused by a drug in particular patient subpopulations. Such predictions can significantly change the way human clinical trials are conducted and analyzed. Thus, companies with therapeutic products increasingly may come to depend on SNP-based technologies, necessitating either broad collaborations, licensing agreements or mergers with those companies that can provide such technologies. The concern for increased concentration in innovation markets is further pronounced when the scope of patent protection is broad enough so as to encompass commercially important improvements in the technology by competitors. If the technology relies on numerous patents — patent thickets — then the concern that such patents may cause effective barriers to competition are also heightened. UTILITY REQUIREMENT AS A BRAKE However, many of the concerns over excessively broad patent protection for gene-based research tools have been mitigated by the requirements for patentability as required by patent law. In particular, the utility requirement (35 U.S.C. 101) as recently interpreted by the PTO serves as a check to runaway patent protection on partially sequenced genes for which the expressed product is unknown. The PTO issued guidelines in final form in January 2001 that appear to exclude certain genetic sequences of indeterminate function from patent protection. See Utility Examination Guidelines, 66 Fed. Reg. 1092 (Jan. 5, 2001). To meet the standards for utility as required by the new guidelines, an invention must show “specific, substantial, and credible utility.” Id. Thus, for example, unless a function has been determined for a partially sequenced gene, it will not be deemed patentable, and thus cannot block research on the complete gene. Thus, while imperfect, a system of checks and balances on the scope of research tools as used in the biopharmaceutical industry exists under the patent regime and under antitrust principles as they are currently evolving. Yet a recent case heard in the context of the Hatch-Waxman Act may change the intellectual property-antitrust landscape significantly, especially as it applies to research tools. The Hatch-Waxman Act created an exemption for patent infringement by allowing generic drug companies to make and test drugs (and later devices as interpreted by the courts) developed by pioneer companies before the expiration of the patent term for the brand-name drug. This exemption for patent infringement to 35 U.S.C. 271(a) (1994) as created by the Hatch-Waxman amendments to the Federal Food, Drug, and Cosmetic Act provides that: “It shall not be an act of infringement to make, use, offer to sell, or sell within the United States or import into the United States a patented invention … solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs.” 35 U.S.C. 271(e)(1). A recent district court decision, Bristol-Myers Squibb Co. v. Rhone-Poulenc Rorer, S.A., 2001 U.S. Dist. Lexis 19361, (S.D.N.Y. Nov. 28, 2001), appeal docketed, No. 02-1280 (Fed. Cir., March 18, 2002) may bring gene-based research tools under a broad ambit of exemption from patent infringement. (This decision is currently being appealed on grounds different from those discussed below.) If allowed to stand, Bristol may significantly expand the exemption to exploratory and investigational research activities before the identification of a compound, device or method that would be the subject of an FDA application. Thus, the consequence of this decision is that the exemption from patent infringement created in 35 U.S.C. 271(e)(1) now applies to all activities reasonably related to an actual or possible FDA application, even ancillary patented inventions not under review at the FDA. THE FACTS BEHIND ‘BRISTOL’ The dispute in Bristol stemmed from Bristol’s use of intermediates of taxane derivatives patented by Rhone-Poulenc Rorer (RPR) in experiments during its research activities regarding analogs of the anti-cancer drug taxol. RPR’s patent (U.S. Re-issue Patent No. 34,277, the ’277 patent) disclosed and claimed processes for preparing taxol and four intermediates obtained during this process. However, none of the intermediates was the subject of a new drug application submitted to the FDA. In response to an infringement suit by RPR, the court held that the use of the intermediates was reasonably related to the development and submission of information under relevant federal law. The court ruled that the term “reasonably related” should be interpreted to mean whether it would have been reasonable, objectively, for a party in the “infringer’s” situation to believe that there was a “decent prospect” that the “use” in question would contribute to the generation of the kinds of information that were likely to be relevant to the process by which the FDA would decide whether to approve the product. Under this test, the Bristol court found that experiments with the patented intermediates were reasonably related to the submission of information to the FDA. 2001 U.S. Dist. Lexis 19361, at 19-20. The decision in Bristol marks a significant expansion of the patent-infringement exemption because it interprets � 271(e)(1) to cover experimental uses before the identification of a product likely to be the subject of the FDA application. Furthermore, under Bristol, the patent-infringement exemption applies at any time in the research and development cycle to all activities reasonably related to an actual or possible FDA application. Even if the infringing uses do not ultimately generate information relevant to the filing of an application for a product seeking FDA approval, the patent-infringement exemption applies as long as the infringer believed that there was a decent prospect for the information being relevant to information sought by the FDA. This case confuses the evolving landscape for antitrust review of patent-protected innovations. First, if Bristol is construed to apply to all patented inventions, then researchers could potentially use virtually all patented research tools as long as the use is reasonably related to the submission of information to the FDA. This would impact the biotech industry adversely because a significant number of proprietary, patented inventions such as monoclonal antibodies, surface marker proteins and the like could be used without infringing the patentee’s intellectual property rights. Thus, many patents claiming biopharmaceutical inventions would cease to have commercial value. Companies may cease to seek patent protection for their inventions, relying instead on trade-secret protection or restrictive licenses to only those companies with which confidential research-based collaborations may prove lucrative. This may result in a higher degree of concentration in the biopharmaceutical industry. However, unlike concentration motivated by valid research motives, the concentration caused by Bristol would be one necessitated solely by the potential of financial ruin. Innovation could be restricted because the technologies protected by such patents would now be protected under available trade-secret protections, and thus, unavailable to the public to improve upon. Furthermore, the unavailability of effective patent protection for research tools may result in fewer companies willing to make essential research investments. In contrast with traditional antitrust analysis of product markets, there are no geographic limitations on innovation-markets analysis. However, limitations such as those potentially imposed by the Bristol ruling can render traditional market-power analyses irrelevant. Thus, although a limited antitrust review of potential patent thickets and innovation markets within the biopharmaceutical industry may be warranted, any such review should take note of the limitations imposed on the industry by evolving judicial interpretations of statutes fundamentally important to the industry. Gregory J. Glover, a partner in the Washington, D.C. office of Ropes & Gray (www.ropesgray.com), is a licensed physician and registered patent attorney with experience in food and drug law, intellectual property law, and technology licensing.

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