Biotech Patent Bottleneck Harms Makers Of Better Mousetraps

Biotech Patent Bottleneck Harms Makers Of Better Mousetraps AUTHOR:RON COWEN Date: September 05, 1988 While the U.S. Patent Office fiddles, small firms lacking earnings records may be losing potential investors WASHINGTON—Chemist George Rathman won’t soon forget July 1, 1987, the day that the worth of his company’s stock dropped $10 million in six hours. President and CEO of Aragen Inc., an eight-year-old biotechnology firm in Thou- sand Oaks, Calif., Rathmann calls the ex

Sep 5, 1988
Ron Cowen

Biotech Patent Bottleneck Harms Makers

Of Better Mousetraps
AUTHOR:RON COWEN
Date: September 05, 1988
While the U.S. Patent Office fiddles, small firms lacking earnings records may be losing potential investors

WASHINGTON—Chemist George Rathman won’t soon forget July 1, 1987, the day that the worth of his company’s stock dropped $10 million in six hours. President and CEO of Aragen Inc., an eight-year-old biotechnology firm in Thou- sand Oaks, Calif., Rathmann calls the experience “a nightmare.” But the nightmare wasn’t caused by a crash on Wall Street. The nightmare even has a name: the US. Patent and Trademark Office.

In 1982 Amgen had applied for a patent on a technique involving a hormone genetically engineered to treat anemia. Five years later, on June 30, its competitor, Genetics Institute of Cambridge, Mass., was granted a patent involving the production of the same drug after having ified an application in 1985. Investors panicked, and Amgen's stock price plunged.

Fortunately for Rathmann, the stock later rebounded, and last October the company was finally awarded its patent for a product made in the course of producing the hormone erythropoietin. But its case illustrates the threat to small biotech firms posed by the current bottleneck in processing U.S. biotechnology patents. Harsh Consequences The bottleneck applies to all applications submitted for biotech patents. But its consequences are particularly harsh for smaller firms. “The media event for bigger companies is placing a product into the marketplace, not the issuing of a patent,” notes William H. Duffey, general patent counsel for Monsanto. “But smaller firms may be depending on the granting of a patent to attract investors.”

Andrew Barnes, vice president for operations at Mycogen Corp., a San Diego firm developing a new breed of biopesticides, says it’s difficult for a small firm to wait in definitely for a decision from the patent office. “The stock price of a Monsanto or an Eli Lilly is based on current earnings,” he says. “But a small biotech firm often has no earnings records. The performance in the stock market and the ability to raise funds is determined by the promise of your product And one indication of that promise is the number of patents a firm has.”

The backlog began to form six years ago. A flowering of research at dozens of new companies nearly doubled the annual number of new biotech patent applications, from 3,116 in 1982 to 6,153 last year. By January 1988, more than 6,900 biotech patent applications were waiting for the review to begin.

The patent office admits it was not prepared to handle the crush of applications. While Congress has urged the office to hire more staff, patents officials have argued that constant turnover and the requisite years of training preclude an overnight solution to the backlog. In fact, despite a 34% increase in its personnel budget since 1983, the number of examiners has grown by only 9%. The rest of the money has gone to boost salaries.

Although officials recently have begun to focus more attention on the problem, the process has not gone smoothly. Charles Van Horn, a veteran director of the group that handles biotechnology and organic chemistry patents, moved up to deputy solicitor in March of this year after his attention to detail was seen as an obstacle to the speedup. “They replaced him because he refused to compromise quality for production,” says Harold Wegner, a patent lawyer and a former examiner.

Van Horn was succeeded by Sam Zaharna, who carried out a consolidation of four biotechnology-related groups. Zaharna, a 29-year veteran trained as a chemical engineer, has a reputation of “ruling with an iron hand,” according to former deputy commissioner Donald Peterson. His emphasis on pushing patents out the door caused a sharp drop in morale among examiners, who worry that the speedup is being done at the expense of quality. In June, Zaharna, who had been acting director, returned to his supervisory post in organic chemistry and was succeeded by John Kittle, a 15-year examiner trained as a chemical engineer.

The office has also been plagued by rapid turnover. Last year 17 biotech patent examiners left the office, an attrition rate of about 50%. The primary reason is greater opportunity—and more money—in the private sector. “The small businesses who complain about the backlog often steal the patent examiners away for their own business,” said Al Halluen, chief patent counsel for Cetus Corp., an Emeryville, Calif., biotech firm. Patents commissioner Donald J. Quigg plans to hire 28 new biotech patents examiners this year to supplement the current staff of 42, and an additional 20 in each of the next three years. But patent officials say that the answer isn’t simply more staff. The intensive, one-on-one training of new examiners steals time away from the regular examining work of senior staff, says senior examiner Thomas Wiseman.

The examiner’s skills are crucial to the process. Obtaining a patent can be seen as a pas de deux between examiner and applicant, with a steady flow of questions and answers serving as the background music. Missteps by either side can cause the dance to grind to a halt for months. Amgen’s application, for example, was resubmitted twice and handled by a biotech unit that has a considerable backlog; Genetic Institute’s was handled by another group, involving protein structures, that has almost no backlog.

Action on a typical patent application in most fields will begin within a few months of filing, and final action will be completed in about 22 months. Because of the backlog, patents officials say, it routinely takes about two years for an examiner to begin action on a biotech application, and another 25 months for the office to reach a final decision.

Quigg has announced that his goal is to have the average biotech patent completed within 18 months. That’s the good news. The bad news is that Quigg doesn’t expect to reach his goal before 1992 at the earliest, because of the growing number of applications. In fact, Quigg set the date at 1993 or 1994 during a March hearing before the small business panel of the House Energy and Commerce Committee. But critics say that such incremental change may doom small companies. Mycogen’s Barnes noted that two patents issued to his company while officials were talking with a Japanese firm about marketing a biopesticide “put us in a better negotiating position.” And he adds that Mycogen is still waiting to hear from the patent office about applications it filed nearly five years ago, shortly after the firm was founded.

Patent delays also put small companies at a disadvantage in competition with large firms to develop new biotech products, according to Linda L. Miller, a vice president of PaineWebber Inc. In competition among more than 20 companies to market a clot-busting drug for heart attack victims based on the same natural body chemical, tissue plasminogen activator (TPA), Miller told the House subcommittee, “the small company 'Davids’ are pitted against many ‘Goliaths’ without benefit of the ‘slingshot’ of patent protection.”

Nevertheless, not everyone is unhappy about the backlog. A large drug company that knows a pharmaceutical may take seven to eight years to receive FDA approval may not want rapid approval of a patent, points out Monsanto’s Duffey. Because a patent’s 17-year clock starts ticking as soon as the patent is issued, some companies not yet ready to market an invention may even try to delay patent approval once they have filed an application. “There are a lot of tricks a company can use,” says Mycogen’s Barnes.

University officials say the backlog doesn’t bother them, either. “It has hardly had any negative impact on our ability to license,” says Bernard Kosloski, director of life science at Research Corporation Technology, a firm that works with more than 100 universities to license their products. He says universities earn their money by licensing products as soon as they emerge from the laboratory, without waiting for patent approval. But that situation may not last forever. “The older philosophy of land grant colleges is changing,” says Ruth Shuman, a microbiologist at North Carolina State. “Technology transfer and the application for patents is becoming more and more important,” she says, in the race to develop products for the marketplace.

Delays in issuing patents lead to both intellectual and economic problems for university researchers, notes William Hostetler, director of technology transfer at Oregon State University in Corvallis. The backlog forces an inventor to drop current research and answer detailed questions about work done several years ago. “When the first office action on a patent does not occur for three years, it’s not intellectually appealing to the university,” he says.

Legal fees can hike the total cost of a U.S. biotechnology patent to $15,000, Hostetler estimates. That’s nearly three times the price of obtaining a patent in another field, reflecting the additional correspondence and revisions usually required. A filing overseas may cost thousands more; the cost may be out of reach for small universities such as Oregon State, which last year had $85,000 to spend on filing patent. Complete Surprise The patent. bottleneck can also have an insidious effect on the quest for new knowledge. According to one university microbiologist, a patent on a technique of gene transfer recently issued to competitors at the University of Wisconsin will mean the expenditure of thousands of dollars and months of research time to devise an alternative method. “We assumed that the process was in the public domain,” said the researcher, who asked not to be identified. “It had been so many years since the process was published that the patent came as a complete surprise.

Most small biotech companies cannot afford such mistaken assumptions as they fight to survive in an increasingly crowded field. “Many small biotech companies that previously flourished may go under during the next five years,” predict. Mark Dibner, director of the information division of the North Carolina Biotechnology Center and author of a recent study of the industry. “Any delay in issuing a patent would make it even harder for them to be successful.”

Ron Cowen is a freelance writer in Takoma Park, Md.