Editors Note: Caroline Horton Rockafellow is a member of the Research Triangle Park law firm of Daniels Daniels & Verdonik, P.A. TechLaw is a regular feature in LTW.

RESEARCH TRIANGLE PARK –0 The United States Supreme Court recently handed down its ruling in Merck KgaA v. Integra Lifesciences I, Ltd., a case that has been closely watched by the biotechnology and pharmaceutical industries.

This case finally resolved the issue of whether patented inventions used in preclinical research are exempt from claims of infringement when the results are not ultimately included in a regulatory submission to the FDA. Overruling the lower court opinion, the Supreme court found that such preclinical research used to identify new drugs falls within the experimental use exception of the Drug Price Competition and Patent Term Restoration Act of 1984, as amended (U.S.C. § 271(e)(1)).

Drug manufacturers have understood for some time that research on and development of generic drugs for the purpose of submitting a regulatory submission during the term of a drug patent would be acceptable, so long as such drugs were not commercialized until after the expiration of the applicable patents. This ruling goes a step further and holds that the use of patented compounds in preclinical studies is also subject to the experimental exception, as long as there is a reasonable basis for believing that the experiments will produce information relevant to a regulatory filing, regardless of whether or not it is actually used in such submission.

The Background

In the early 1980s Scripps Research Institute and its researcher, Dr. David Cheresh began working on drug development in the field of angiogenesis. His work proved promising, and Scripps and Dr. Cheresh eventually began working with Merck KgaA to continue the angiogenesis drug development based on compounds supplied by Merck.

During this process it was determined that the group of compounds which appeared most promising were covered by a series of five patents owned by Integra Lifesciences I, Ltd. and the Burnham Institute. These patents were related to a tripeptide sequence, known as the RGD peptide. Integra offered to license Merck rights to such patents, but Merck refused. Integra subsequently filed suit against Merck, Scripps and Cheresh, claiming that Merck infringed its patents and willfully induced others (Scripps and Cheresh) to infringe its patents by supplying the peptide to Scripps and Cheresh (the suit against Scripps and Dr. Cheresh was dismissed at the District Court level).

Under U.S. law, anyone who “makes, uses, offers to sell, or sells any patented invention, within the United States or imports into the United States any patented invention during the term of the patent therefore, infringes the patent.” Accordingly, the research use and application of the RGD peptide claimed in the Integra patents would, without more, constitute an infringing use under U.S. law.

However, in 1984 the Drug Price Competition and Patent Term Restoration Act was enacted to provide an exception to the general law for acts that “make, use, offer to sell, or sell within the United States or import into the United States a patented invention — solely for uses reasonably related to the development and submission of information under a Federal law which regulates the manufacture, use, or sale of drugs or veterinary biological products.”

In other words, activities that would otherwise be deemed to infringe a valid U.S. patent are subject to a safe harbor exemption, if such activities are undertaken as part of a research effort required for submission of a regulatory application.

In this case, the question before the Court was whether the testing of patented peptide sequences for the purpose of identifying drug candidates fell within this safe harbor exception. The Court noted that because “scientific testing is a matter of trial and error, one can know at the outset that a particular compound will be the subject of an eventual application to the FDA only if the active ingredient in the drug being tested is identical to that in a drug that has already been approved.” Accordingly, the Court’s final ruling held that the safe harbor exemption under U.S.C. §271(e)(1) extends to all uses of patented inventions that are reasonably related to the development and submission of any regulatory information.

Impact on the Industry

This ruling is both good and bad news for our local economy. For companies, that depend on a revenue stream based on early development of drug compounds with a license of patent rights to third parties for the purpose of continued drug development (“Compound Companies”), this ruling is potentially devastating. If there are trade secrets or other useful know-how associated with the compound, then the Compound Companies may still have something of value to license to the drug developer (“Developing Company”). If, on the other hand, the only critical piece of intellectual property is the patent and the drug is still years from commercialization, then under this new ruling, the Developing Company may be able to move forward and use the Compound Companies’ compound in its drug development efforts, without compensation to the Compound Companies.

In contrast, companies that were previously limited in their ability to develop drugs based on patented compounds are now able to move forward with such development, provided that there is a reasonable basis for the company to believe that the compound tested could be the subject of a regulatory submission, i.e., an FDA filing. In addition, there is less of a concern that drug development may infringe third party patents, since this only becomes a concern at the commercialization stage and not the development stage. This may result in a speedier due diligence analysis for venture-backed companies, as the patent infringement analysis for pre-commercial drug research efforts become less critical.

Also, certain research that was previously viewed as infringing and was therefore conducted overseas can now be moved back to the United States. This may result in additional opportunities and jobs for small research and development companies.

It was the large pharmaceutical companies that bankrolled and supported this litigation. However, in the end it may be the small start-up companies that benefit the most from this ruling. Although there will be some companies devastatingly impacted by the loss of licensing revenues, the additional flexibility in undertaking early stage research may result in significant additional opportunities for other small companies. After all, it is the small start up companies that have proven to be the most flexible in adapting to new opportunities.

While the recent Supreme Court holding in Merck KGaA v. Integra Lifesciences I, Ltd., may have been overshadowed by other holdings of more interest to the mainstream media, this case may ultimately have a greater impact on our local economy than any other case coming out of the Court this session. It remains to be seen whether the negative loss related to licensing revenues or the positive gain related to additional flexibility for development companies will ultimately have the greater impact for our local economy. Either way, this ruling will definitely impact the way companies move forward with research and development in the drug development arena.

Daniels Daniels & Verdonik, P.A. has been serving the legal needs of entrepreneurial and high technology clients for more than 20 years. Caroline Horton Rockafellow is a licensed patent attorney who works primarily in the areas of technology deals and licensing. Questions or Comments can be sent to crockafellow@d2vlaw.com