Thursday, 12 January 2017

When a company's future is caught in the generic drug/proprietary drug crosshairs

There is nothing in any other IP regime analogous to the generic/proprietary divide with respect to the exploitation of patent rights in the pharmaceutical industry. The relatively short period of patent protection, 25 years at the most, in light of the multi-generational staying power of some drugs, means that there is potentially big business in commercially exploiting the public domain after a drug has come off patent. Add to this the symbiotic relationship between proprietary and generic products; without the patent protection undergirding the former, the latter would never come to be.

While a first view of the proprietary/ generic landscape might lead one to think that it is a zero-sum game, i.e., a company that is engaged in
proprietary products will not also be involved in the generic market, and vice versa, the commercial reality is much more complex and nuanced. There is no pharmaceutical company that better reflects the challenges of trying to master both these product markets than the Israeli-based company, Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA) Thus, while it is often said that Teva is the world’s largest generic drug company, its most successful product over recent years has been the proprietary drug for multiple sclerosis, COPAXONE, reportedly amounting to 35% of profits. This reminds us how a basket of generic drug products can be barbelled by a single proprietary blockbuster.

The problem for Teva is that COPAXONE is coming off patent. Add to this a lackluster track record of acquisitions and general pressures from competitors in the generic space, culminating in the failure of its multi-billion dollar acquisition of the Mexican company, Rimsa. This is before President-elect Trump's comments yesterday on drug prices and manufacture abroad, as reported by fellow blogger, Mike Mireles. It is no surprise, perhaps, that Teva’s shares have continued to tumble.

Against this backdrop, the interview given by Teva activist shareholder Benny Landa is an illuminating window through which to view the challenges facing this mid-sized, proprietary cum generic drug company, with a bit more than $20 billion in sales per annum. Landa is an iconic figure within the Israel high-tech scene, best known as the founder of the digital print product company, Indigo, which was acquired by HP in 2002. In an interview that was published by GLOBES, an Israeli business paper, on January 9th, Landa was pointed in his criticism about the management and strategy of the company.

Landa's criticisms derive from the fact that, as he describes--
"[t]he company has lost half of its value. It's worth less than its debt [a drop of nearly 50% in its share price during this period, pushing its market cap down to $35 billion]. “
The problem starts with the inappropriateness of the board of directors as well as the CEO.
"… it's clear to me that they need one of two things: either a CEO with pharma experience or an experienced board of directors to guide him….. I'd like to see at least a third of the directors with substantial experience - at least one third. For that, the board of directors would have to replace itself, and that's not happening."
Landa continues--
"All the directors are excellent people with experience in their fields, but they can't devise a strategy for a company like Teva. It's no wonder that the company made such mistakes. The directors don't even know what questions to ask.”
In addition to the problem of the composition of the board of directors and the expertise of the CEO in the pharma industry, Landa frontally attacks the company's strategy, in the following words--
"In my opinion, the emphasis on generics is a big mistake. It's a misguided return to the comfort zone, based on the idea that what worked so well in the past will go on working. The world has changed, however. Generics is now competition over price - who can produce the most cheaply. Is that Israel's advantage? Cheap production? That's not what we are.

Teva should follow the trail blazed by COPAXONE - Israeli innovation and technology. Teva knows how to be innovative. It's such a pity that all this capital is going to generics. It's just tying the company's hands, and it can't make innovative acquisitions. Teva has to rid itself of its dependence on generics."
He was emphatic—Teva "mustn't be the Walmart of the drug market. It can't operate in the cheap mass sector."

Not surprisingly, Teva has a different view of the situation here.

The criticism leveled by Landa addresses the more general question of the proper business model for the company, given its historical success in the generic market overlaid by several profitable proprietary products. As Landa notes, the generic market puts a premium on operations, while the prerequisite for proprietary market penetration is R&D, either home-grown or acquired. And in this lies the challenge for Teva: can it successfully carry on with its generics business; does it have the savvy to identify winners in the proprietary space; and does it have the wherewithal to do successful R&D (recall that COPAXONE was based on a discovery made at the Weizmann Institute of Science)? To hear Landa, the answers to these questions may be a matter of commercial life or death for the company.

For more on patent exploitation and the public domain, see here.

Wednesday, 11 January 2017

Trump on Drug Prices: Pharma/Bio Stocks Drop

Some have criticized Donald Trump for backing off of some of his campaign promises.  However, in a press conference on January 11, 2017, Trump reiterated his concern with drug prices stating that drug companies "are getting away with murder."  I don't know if he could have expressed himself in stronger terms.  Notably, the Washington Post reported that the stock of pharmaceutical and biotechnology companies dropped after the press conference and that concerns were expressed by one biotechnology insider that venture capitalists may move away from biotechnology companies.  This is troubling given the competition that already exists for venture capital funds from software startups and the promise of expensive to develop biologics.  Moreover, some successful securitization deals have greatly benefited a few universities.  The move to take a big step toward drying up the pipeline for new biologics may not be the best approach.  What are some other ideas Trump could consider?  Should Trump look to other developed countries to help carry the supposed very high cost of pharmaceutical/biologic development?  That's not very satisfying.  Should the government invest more public funds into research and development?  For more on pharmaceutical pricing, see here, here and here

Monday, 9 January 2017

The Trump is Coming to Town: AIPLA Provides an IP Wish List

The Trump presidency is looming ahead, but what of intellectual property policy.  Interestingly, BNA reported that a Republican Congressional Representative from California (Issa) called on Trump to keep Michelle K. Lee as head of the United States Patent and Trademark Office.  There also have been grumblings about pushing for legislation to undermine and reverse the U.S. Supreme Court’s Alice decision on patent eligible subject matter.  Recently, the American Intellectual Property Law Association (AIPLA) sent an advice letter to Trump regarding intellectual property.  Notably, the AIPLA letter covers patent, trademark and copyright law in some relative detail, and also gives some advice regarding trade secret law, domain names and other matters. 

The copyright focus of the letter relates mostly to Copyright Office leadership choice and modernization.  The trademark focus is on consistency of decision making concerning section 2(a) on disparagement (if it is upheld by the U.S. Supreme Court), removing “deadwood” from the register, protecting U.S. consumers from confusion from U.S. uses of foreign marks well-known in the U.S., and strengthening the Madrid system. 

The patent focus is the longest part of the letter and seems to generally counsel the exercise of care in passing any more patent reform particularly directed at litigation abuse.  The message appears to be that we need to study the changes that have been made to address abuses of the system before we engage in any more changes to address litigation abuse (or at least be fully aware of the changes that have been made).  Notably, the letter states that the existing changes may not address all abuses of the system, but that we also need to consider lawful (non-abusive?) enforcement.  However, there is room for reform in, at least, two areas: the Patent Trial and Appeal Board and patent eligible subject matter.

The letter addresses the Patent Trial and Appeal Board stating:

In the first few years of the PTAB’s existence, its proceedings have been used more than anticipated, and some are concerned that the proceedings, as currently implemented, are not as fair and balanced as they should be, and that they are stacked in favor of those seeking to invalidate patents.  AIPLA believes that the proper balance can be found through targeted changes, and we look forward to working with your Administration in this effort.

And, as alluded to before, patent eligible subject matter and the Alice decision are a major concern.  The letter nicely lays the groundwork for reforming Alice based on administrative necessity and clarity:

Independent inventors, small and large businesses alike need a strong, balanced and predictable patent system to foster R&D, manufacturing and sales.  Section 101 of Title 35 sets out the categories of patent-eligible subject matter that may be entitled to patent protection.  However, recent Supreme Court decisions have created uncertainty about the kinds of innovations that are patent-eligible in certain industries, such as biotechnology and computer software.  Meanwhile, the USPTO has experienced challenges in applying the Court’s evolving interpretation of patent eligibility into its examination processes.  AIPLA believes that more clarity, whether from the courts or from the Congress, is needed in this area, and we ask that efforts to provide such clarity and predictability be supported by your Administration.

The letter concludes with a request for continued and increased enforcement of U.S. IP in foreign markets, continued strengthening of trade secret protection and enforcement given an asserted increase in hacking, and continued involvement in administering the domain name system. 

Thursday, 29 December 2016

The Internet of Things: U.S. Copyright Office Releases Report on Software Enabled Products

In December of 2016, the U.S. Copyright Office released a 94-page Report on Software Enabled Consumer Products [Report].  The Report is in response to a request for analysis from members of the Senate Judiciary Committee concerning current copyright law and the ubiquitous nature of software.  Notably, the U.S. Copyright Office believes that, at least in the context of copyright law, that there is not a need for new legislation.  The U.S. Copyright Office appears to believe that current flexibilities in the law can accommodate technological change.  In particular, the Report, in part, “examines how software-enabled consumer products can be resold, repaired or improved, researched for security flaws, or made to interoperate with other products or software.”  The Report concludes that:

The Office’s study did not reveal evidence that consumers have been prevented from reselling or otherwise disposing of their software-enabled consumer products.  The Office does not see a current need for legislative change relating to resale, so long as courts properly apply the first-sale right embodied in section 109 of the Copyright Act.  

The Office recognizes the value of allowing the public to freely repair defective consumer products and tinker with products to improve their function.  But establishing a new statutory framework explicitly permitting repair and tinkering does not appear to be necessary at this time.  Properly understood, existing copyright law doctrines—including the idea/expression dichotomy, fair use, merger, scènes à faire, and section 117—should continue to facilitate these types of activities.

Similarly, the Office recognizes the value of allowing the public to engage in good-faith security research of software-enabled consumer products.  Again, however, statutory changes (at least outside the context of the anticircumvention provisions in section 1201) do not appear to be necessary at present.  Existing copyright law doctrines should protect this legitimate activity.

The Office recognizes the significance of preserving the ability to develop products and services that can interoperate with software-enabled consumer products, and the related goal of preserving competition in the marketplace.  While a new statutory framework might help reduce some uncertainty in this area, such action does not appear to be necessary at this time.  Again, faithful application of existing copyright law doctrines can preserve the twin principles of interoperability and competition.

Interestingly, the Copyright Office reviewed licensing practices, particularly resale, and concluded that:

The Office’s study found that, in certain circumstances, such as resale, there is only limited evidence regarding real-world restrictions.  Accordingly, the Office believes that the question of ownership versus licensing, while very important, is one that can be resolved with the proper application of existing case law. 

The Copyright Office further stated that in the context of resale:

Some commenters made the claim that—even if manufacturers of software-enabled products do not currently impose restrictions on resale as part of software licensing agreements—they may do so in the future in an attempt to eliminate secondary markets for software-enabled products.  The Copyright Office agrees that if license agreements in the future interfere with consumers’ ability to resell or otherwise dispose of their software-enabled products, such a practice would be a concern worthy of legislative attention.  One possible solution is YODA, mentioned above, a bill that several commenters supported as a good starting point to resolve concerns regarding the resale or transfer of software-enabled consumer products.  At the same time, there may be reasons to think that this issue is unlikely to arise, including that market forces—such as the efforts of consumer advocacy groups to shed light on abusive practices—are a barrier to engaging in behavior of this sort.

Facebook to Scoop (?) New Ideas in Partnership with Leading Research Universities

In an intriguing post, co-Blogger Neil Wilkof recently discussed how essentially elite firms may be beating the competition.  In a recent article on Reuters titled “Facebook Forges Agreement with 17 Universities to Streamline Research,” Dustin Volz discusses how Facebook has entered into partnerships (which includes unstated funding) with 17 major research institutions, including Harvard, Stanford and MIT, for the opportunity to work together on forthcoming research.  The article is a little light on details concerning the agreements.  As I described Steve Blank's discussion in an earlier post, some firms have placed outposts in technology innovation hotbeds to track new cutting edge developments and companies.  For sure, the nimble survive and those who are not do not—see Kodak.  However, Facebook may be strategically moving one step forward by starting at the source of some of the new major developments.  This arguably gives Facebook the “first” opportunity to scoop up new research and ideas as they develop in leading research universities.  Is this a good thing or a bad thing for innovation and importantly competition? 

The Reuters article states that:

The agreement between Facebook's Building 8 and the universities comes as the social media company seeks to find new revenue streams in virtual reality and artificial intelligence, after the company signaled last month it had begun to hit some advertising growth limits on its network of 1.8 billion monthly active users.

Research partnerships between universities and companies typically take nine to 12 months to facilitate, but the new agreement will allow for collaboration on new ideas within weeks, said Regina Dugan, who joined the company in April to run the new Building 8 unit.

Dugan did not provide specifics to explain how the partnership will promote a quicker pace of research, but traditional negotiations between universities and companies can often take several months.

Friday, 23 December 2016

Association of University Technology Managers Releases FY 2015 Highlights Report

The Association of University Technology Managers (AUTM) has released a Highlights report concerning its FY2015 annual survey.  The results of the survey are promising.  For example, there was a 15% increase from the prior year of licenses and options executed.  An almost 15% increase in new patent applications filed.  Over an 11% increase in the number of start-ups created.  And, a 5% increase in both research expenditures and invention disclosures.  I am not too excited about using patent applications and grants as a metric for technology transfer success, but the licenses, options, number of startups and research expenditures is positive.  Moreover, the supposed increase in using consultancy agreements and licensed know-how divorced from patents by technology transfer offices may point to even more actual technology transfer happening from university to the private sector.  (I am assuming the reported licenses and options are associated with patents.) 

The Highlights further states that 879 new products have been introduced to the market and $28 billion “in net sales from new products” has been realized.  Interestingly, 785 of the 1,012 startups were formed in the research institution's home state.  Importantly, $2.5 billion in licensing income was collected which is 28.4% more than the prior year.  It would be interesting to see that $2.5 billion number broken down by patent and product/service (for a critique of using revenue generated as a metric of technology transfer success, see here).  AUTM notes that 3.8 million jobs have been created as well as 153 new drugs and vaccines on the market “because of the Bayh-Dole Act.”  There was about a 65% response rate to the survey—202 of 308 institutions participated. 

Thursday, 22 December 2016

Call for IP valuation experts

Jackie McGuire, at Coller IP, has informed us that she and Martin Brassell, at Inngot, are undertaking a study of the IP valuation market for the UK Intellectual Property Office, including the structure of the IP valuation market, motivations and barriers to engagement, and best practice in different contexts.

Jackie notes that prior studies for the Intellectual Property Office have established that the majority of UK business investment, and business value, now lies in intangible rather than fixed, tangible assets. Despite this, companies do not always value their IP or take steps to protect the value that it underpins. The study builds on the report from the European Commission Expert Working Group on IP Valuation and Banking on IP. The results will be used to inform UK policy and to develop solutions to promote the wider adoption of IP and intangible asset valuation.

All discussions on this study are using the Chatham House Rule. They will use the information received, and with permission, reference the company’s participation in a published report. While they would welcome the opportunity to use specific case studies, they will not link the personal identity of those interviewed or that of the company with specific comments or findings, without prior approval.

Please contact or by 15th January 2017.