The pharmaceutical industry is facing uncertain times as a once-lucrative business model buckles under a globalising world economy. Charlotte Edmond reports on the companies and lawyers battling to secure all-important intellectual property in a rapidly changing market

Big pharma is big business, but business is changing. Dominated by a few multibillion-dollar players and shrouded in intellectual property (IP) secrecy, this has always been prime hunting ground for lawyers, and that goes double now that the business model that once generated lucrative products is facing major upheaval.

And for every monolith there are hundreds of smaller, innovative biotechs crying out for advice on how to protect their IP and get their business off the ground.

As much as law firms like to claim that every industry sector they serve has the potential to be cross-sold into different practice areas, the difference with the life sciences sector is that it really can be. From specialist patent litigators and IP gurus to regulatory compliance experts and multi-jurisdictional M&A advisers, there seems to be something here for everyone.

But for all these areas of the profession involved, the work for pharmaceutical companies essentially boils down to one thing: pipeline management. For years big pharma has been sustained by multibillion-dollar blockbuster drugs: the big sellers typically generate around $1bn (£660m) a year for the lifetime of the drug, but for the mega league – the likes of the sartan hypertension family, such as Losartan and Valsartan and Eli Lilly's 'happiness in a blister pack' Prozac, which managed to become part of the zeitgeist – this can reach up to $10bn (£6.6bn) annually. In the short-term these companies are cash-rich, but with many of these drugs either now off-patent or coming off patent in a few years' time, there is a storm on the horizon.

As Herbert Smith IP partner David Wilson puts it: "The pipeline of products in development by a large number of the traditional originator companies is not as large as it was, say, 10 years ago. One view is that this is because they have already picked the low-hanging fruit and are now left with those diseases that we are still trying to fully understand, let alone devise effective treatments for."

And with fewer drugs coming through the pipeline – as well as the fact that those that are filtering through are subject to greater scrutiny and more regulatory hurdles – there is a dash to secure intellectual capital. In recent years there has been a significant increase in licensing deals and takeovers in the biotech industry as big pharma battles to find the next big thing. But with nothing a sure bet, existing IP is at a premium. And you can guarantee that pharmaceutical giants will fight tooth and nail to defend it, inching every last bit of life out of patents and coming up with new and innovative indications for existing products.

Scrutiny breeds insecurity

This so-called 'lifecycle management' was
one of the key factors that led the European Commission to kick off its closely-watched inquiry into the pharmaceutical sector in
2008. For years pretty much the only major competition aspects firms and their advisers had to concern themselves with were issues surrounding parallel trade and dual pricing. (Parallel trade involves third parties acquiring patented drugs in one country to sell in
another market where they are more expensive, without the permission of the local trademark owner. Dual pricing covers brand owners marketing products for substantively different prices in different markets, sometimes giving widely varying prices or discounts to national purchasing bodies depending on how eager they are to secure market share in the target jurisdiction.)

And then one morning in January 2008 many of the major companies were hit by dawn raids as competition commissioner Neelie Kroes attempted to gather evidence of anti-competitive behaviour preventing new drugs and generic alternatives from reaching the market.

It was the first time that a sector inquiry had kicked off with unannounced inspections of this type, and was illustrative of how Kroes would come to tackle the sector, subjecting the industry to intense scrutiny in an attempt to crack down on the length of time it took generics to become readily available, thereby reducing healthcare expenditure.

Bristows joint managing partner Pat Treacy comments: "Competition law didn't used to impinge too much on the running of these businesses, but in the last three to four years the authorities have shown increased interest and suspicion, looking out for these so-called 'pay for delay' deals, for example."

In its final report into the sector, issued last summer, the Commission identified a number of key methods it said major players were using to maintain revenue streams for their blockbuster drugs.

"From a law firm point of view, some of the biggest projects involve cross-border lifecycle management work, and these can be organised to be completely legitimate, of course," comments Bristows head of IP Edward Nodder.

Among the criticisms the report levelled at the industry, one of its primary causes for complaint was the use of strategic patenting: filing a cluster of patents for the same medicine, making it difficult for generic competitors to see whether a version of the drug can be created without infringing patents. According to Commission figures, individual blockbusters are protected by up to nearly 100 product-specific patent families, leading to up to 1,300 patents or patent applications across the member states.

And as the number of patents increases, so does the number of disputes – another useful tool to delay generics coming to market, argues the Commission. There is also the related issue of the settlement agreements coming out of patent disputes, which often result in the generic company's access to market being restricted.

Another tactic has seen an increasing number of submissions before national authorities, with originators arguing that marketing authorisations or the pricing or reimbursement status of a generic could violate their patent rights. According to the Commission, when an originator company intervened, marketing authorisation procedures took, on average, four months longer.

Many originators would argue, however, that all of the above are merely normal business practices allowed under the law. And while the Commission is making noises about clamping down on the sector, companies are in a state of quandary, not sure what they are permitted to do. Several advisers report that this has led to an increase in work, with risk-conscious clients checking up on straightforward matters they would have otherwise dealt with in-house.

Treacy comments: "There is now a distinct atmosphere of uncertainty in the market – companies are now seeking advice about measures that would have previously been thought of as a natural way to fight for business and remain competitive. The sector inquiry really was a wake-up call, but it was always inevitable the sector would one day come under scrutiny – I sometimes felt like Cassandra warning people about it!"

Pipeline management

As the large players look to protect their pipelines into the future, the market has witnessed increasing consolidation. The most notable example of this to date – and probably the largest deal the industry has witnessed – was Pfizer's $65bn (£43bn) acquisition of Wyeth last year. This was swiftly followed in March by Merck's $41bn (£27bn) acquisition of Schering-Plough, further evidence of just how much companies are willing to pay to secure a better pipeline.

Wilson (pictured) adds: "If you are buying a company for its pipeline, it's all a matter of risk assessment – its value at any point in time depends on how far down the development programme the products have managed to get and what promise they have shown in clinical trials. Candidates can fail or throw up problems at any time right up to, and even after, regulatory approval. But get it right, and the potential upside is very large indeed."

Deals like this are undoubtedly a boon to corporate lawyers, but many of these large M&A advisers would not claim to have any particular expertise in the pharmaceutical sector. Rather they are parachuted in to help out on deals of this size where the issues are less about the sector and more about the nature of bringing two companies together.

But for every deal approaching this size, there are countless smaller buyouts of small to medium biotechs that own promising technologies or drugs which have passed initial clinical trials. A number of law firms have carved out a niche advising smaller start-up companies in the sector – ranging from medium-sized businesses working on a few drugs right down to research departments run out of universities. Work on this scale is not just legal advisory, but business advisory, with the majority of smaller biotechs not having any in-house legal expertise and often requiring business knowledge.

Investing in biotech

As many of the larger pharmaceutical companies cut back or outsource their research and development (R&D) functions (just this month AstraZeneca cut up to 1,000 jobs and announced it was to close its R&D site at Charnwood in Leicestershire and a smaller facility in Cambridge), the large group of biotech and university-based industries, particularly in the US and UK, take on increasing importance. Between 2000 and 2007 originator companies spent an average of 17% of their turnover from prescription medicines on R&D worldwide.

With the expense of developing drugs (most estimates put the average cost of getting a drug to market, taking into account the failure rate, in the region of $1bn), and in particular putting them through the clinical trial process, these small companies eat through capital rapidly.

Venture capitalists (VC) such as Abingworth, Essex Woodlands and Avlar BioVentures specifically operate in the life sciences space, and a number of broader-focused investment houses such as DFJ Espirit and Advent International have also invested in the sector. Swiss giant Novartis has established its own VC arm – Novartis Venture Funds – specifically to target promising new ventures that could bolster its pipeline and provide investment in return for equity. The industry has also in the past attracted a number of larger players such as Warburg Pincus and Bridgepoint Capital at later stages in the development process.

Traditionally, the US VC houses have been far more willing to invest in the pharmaceuticals industry, possibly to the detriment of UK innovation, which has struggled to get backing in recent years, especially since the market downturn. Advisers believe some sizable funds such as 3i and Atlas Venture have been scaling back or are withdrawing from biotech altogether.

"The US has typically had a deeper pool of capital available to the sector and is less risk-averse – it is just a different attitude to the sector. Consequently, biotechs in the US have been able, on average, to raise more capital than their UK equivalents, meaning US CEOs are not constantly worrying about the next financing round and are better able to concentrate on growing their underlying business," argues Morrison & Foerster's London corporate head, Paul Claydon.

A number of UK partners operating in the sector have raised concerns about what this means for the UK industry, with many of the country's innovative companies struggling due to the unsupportive environment.

"Sadly, a considerable number of biotech companies out there are going to the wall and then their IP, which took substantial effort and resources to develop, is picked up for next to nothing. Although the UK still has a strong biotech industry, it is getting increasingly difficult to keep the money coming in," says Taylor Wessing partner Tim Worden.

"For the UK the big issue is funding. There are a number of small to mid-sized companies leaving to go to jurisdictions that are better in terms of research, incentives and tax. Historically, the US has better funding for spin-outs and more of a long-term view. The market has been more liquid and there are more fiscal incentives. However, even in the US the funding position is very difficult at the moment," adds Bristows commercial partner Fiona Nicolson.

Firms such as Taylor Wessing, SJ Berwin, Ashurst, Dechert and CMS Cameron McKenna have found good business in advising on these investment deals, with many finding it provides a useful bridge between their IP practices and their broader funds and commercial groups.

There are also follow-on deals to be had, as the biotechs aim to expand and tap the public markets. This has opened a related section of the market to players such as Travers Smith and Lovells, which have strong links into sponsors active in the sector such as Cazenove and Piper Jaffrey.

Licensing in times of need

With the downturn in the market, many operating in the sector have noticed a marked increase in the number of licensing and partnering deals. It allows big pharma to nurture potential future performers without the commitment of taking on the company wholesale.

As Taylor Wessing's Worden, who was previously legal counsel and company secretary at Eli Lilly, comments: "For biotech, licensing out a product to pharma – for a sizeable upfront payment and royalties – is the holy grail. Biotech companies look to develop a product to a point where they have the data to attract a pharmaceutical company that is willing to put its expertise and financial muscle behind progressing the product through later stage clinical trials and on to the market. From a legal perspective, licensing out is a complex, bet-the-company-type transaction."

Most of the major players such as Merck, Roche and Eli Lilly have established partnering arms. Many, like Roche, purposely distance their partnering arm from the main body of the business and attempt to style themselves like biotech arms in order to have the greater flexibility and innovation sometimes lost in larger companies. In 2008 alone Roche struck 57 new agreements, including seven product transactions and 43 research and technology collaborations.

"This is very good legal business – there are always regulatory issues and partnering agreements, no matter the financial environment," states Covington & Burling life sciences partner Grant Castle.

Disputing rights

Litigators are, inevitably, another key contingent of legal practitioners that come into play in a market downturn. And the pharmaceutical industry, more so than most, is no stranger to disputes.

There is the typical innovator versus generic dispute, which, no matter the financial environment, will increase as these disputes are effectively over patent expiry. And then there is a growing level of litigation between innovators as competing companies struggle to license similar technologies. There is no room for generalist corporate law firms here – this is the realm of the specialist such as Bristows, Bird & Bird and Powell Gilbert.

According to European Commission figures, the number of patent litigation cases between originator and generic companies increased by a factor of four between 2000 and 2007.

And the US is a hugely litigious environment, in recent years generating sizable class action disputes, such as those which occured over painkillers Vioxx and Bextra, the like of which would not be seen in the UK.

However, some have raised questions as to whether the much-touted review of litigation costs by Lord Justice Jackson, which was published in January, will change this dynamic. "The dominant pharma litigation theme in recent years has been the financing of claims. The poor track record for claimants in pharma litigation in the last two decades and the risks to claimant lawyers of not recovering their costs under [conditional fee arrangements] have kept claims at a low level," says Reed Smith UK head of product liability litigation Paul Llewellyn.

Although the majority of cases are initiated by originator companies, generic companies win the majority of cases in which a final judgment is given, according to the Commission's recent inquiry. The average duration of patent litigation across EU member states is around 2.8 years.

But for some originators this is a gamble worth taking as the pay-off if a blockbuster drug can remain on the market, even for a few months longer, is enormous. Estimates put the cost of litigating patents in the UK at around £1m-£1.5m, but potential losses could be far greater.

"There is less of a stigma now, and litigation is no longer being seen purely as a fight between two parties who cannot agree, but a part of doing business," observes Wilson.

Many law firms contend that it is particularly in the realm of litigation that the divide between originators and generics comes into play. Especially in the UK, several law firms, such as Herbert Smith, Bristows and Covington & Burling, set their stall by only acting for originators.

"Most major pharmaceutical companies recognise that a firm with deep expertise will necessarily work for manufacturers that compete with one another. As long as they are sure that their confidences are maintained and that the firm will not act adversely to them, they are usually willing to accept the fact that it also acts for [originator] competitors," comments Covington partner Richard Kingham.

Patently clear

Disputes aside, increasing regulation is becoming one of the primary drivers shaping the industry. With the major regulators like the US Food and Drug Administration (FDA) and the European Medicines Agency (EMEA) creating a more stringent regulatory environment, it is becoming progressively more difficult for drug firms to secure patents for their products.

There has been a general rise in the level of information required to secure a patent. It is a problem inherent in the first-to-file system generally adopted in major jurisdictions aside from the US that companies filing too early in the process risk having their patents thrown out, but those who file too late may lose out to competitors.

Although regulation in the EU is supposedly harmonised, there are some significant variations in key areas, such as clinical trials, that give rise to further problems when crossing the hurdles to get a drug to market.

And harmonisation with regards to patents has been a long time coming. Traditionally, the UK has been viewed as having a strong national patent court, and decisions made in the UK are generally upheld around the EU.

However, moves towards creating a united front for litigation in the EU seem to have been thwarted at every turn. The recent sector inquiry found "strong support for the creation of a single community patent and a unified specialised patent litigation system".

Bird & Bird IP partner Gerry Kamstra comments: "We are getting closer to a European patent court system after political agreement was reached in December. Providing a pan-European patent litigation system has benefits but its use will depend on confidence in its features, some of which remain to be settled."

Even once a drug has been proven ready for market, varying pricing and reimbursement systems provide a further barrier to entry. In the UK, the National Institute for Health and Clinical Excellence, the body that provides guidance to the NHS, directly affects the margins that drug companies are able to make on products, and can make crushing calls on whether products are sufficiently cost-effective. In the US this is not currently an issue, although various proposals put forward under President Obama's healthcare bill could have a significant impact.

The bottom line

On average, around €430 (£474) was spent on medicines for each European in 2007. This corresponds to 2% of the EU's gross domestic product – and this is widely expected to increase as the population ages. The bottom line will always come down to the fact that regulations and political and social sentiments are focused on the need for better, cheaper and more personalised medicines.

Given the change in the regulatory environment reflected in the major jurisdictions, many predict that blockbusters are a thing of the past. Countries such as China and India, where the generics market is experiencing exponential growth, are becoming the new focus for the industry and reflect the trend towards mass medicines produced at low cost.

In contrast, in Western Europe and the US, where the R&D industry is strong, medicines remain expensive and highly regulated. However, without these high-cost centres of innovation the wheels would come off the wagon and there would be no money to develop new products.

If it remains unclear what will replace the industry's old model, it seems apparent that lawyers will increasingly be called upon to protect and conserve the lucrative IP being painfully stretched across an increasingly global market. As Reed Smith partner John Wilkinson summarises: "The pharmaceutical industry is one of the great successes of the capitalist system." But historical success alone does not appear to be enough to secure the industry's future in a much-changed world.

———————————————————————————————————————————————–

No stone unturned – protecting drug patents

Unsurprisingly, the bulk of drug patent litigation seen in the past five years has involved battles between originator and generic manufacturers.

"We are seeing fewer of these actions now, but more litigation between big pharmaceutical companies. This trend typically involves disputes over patents relating to certain biologics," says Justin Turner QC of Three New Square (pictured).

"These cases represent a maturing of these technologies and their practical application in the clinic," Turner adds. "Pharmaceutical companies are investing heavily in biologics [drugs derived from cells and tissues] and it is expected this trend will continue."

Past examples include Eli Lilly v Human Genome Sciences (HGS) [2008], where litigation was concerned with treatments for an auto-immune disease. In that case, Powell Gilbert, 11 South Square silk Henry Carr and 8 New Square's Michael Tappin QC were instructed for HGS. Howrey advised Eli Lilly, instructing Three New Square's Andrew Waugh QC and Colin Birss QC.

Another case coming up in this area is Medimmune v Novartis, which concerns Lucentis, the biologic drug used to treat retinal degeneration, sold by Novartis.

A number of chambers have seen litigation in relation to supplementary protection certificates (SPCs), which aim to give additional protection after the expiry of a basic patent. One such example is Generics UK v Synaptech. Taylor Wessing was instructed by Generics using Three New Square's Waugh and Brick Court Chambers' Kelyn Bacon.

"We anticipate more litigation exploring the circumstances under which SPCs may be granted and may be challenged," says Mark Chacksfield, a junior barrister at 8 New Square.

Another area which has occupied the courts recently is the ability to patent enantiomers – compounds that exist in two 'mirror images' of each other at a molecular level but which can have very different effects. Pharmaceutical companies are encouraged to synthesize the two enantiomers separately. Sometimes only one is active, and sometimes one can be toxic. This has led to the filing of patents for individual enantiomers.

There have been a number of cases relating to this class of drugs, including Generics UK v Lundbeck and Generics UK v Daichii. The former case saw Taylor Wessing again brought in for Generics, while fellow appellants Arrow Generics and Teva instructed law firms Forsyth Simpson and Roiter Zucker respectively. Barristers instructed included Three New Square's Simon Thorley QC and Tom Mitcheson and 8 New Square's Tappin and Chacksfield. In the case of Generics UK v Daichii, Taylor Wessing, Tappin and Carr advised Generics, and Herbert Smith and Three New Square's Andrew Waugh QC and Thomas Hinchliffe advised Daichii Pharmaceutical and Daichii Sankyo. The patentability of the anti-depressant drug Escitalopram, which was an enatiomer of an earlier drug, Citalopram, was litigated to the House of Lords.

———————————————————————————————————————————————–

Really big pharma – recent key deals

• Merck's $7.2bn (£4.8bn) acquisition of lab filter and purifier manufacturer Millipore earlier this month saw a trio of firms instructed. Skadden Arps Slate Meagher & Flom took the lead role for Merck, fielding a team including M&A partners Peter Atkins, Hilary Foulkes and Margaret Brown. Millipore turned to Cravath Swaine & Moore and Ropes & Gray for advice.
• In January 2010, Allen & Overy (A&O) advised pharma giant Novartis on its $28bn (£17.4bn) acquisition of a majority stake in Alcon, the world's largest eye-care company. The deal was the second stage of a larger transaction originally struck in spring 2008, when Novartis purchased a 25% stake in Alcon for $10.4bn (£6.5bn), handing the company an option to purchase the 52% of the company owned by Nestle.
• In September of last year, Willkie Farr & Gallagher and Paul Weiss Rifkind Wharton & Garrison took lead roles on the $2.6bn (£1.6bn) acquisition of US drugmaker Sepracor by Japan's Dainippon Sumitomo Pharma.
• In September 2009, Freshfields Bruckhaus Deringer and Baker & McKenzie took on lead roles on Abbott Laboratories' $7.1bn (£4.5bn) acquisition of pharma company Solvay's drug unit. Solvay turned to a team from Freshfields led by corporate partners Geert Verhoeven in Brussels and Timothy Wilkins in New York.
• In May 2009, Shearman & Sterling advised longtime client Novartis on its $1.2bn (£757m) acquisition of the generic cancer drug business EBEWE Pharma. Corporate partner Harald Selzner, based in Duesseldorf, led the firm's team on the deal. Shearman has represented Novartis on several previous deals, including its $8.4bn (£5.3bn) acquisition of generic drugmakers Eon Labs and Hexal in 2005.
• In April 2009, Cleary Gottlieb Steen & Hamilton advised GlaxoSmithKline (GSK) on a $3.6bn (£2.5bn) buyout of dermatology specialist Stiefel Laboratories. Cleary's New York-based team was led by corporate partner Benet O'Reilly. GSK has instructed Cleary on many occasions in the past, including in 2008 when the firm's London-based US capital markets partner Sebastian Sperber advised on its $210m (£145m) acquisition of some of Bristol-Myers Squibb's Egyptian assets.
• In March of last year, Fried Frank Harris Shriver & Jacobson and Wachtell Lipton Rosen & Katz secured lead roles on Merck's $41bn (£28.4bn) acquisition of US pharma rival Schering-Plough. The two firms have long been major M&A counsel to the two companies with Fried Frank advising Merck and Wachtell advising Schering.
• In July 2008, Davis Polk & Wardwell won the lead role on the $43.7bn (£21.9bn) biotech takeover bid, as Swiss healthcare group Roche offered to buy the remaining shares in US biotech company Genentech. Roche already owned 55.9% of Genentech, and the deal to purchase the remaining 44.1% formed the seventh-largest drug maker in the US, with sales of $15bn (£7.5bn) in the country, according to Roche.
• In March 2007, A&O landed a lead role advising Schering-Plough on its €11bn (£7.5bn) acquisition of the medicines business of Dutch chemicals group Akzo Nobel. The A&O team was led by Amsterdam corporate partner Sietze Hepkema (pictured) alongside banking partner Andrew Thomas and tax partner Olaf van der Donk. It was the second-largest M&A transaction in Dutch history, following the €24bn (£16bn) tie-up between Netherlands-based utility giants Essent and Nuon.