Patents: Patent Strategies for Biotechnology Enterprises

Patent protection in the biotechnology industry has received much public attention recently. The number of patent applications from the biotech industry has grown faster than the number of patent applications from other industries over the past several years.¹ Biotechnology patents not only reward inventors for their inventions through market exclusivity, they also can stimulate research and the flow of scientific and technological knowledge on a global basis. Moreover, biotechnology patents encourage companies to invest in developing new drugs, therapies, and equipment; this development often takes many years and is a very expensive and risky process.

Wei Li

As in other technology-based industries, a biotech patent must be regarded as a strategic asset aimed at improving the competitive advantages and earning capacity of a company. However, although growing numbers of business owners are becoming more concerned about their patent rights and those of their competitors, a substantial number of businesses are not taking full strategic advantage of their patent assets to establish competitive advantage and increase profits. For many biotech companies, developing a patent strategy is an important component of the business plan. It is the bridge that links the power of patents to the objectives of business. An ideal patent strategy would provide the broadest and strongest protection for core technology and commercial applications.

Xiang Yu

PATENT APPLICATION STRATEGY: ERECTING A RING FENCE

For many biotechnology companies, before filing a patent application for an invention, the initial strategy is to carefully assess and evaluate the current state of the intellectual property owned or licensed by the enterprise.² A biotechnology enterprise need not file a huge number of patent applications when attempting to cover a commercially important technology, although such a strategy may be effective if the company can afford it. For example, any enterprise that wants to challenge Affymetrix in the gene-chip business will need to get legal opinions on Affymetrix's 200 patents—at considerable expense.

An alternative to filing a huge number of patent applications, and an equally effective strategy, can involve creating a set of claims with sufficient complexity to make it difficult for an outside enterprise to use a single argument to challenge all of the claims. If a patent challenger is forced to present a complex legal situation to a judge or jury, that challenger faces an uphill battle simply because, quite often, no one has the patience to think the situation through. Thus, patent portfolios should contain sets of claims to diverse aspects of an enterprise's technology, and these diverse sets of claims should contain variations on key terms or phrases.

Quick Recap

The story of Amgen is a case in point. The key to Amgen's strategy is that it has always kept an Epogen (EPO) patent application filing alive in the US Patent and Trademark Office (USPTO), thus permitting it to make new claims, even today. Amgen's patent portfolio involves only five US patents, all of which originate from the same patent application; Amgen has used its original priority date to obtain a series of five patents, each of which protects a different aspect of its EPO technology (Table 1). Amgen's EPO patent is now 24 years old, and when a competitor enters the EPO marketplace, Amgen has the opportunity to analyze the product and file new patent claim language to block its commercialization. Amgen has filed lawsuits using at least five different sets of overlapping claims covering the recombinant EPO polypeptide, cells producing recombinant EPO, and processes for preparing recombinant EPO. These patents also contained claims to therapeutic treatment of diseases using EPO.³

Table 1. Amgen patent application strategy: Ring-fence the Epogen

CREATING HIGH-VALUE PATENT PORTFOLIOS

A Strong Patent Portfolio Can Minimize Litigation Risk

A patent portfolio can be used both offensively, as a "sword" to strike competitors, and defensively, as a "shield" to avoid competitor attacks. Offensively, the sword prevents competitors from infringing (making, using, or selling) the invention. Defensively, the shield serves as a bargaining chip against a competitor who threatens to sue for patent infringement of one of the competitor's patents.

Developing a strong patent portfolio minimizes the risk of an infringement claim.⁴ Yale University Professor Jean Lanjouw has conducted research showing how decisions on a firm's patent portfolio can affect future litigation. He used litigated patents reported to the USPTO between 1975 and 1991 to explore whether large firms have a strategic advantage over small firms in patent litigation because they have a large portfolio of patents with licenses that can be used as bargaining tools.^5,6 His analysis of patenting and litigation patterns showed that having a large portfolio of patents reduces the probability of being involved in a dispute on any patent in the portfolio, although the portfolio effect is larger for smaller companies. He noted that on average, small firms with 500 or more patents were four times less likely to be involved in patent litigation than those with 100 patents. Apparently, if a venture firm has more complete protection for its technology (reflected in a larger number of patents covering the technology and its variations), it can potentially avoid costly lawsuits with competitors.⁷ A report published in 2003 by the Organization for Economic Cooperation and Development (OECD) reached essentially the same conclusion. According to the report, developing a strong patent portfolio minimizes the risk of an infringement claim. Patent litigation risk is much higher for patents owned by individuals and firms with small patent portfolios. Patentees with large portfolios of patents to trade, or other characteristics that facilitate "cooperative" resolution of disputes, are much less likely to prosecute infringement suits.⁸

Formulating a Value Chain for Each Patent Portfolio

In the biotech industry, a strong portfolio contains patents along the entire value chain. To the fullest extent possible, an enterprise should seek patents that not only cover its products, but that protect against what others in the market are likely to do. By having both marketing and technical personnel periodically review competitors' products and marketing literature, an enterprise can endeavor to patent innovations that may not necessarily be technological breakthroughs.⁹

A strong patent portfolio may discourage others from bringing suit. For example, companies might be reluctant to sue Affymetrix, which obtained a record 37 patents in 2006 alone. And if a competitor does threaten suit, a strong patent portfolio can allow an enterprise to negotiate a cross-license rather than pay for technology it might have developed itself.

Affymetrix has established a strong patent portfolio consisting of eight families of issued patents and pending applications. These patents cover its core technologies, including DNA and protein arrays, scanner and detector technology, and microfluidics, as well as a broadened portfolio of patents related to the use of beads to measure nucleic acids or peptide binding for genomic analysis (Table 2). In January 1998, Affymetrix filed litigation against Incyte over the issues of high-density arrays and two-color labeling in US patent numbers 5445934, 5744305, and 5800992. In October 1999, a court ruled in Affymetrix's favor. It is important to note that this case involved only three patents in the Affymetrix patent portfolio, which includes more than 130 issued and more than 300 pending US patents. According to Phil McGarrigle, Affymetrix's chief intellectual-property counsel, "We try to cover the array area from start to finish."¹⁰

Table 2. Affymetrix patent portfolio (as of April 2007)

Affymetrix's example demonstrates how a strong patent position not only is an important goal for a successful biotechnology business, but also the primary asset by which an enterprise will be valued during all stages of its development.

ALLIANCE AND LICENSING STRATEGIES

Companies in the biotech industry typically require one or several partners as they complete the product development cycle. Many entities, including universities, government agencies, specific technology companies, commercialization organizations, and clinical trial specialty companies, may have resources or technology needed to complete the cycle. A typical scenario for a biotech enterprise or investor involves looking to entities upstream for basic research or platform technology, and looking downstream for commercialization and to fund costs of clinical trials. Alliances also provide an effective means of broadening a patent portfolio. When the enterprise finds itself on the wrong side of a patent infringement suit, the patent alliance can be used to fire back at the plaintiff and thereby promote settlement.¹¹

In 1988, Hoffmann-La Roche and Cetus Corp. negotiated a licensing agreement for two anti-cancer drugs, Interleukin-2 and Polyethylene Glycol Modified IL-2. This agreement became the prototype for cross-licensing between companies with parallel patents. In addition, many cross-licensing arrangements arise as an attempt to settle disputes on conflicting claims in the litigation process or in expectation of impending litigation. Indeed, according to Carl Shapiro, professor of business strategy at the University of California at Berkeley, "Virtually every patent license can be viewed as a settlement of a patent dispute: the royalty rate presumably reflects the two parties' strengths or weaknesses in patent litigation in conjunction with the licensee's ability to invent around the patent. The same is true of cross-licenses, where net payments reflect the strength of each party's patent portfolio along with its commercial exposure to the other's patents."¹²

It has long been acknowledged that new innovations build on previous ones. Examples include the Cohen-Boyer patent on the technology for inserting foreign genetic material into bacteria, the Genentech patent on a technology for getting foreign genes to "express," the polymerase chain reaction (PCR) technology for replicating DNA in test tubes, gene guns, and recent suppression technologies that cause gene sequences to become inactive. The salient feature of such a property is that it is efficient to let firms other than the patent holder use it. The reason is that the follow-on innovator typically needs to obtain the right to use the previously patented innovation. When such a right is not secured by a licensing agreement before engaging in research and development, the infringer may become involved in a legal dispute ex-post. The patent holder is entitled to litigate and collect damages, to be compensated for infringement. It is not surprising that follow-on innovators typically refrain from engaging in ex-ante licensing agreements with patent holders.

In March 1997, Hyseq sued Affymetrix in the Northern District of California. Hyseq alleged that Affymetrix infringed Hyseq's patents for DNA sequencing by hybridization (SBH) on microarrays.¹³ In October 2001, the parties agreed to a settlement that acknowledged the validity of all the patents at issue between them. As a result of the settlement, Affymetrix obtained a 10% ownership of Callida Genomics, a new Hyseq subsidiary to which Hyseq assigned all of its SBH patents. Hyseq's early patents covered SBH techniques; in contrast, many of Affymetrix's early patents covered microarray manufacturing processes. Although Affymetrix did patent some experimental applications of microarrays, its settlement agreement with Hyseq suggests the value of analyzing research and development strengths in anticipation of litigation. Had Hyseq and Affymetrix focused simply on sequencing and manufacturing strengths respectively, the companies might have come to an adequate cross-licensing arrangement without incurring expensive litigation.

CONDUCTING PATENT DUE DILIGENCE INVESTIGATIONS

Patent due diligence is the detailed patent investigation of a business, the aim being to identify problems within the business, especially those that might result in future liabilities.¹⁴ Due diligence of a biotech's patent portfolio will cover the following issues:

• The biotech's key product candidates and platform technologies. These will be investigated to determine whether they are adequately covered or protected by patents. The length of each patent's unexpired term will also be investigated.

• Protection of the biotech's inventions. Have these been protected in key territories, and are procedures are in place to ensure that all renewal fees have been paid for those territories?

• Employment contracts and research contracts. These will be reviewed to determine how ownership of intellectual property is dealt with in the business.

• Challenges or opposition to a biotech's patents. The due diligence process will establish whether there have been any of these, whether the patents actually provide useful protection, and whether they can be circumvented.

• Pending or threatened actions, as well as potential risk for such action. Due diligence reviews will consider whether another party has offered the biotech licenses to its technology, or has threatened to sue. Further investigations may involve relevant third-party patents, and if these exist, may question whether the company has sought infringement and validity advice in respect of those patents.

BLOCKING STRATEGIES

A company should use both the defensive strategy of protecting its pre-existing core technology, as well as the offensive strategy of patenting claims covering future competitors from novel ideas of products, methods, or improvements.¹⁵ An intelligent offensive patent strategy can block future competition, secure emerging standards, increase an enterprise's valuation, collect licensing royalties, and forecast future trends of a certain product. For example, although its business model has since changed, the genomics enterprise Incyte acquired a substantial patent portfolio from patents on mostly novel, full-length genes and a few partial sequences obtained through its computer system. This strategy discourages competitors from taking similar inventions to market, and it allows the enterprise to collect potential licensing fees in the future.

Blocking out competitors 100% is an ideal. It is unlikely that a biotechnology enterprise can develop a patent strategy that can protect it from competitors over a very long period of time. However, having an understanding of the ultimate or ideal techniques of protection can help the enterprise to identify ways to protect itself from competitors. Each link in the patent value chain provides opportunities to block competitors (Figure 1). Any link that is blocked from competitive access might be sufficient to protect the business. Combinations of blocking techniques over several links increase the probability of success. The objective of a blocking strategy is to find ways to protect each link in the patent value chain so that the competitor is denied access. Where that protection is not 100% certain, biotechnology companies want to make it difficult, time-consuming, or expensive to overcome the blocking factors.

Figure 1.

CONCLUSION

Patents play a critical role in driving innovation and protecting advancements in the biotechnology sectors, and the need for strategic management of patents is greater than ever. Because the ultimate purpose of any good patent strategy is to serve the enterprise's overall business objectives, that strategy must be developed concurrently with research, development, and investment strategies. It certainly requires consistent business, technical, and legal collaboration. No generic system will work for every enterprise, so companies should be careful to establish patent strategies tailored to benefit their particular needs. A thorough and clear understanding of patent strategies may enable patentees or competitors to avoid the high stakes and costs of attacking and defending biotechnology patents.

ACKNOWLEDGEMENT

This research was supported by the JSPS of Japan and the National Nature Science Foundation of China, Project No. 70472060.

Wei Li is a doctoral candidate at the school of management at Huazhong University of Science and Technology, Wuhan 430074, Hubei Province, People's Republic of China, 0086.27.629.52.233, wli@smail.hust.edu.cn

Xiang Yu is a patent attorney and a professor of school of management at Huazhong University of Science and Technology, Wuhan 430074, Hubei Province, People's Republic of China, 0086.27.8755.6460, Xiang_Yu_de@yahoo.com.

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