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March 28, 2000
Two Paths to the Same Protein
By ANDREW POLLACK
OSTON, March 27 -- A legal showdown began here today that could determine whether some of the biotechnology industry's most lucrative drugs will be vulnerable to lower-priced competition.
On one side is Transkaryotic Therapies Inc., a tiny company with technology that could allow it to circumvent patents on drugs produced by genetic engineering. In partnership with Aventis, the big European drug company, it wants to sell its own version of Epogen from Amgen Inc., the biotechnology industry's best-selling drug, with worldwide sales of about $4 billion.
Amgen, which has become the biotechnology industry's superstar largely on the strength of Epogen, has filed a patent infringement lawsuit to protect its product.
The trial in the United States District Court here comes at a time of growing controversy over biotechnology patents. The issues in this case are different from the recent furor over whether human genome data should be patented. Still, the case could touch on one of the fundamental questions of the biotechnology age -- just how far patents can extend to cover a substance found in nature.
Besides the immediate stakes involved with Epogen, which is used to prevent anemia in kidney dialysis patients, a validation of Transkaryotic's technology could lead to cheaper versions of some other biotechnology drugs. These include such wonder drugs as human growth hormone; alpha or beta interferon, which are drugs used for treating hepatitis C and multiple sclerosis, respectively; or Amgen's other billion-dollar product, Neupogen, which counters the adverse effects of chemotherapy. Indeed, TKT, as Transkaryotic is usually called, says it has six other drugs, which it will not identify, under development using its technology that could eventually challenge products from other companies that are now on the market.
"It does raise the specter and concern that there could be a generic biotech product," said Elise Wang, biotechnology analyst at PaineWebber.
But if that might be bad news for investors in some of the established biotechnology companies, it could be good news for consumers and health insurers, because bio-engineered drugs are some of the most expensive in the world, in part because they face little competition.
Epogen costs about $8,000 a year for kidney dialysis patients. Cerezyme, which produces sales of about $500 million a year for the Genzyme Corporation and is used to treat a rare hereditary disease, costs about $170,000 a year for each patient.
Indeed, Genzyme agreed last year to acquire Cell Genesys Inc., a company with technology similar to Transkaryotic's, in part to obtain patents it thought it could use to block competition from TKT. The acquisition fell apart, however, for unrelated reasons.
The threat to other drugs besides Epogen will not materialize for years because Transkaryotic, which is based in Cambridge, Mass., has not started clinical trials on any of the other six products it is developing. And even Amgen might be less vulnerable than first appears.
Still, with the stakes so high, investors are watching the case closely. At its health care industry investment conference in January, Chase H & Q invited 40 of its top institutional investor clients to an exclusive dinner at which two law firms presented a tutorial on the case. PaineWebber hired a lawyer to conduct conference calls analyzing the results of preliminary hearings that began today.
About 100 people, including some Wall Street analysts and investors in the companies involved, attended today's hearing, in which Judge William Young began to interpret some of Amgen's patent claims. The actual trial is scheduled to begin sometime next month.
Amgen's stock, which fell sharply last week on jitters about the case, rose $5.8125, or 10.7 percent today, closing at $60.375, as Judge Young sided with Amgen on the first term in dispute. Transkaryotic's stock fell $7.875, to $70.25.
At risk for Amgen is a chunk of its $1.8 billion in annual sales of Epogen, which is also used to treat anemia in patients undergoing chemotherapy. Equally threatened is Johnson & Johnson, which has an estimated $2 billion or more in sales of the drug, which it calls Procrit, under license from Amgen.
But with many other products in their arsenal, neither company's fate rests on the outcome of the patent dispute.
If Transkaryotic loses, on the other hand, it would deal a severe, though probably not fatal, blow to the company, which as yet has no products or profits. "If TKT loses, it's a $30 stock," said Anders Hove, a representative of BB Biotech, a Swiss investor that owns about 12 percent of Transkaryotic. "If they win, it is a $150 to $200 stock in three weeks."
Epogen, generically known as erythropoietin, or EPO, is a protein produced in the kidney that stimulates the production of red blood cells.
Amgen produces it using recombinant DNA, or gene-splicing, technology. It clones the human gene governing the production of EPO and implants the gene into hamster ovary cells, which then make the protein.
Transkaryotic uses what it calls gene-activation technology. It relies on the fact that all human cells have a complete set of genes, even though the gene for producing EPO is not active except in kidney cells. So Transkaryotic inserts an "on switch" into human cells grown in culture, activating the gene for EPO. The switch is surrounded by genetic sequences that match those found upstream of the EPO gene on the chromosome. That guides the switch to the spot where it will turn on the EPO gene and not any other gene.
Transkaryotic argues that its process is distinct from gene splicing and was not even envisioned when Amgen got its first patents in the 1980's, and therefore does not infringe on Amgen's work.
"We think that we're doing something fundamentally different," said Dr. Richard F. Selden, Transkaryotic's founder and chief executive.
Amgen, however, has five patents related to EPO that together claim to cover all versions of EPO made in cells of vertebrates. "Amgen's claims for EPO are not limited to recombinant products," Rusty Day, a lawyer representing Amgen, told the court today. "They are much broader than recombinant products."
A key issue in the case, which was filed in 1997, is whether Amgen's patents will be interpreted that broadly.
At today's hearing, for instance, the attorney for Transkaryotic and Aventis argued that the term "vertebrate" cells should not include human cells. But Judge Young said he would take the term at its face value, to include human cells.
Transkaryotic argues the patents should not include all EPO because Amgen did not invent the substance. Other scientists had isolated EPO from human urine well before Amgen even existed, and one doctor even tried treating three anemic patients with it.
Indeed, Transkaryotic is hoping to get all of Amgen's patents invalidated by claiming that Amgen defrauded the Patent and Trademark Office by withholding information about this prior work and about the chemical composition of its EPO. Amgen says the Patent Office was fully informed.
"The real question is how strong is the U.S. patent system," Gordon M. Binder, chief executive of Amgen, said after today's hearing. "TKT can do the same thing to many other biotech products that they did to EPO."
While some important rulings could come in the next few days, an ultimate decision probably will not be issued for months. Whatever the outcome, it is all but certain to be appealed.
Still, many analysts say that Amgen, which has received some new patents on EPO in the last few years, is in a strong position because it is making 18 claims of infringement.
"The defendant must win on all the claims," said Edmund R. Pitcher, the lawyer retained by PaineWebber to analyze the case. "It's as if you are standing in a position and 18 bullets are coming at you. It doesn't do you much good to dodge 17 of them."
But Eric Schmidt, an analyst at SG Cowen, said he thought Transkaryotic would win. "We don't believe the erythropoietin protein is patentable," he said. "There's just too much prior art." Some of Amgen's more recently issued patents, he said, had claims that had been broadened because Amgen knew of Transkaryotic's work.
Other analysts say Amgen will not be hurt too much if it loses the case because it has already filed with the Food and Drug Administration for approval to sell a second-generation version of Epogen that can be given less frequently. The new version, called NESP, is likely to be approved next year, even before Transkaryotic's version of first-generation EPO is released. TKT and Aventis, formed by the merger of Hoechst A.G. of Germany and Rhône-Poulenc S.A. of France, do not expect to apply to the F.D.A. for marketing approval until later this year.
Moreover, NESP will open up big new markets for Amgen. Under its agreement with Johnson & Johnson, Amgen sells Epogen only for kidney dialysis in the United States while Johnson & Johnson sells it for other uses domestically and for all uses in Europe and some other countries. But Amgen will be allowed to sell NESP for all uses in both the United States and Europe.
Meanwhile, a victory for Transkaryotic would not necessarily mean smooth legal sailing for its other drugs. Each one is likely to face a patent challenge and each patent has different wording, lawyers say.
Indeed, Amgen's own EPO patents are weaker in Europe than in the United States, raising the possibility that Transkaryotic might lose here but be able to sell in Europe, where a similar trial is scheduled to start in September.
Analysts say TKT's threat is likely to be limited to the first generation of biotech products like EPO, Neupogen, the interferons, insulin and growth hormone. These proteins were known before gene splicing was developed. But now biotechnology companies often discover new proteins, making it easier to get a patent on the substance itself, no matter how it is made.
If Transkaryotic wins, royalties from the sale of EPO would also go to Cell Genesys, the company with similar gene-activation technology. That is because Aventis licensed Cell Genesys' patents to prevent Cell Genesys from blocking TKT. The license also extends to the second drug Transkaryotic and Aventis plan to produce together. That drug, which is about to enter clinical trials, is speculated to be Amgen's Neupogen.
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