The Supreme Court’s Integra Lifesciences v Merck KGaA Decision: Adverse Effect on the Relationship between Big Pharma and Biotech?

Ian G. DiBernardo, Esq., Rita H. Lin, Esq. and Amy E. Wilson, Ph.D.

Stroock & Stroock & Lavan LLp

     With public concern over prescription drug pricing at an all time high, many hailed the recent Supreme Court decision in Integra Lifesciences v Merck KGaA[1], which broadened the safe harbor exemption from patent infringement liability, as having the potential to lower drug development costs and to reduce, or at least to slow the increase of, high drug prices. The underlying assumption is that these savings will be passed on to the consumer. A closer look at the decision and its potential impact raises questions about the validity of that optimistic assumption, and suggests it may have far-reaching consequences for the pharmaceutical and biotechnology industries that could negatively affect investors and consumers.

Background: The Safe Harbor Exemption

     The U.S. Patent Statute provides that whoever “makes, uses, offers to sell, or sells any patented invention, within the United States…during the term of the patent, infringes the patent.” Section 271(e)(1) of the patent statute provides a “safe harbor” exemption to infringement, namely that it is not an act of infringement to use a patented invention “solely for uses reasonably related to the development and submission of information” to the FDA as part of a drug application. The Supreme Court’s Integra ruling broadened the previously accepted scope of the §271(e)(1) safe harbor exemption. Under that broadened interpretation, investigators have greater freedom to perform experiments on patented compounds, so long as there is a reasonable basis to believe that the resulting data could be used in an FDA application. In other words, companies can perform experiments using patented compounds without licensing those compounds if there is reasonable belief that the data could be used in a later FDA application. Although this may be good news for big pharmaceutical companies, for the biotech industry, which focuses on very early stage drug development and generates a large percentage of its revenue from licensing patented compounds (both chemical and biological) and technologies to pharmaceutical companies, the decision potentially is problematic.

The Decision

     Merck KGaA (not related to the American company by that same name) (“Merck”) provided funding for angiogenesis research conducted at the Scripps Research Institute (“Scripps”). Angiogenesis is the process by which new blood vessels grow and plays a critical role in such disease processes as solid tumor growth, diabetic retinopathy and rheumatoid arthritis. Merck also provided Scripps with a cyclic peptide, referred to as the “RGD peptide,” for use in the experiments. Scripps discovered that the cyclic RGD peptide reversed tumor growth. The findings were published in leading scientific journals, as well as in The New York Times. Upon learning of Scripps’ work through these publications, Integra Lifesciences (“Integra”) and the Burnham Institute (“Burnham”) – the owners of five patents related to the RGD peptides – filed a patent infringement suit in the District Court for the Southern District of California against Merck, Scripps and the doctor performing the research.

     At the conclusion of the first trial, the jury found that Merck, et al. had infringed Integra’s patents. On appeal, the Court of Appeals for the Federal Circuit (“CAFC”) affirmed that part of the decision, holding that the §271(e)(1) safe harbor exemption did not apply because the experiments performed were “not clinical testing to supply information to the FDA, but only general biomedical research to identify new pharmaceutical compounds.” Integra Lifesciences I, Ltd. v. Merck KGaA, 331 F.3d 860, 866. The Supreme Court granted Integra’s petition for certiorari.

     Because the CAFC’s interpretation of the safe harbor exemption excluded both “(1) experimentation on drugs that are not ultimately the subject of an FDA submission” and “(2) use of patented compounds in experiments that are not ultimately submitted to the FDA,” the Supreme Court criticized it as too narrow. 125 S.Ct. 2372, 2382. Noting that it is difficult for scientists to predict whether the use of a patented compound in an experiment will yield results that justify its inclusion in a submission to the FDA, the Court found that the §271(e)(1) safe harbor exemption should apply “where a drugmaker has a reasonable basis for believing that a patented compound may work, through a particular biological process, to produce a particular physiological effect, and uses the compound in research that, if successful, would be appropriate to include in a submission to the FDA.” 125 S.Ct. 2372, 2383. Further elaborating on this “reasonable basis” standard, the Court held that basic scientific research “performed without the intent to develop a particular drug or a reasonable belief that the compound will cause the sort of physiological effect the researcher intends to induce” is not covered under the §271(e)(1) safe harbor exemption.[2]  Id.

Implications for the Biotech Industry

     The prevailing view is that the Integra ruling will lead to reduced drug prices because pharmaceutical companies will not have to pay royalties to biotech companies for patented lead compounds. The problem for many biotech companies is that their focus is on conducting early stage drug discovery and lead identification. Their bread and butter is the royalties they earn from larger pharmaceutical companies that license their discoveries for refinements that are included in a drug composition, not used for direct use in drug production. Arguably, under the Integra decision, the threshold for the safe harbor exemption of §271(e)(1) is so low that most research activities of a large pharmaceutical company will be covered. Perhaps all of the research activities of pharmaceutical companies will fall within the §271(e)(1) safe harbor exemption because they arguably never perform an experiment unless they “reasonably” believe the results will be submitted in a FDA application. In any event, the Integra decision appears to undercut the value, or at least the currently perceived value, of the patents owned by biotech companies because the Court’s more lenient “reasonability” standard effectively insulates pharmaceutical companies in many situations from the obligation to pay royalties for the use of patented lead compounds in research.

     In response to the Integra decision, biotech companies in the future may choose to protect newly discovered lead compound inventions as trade secrets rather than by obtaining patents on them, the publication of which would disclose the compounds to pharmaceutical companies, making them ripe for the taking under the Integra safe harbor exemption. A trade secret is, as the name implies, information maintained in secret that provides a competitive advantage. Trade secrets can be licensed, but the licensing agreement is typically more complicated than patent licenses because details of how to maintain secrecy should be worked out in advance. In an industry where knowledge is money, retaining knowledge as a trade secret might seem attractive because trade secret protection essentially continues as long as the knowledge remains secret, whereas patent protection is of limited duration. However, as discussed below, trade secret protection can be a double-edged sword.

     The dilemma is that to maintain an invention as a trade secret, the invention cannot be disclosed to the public in, for example, trade publications or as a published patent – two of the most effective mechanisms for attracting investors and potential partners. Therefore, if biotech companies rely on trade secret protection for their lead compound discoveries, they must find alternative means to identify, attract, and educate potential licensees. Whether it makes business sense for biotech companies to sacrifice patent protection in order to discourage pharmaceutical companies from utilizing the Integra safe harbor ultimately will depend on how successful they are in licensing their trade secrets.

Life since Integra

     Several cases decided since the Integra decision have applied the broad interpretation of the 271(e)(1) safe harbor. In Classen Immunotherapies, Inc. v. Biogen IDEC, et al., 381 F.Supp. 2d 452, 456 (D.Md. 2005), the district court dismissed claims against the defendants, holding that after Integra, the broad scope of the § 271(e)(1) safe harbor clearly protects any information reasonably related to the development and submission to the FDA – including post-approval activities associated with a drug already on the market. In a second case, Third Wave Technologies, Inc. v. Stratagene Corporation, 381 F.Supp. 2d 891 (D.Wis. 2005), the defendant asserted that its actions were exempt under the § 271(e)(1) safe harbor. However, the district court determined that evidence was lacking to clearly link the defendant’s past action with its claimed future intent to obtain FDA approval. Although this was a victory for the patentee, the decision does not prevent the defendant from offering more evidence during trial to show that its past actions are “reasonably related” to submission to the FDA. The standard of “reasonably related” continues to be murky.

Conclusion

     Though the Integra decision has spurred considerable debate and even friction between the pharmaceutical and biotech industries, in the long-term their interests are so intertwined that an accommodation will have to be reached. Ongoing collaborative relationships between these two groups are essential to moving the science of drug discovery and development forward and mechanisms will have to evolve that enable all parties to reap the rewards of their efforts. There will be bumps along the way, and biotech companies need to plan their strategies carefully to strike an appropriate balance between protecting assets and identifying and exploiting appropriate licensing opportunities.

[2] Although the Supreme Court sidestepped the issue of whether the use of patented research tools would also be exempt from infringement when used in the development of information for the regulatory process, it concluded from the record that the RGD peptides were not research tools.  Research tools generally are defined in the industry as a product or compound that is useful in drug identification or development, but is not the drug product itself.