Spring 2010 Payments to Healthcare Professionals By David Hoffmeister, Partner, Farah Gerdes, Associate, Kristen Harrer, Associate, and Federal law makes it illegal for medical device and pharmaceutical companies to offer or give anything of value to healthcare professionals in exchange for purchasing any product or service that is reimbursed by the federal government (e.g., under Medicare or Medicaid). It is also unlawful for the companies’ customers—primarily physicians, hospitals, and healthcare institutions—to either solicit such items of value from their vendors or to receive them when they are offered. Thus, the law applies directly to both the vendor companies and to their healthcare customers. This federal anti-kickback statute is broadly enforced on the civil side by the Office of Inspector General (OIG) of the Department of Health and Human Services and on the criminal side by the Department of Justice. Penalties for violations of the statute are severe, consisting not only of substantial civil and criminal fines and up to five years in prison, but also exclusion from participation in Medicare, Medicaid, and other federally funded healthcare programs. The exclusionary penalty, if applied, can result in a company’s products not being reimbursed by the federal government’s healthcare programs. If a company’s customers cannot receive reimbursement for procedures in which the company’s products are used, the company’s revenues may be materially affected, and the company may even be forced out of business. This exclusionary penalty is why virtually all companies settle claims brought against them under the federal anti-kickback statute, rather than go to trial against the government. Many states also have broad anti-kickback statutes, some of which are “all payer” laws, meaning that these laws don’t require that the company’s product be reimbursable by the government under Medicare or Medicaid. Recently, a number of state marketing compliance laws, as well as industry codes like PhRMA and AdvaMed, have been enacted or revised that specifically address how medical device and pharmaceutical companies should interact with healthcare professionals. In particular, they significantly increase the restrictions on remuneration and gifts provided to healthcare professionals by medical device and pharmaceutical companies. The majority of these state laws and codes also apply regardless of whether a company’s products are reimbursed by the government. Accordingly, developing, adopting, and actively implementing policies around interactions with healthcare professionals should be a priority for all medical device and pharmaceutical companies, their executive staff, and their boards of directors. Research, consulting, advisory board, training, and speaker arrangements (where payments are made by a company for services rendered by a healthcare professional) are among the most common interactions that medical device and pharmaceutical companies have with healthcare professionals. Each of these arrangements raises potential issues under the broad anti-kickback laws and industry codes described above when the healthcare professional being paid is in a position to influence the purchase or prescription of the company’s products. The OIG has acknowledged that it is not necessarily unlawful for medical device and pharmaceutical companies to pay healthcare professionals or medical institutions to perform legitimate and needed services, even if they also may be in a position to prescribe, recommend, or purchase the company’s products. However, courts have held that the federal anti-kickback statute is violated if even one of the purposes of such a payment: (a) is to induce a decision to order, purchase, or recommend an item or service; or (b) is in exchange for ordering, purchasing, or recommending an item or service, or for the referral of patients. It is also clear that the fact that a particular arrangement is common in the healthcare industry is not a defense to a violation of the law. In light of the significant penalties associated with a violation of the broad anti-kickback laws, what should early-stage medical device companies or drug development companies do to reduce their risk of running afoul of the law when they engage healthcare professionals to help them: (a) bring products to market or (b) continue to develop and improve products once they have reached the point of commercialization? Consulting and Other Services Arrangements Should Satisfy All Elements of the Services Safe Harbor under the Federal Anti-kickback Statute Even when legitimate services are actually provided by a healthcare professional, the structure or amount of compensation may appear to provide an inducement to purchase, recommend, or refer a patient to the company’s products. Companies making payments to healthcare professionals and medical institutions (who are in a position to make purchasing decisions or refer patients) in exchange for services are assured of protection from liability under the federal anti-kickback statute only when the arrangement under which such payments are made satisfies all of the criteria for the personal services safe harbor. This safe harbor requires, among other things, a written agreement under which the aggregate amount of compensation: (a) is set in advance; (b) represents fair market value for services actually rendered; and (c) does not vary in accordance with the volume or value of business generated between the company and the healthcare professional or medical institution. In many respects the requirements of the new state laws and industry codes mirror the requirements of the services safe harbor of the federal anti-kickback statute. Accordingly, structuring consulting or other services arrangements with healthcare professionals in accordance with the services safe harbor will put medical device and pharmaceutical companies, regardless of the reimbursement status of their products, in fairly good stead under state law as well. An Annual “Needs Assessment” Should Be Conducted Although many medical device and pharmaceutical companies may be structuring their agreements with healthcare professionals to comply with the services safe harbor, relatively few companies are conducting a regular (e.g., quarterly or annual) assessment of the company’s needs for services from healthcare professionals. This type of assessment is referred to as a “needs assessment” and is now required to be conducted by medical device and pharmaceutical companies doing business in Massachusetts. Furthermore, conducting such a needs assessment on an annual or more frequent basis is a good business practice, as doing so will help companies to document and make the case that the services it solicits and receives from healthcare professionals represent legitimate activities that are needed and beneficial to the company, unrelated to inducing the purchase or prescribing of its products. A documented needs assessment also can be a useful tool to confirm that the desired services actually were provided to the company and that the results of such services actually were used for their documented purpose. The following points should be considered by life sciences companies and their executive management in conducting a needs assessment:
As the compliance bar for medical device and pharmaceutical companies continues to rise, the tools described above (properly structured consulting and other services agreements entered into based on bona fide business needs) will be increasingly important for companies, management, and their boards of directors to employ when considering their interactions with healthcare professionals. Please contact David Hoffmeister, Farah Gerdes, Kristen Harrer, or Jon Nygaard with questions regarding the anti-kickback statute, services agreements with healthcare professionals, or conducting a needs assessment.
Medical Device Innovation Leaving the U.S.
By Robin Young, founder and publisher of RRY Publications, the parent of Orthopedics This Week My medical entrepreneur friends are spending so much time outside the U.S. that this country, for them, has become a kind of bedroom community. They sleep here, but go to work in Europe, China, or Latin America. They still pay taxes in the U.S., but their medical technologies are, increasingly, gone, baby, gone. Since just this past July, four companies have told me that they plan to stop their applications at the FDA and shift resources to clinical studies and product launches in the EU, China, or Brazil. Here’s a verbatim email I received last week from one particularly well-known and famous U.S. inventor: “We are bringing our technology to China, as we find that going through the FDA has become prohibitive cost-wise. The unpredictability of getting ultimate approval has caused us and many other U.S. companies to look for alternatives in bringing their advances to patients.” At a surgeon meeting just eight weeks ago, one young implant entrepreneur stood up and said that it costs him $2 million and a few years to get into the European market, while it costs $70 million and seven years to get into the U.S. market. He told the group of about 100 surgeons and business people that he has decided to avoid the U.S. market. The strength of free markets, of course, is that it allows the unfettered movement of capital, technology, and people—even if it means leaving the U.S. Well, the free market is operating. A couple decades ago, Rick Scott, then CEO of HCA, could make a statement like, “The first words out of the mouth of U.S. tourists in Europe when they have a health problem is; ‘Get me to the United States.’” Most everyone would have agreed. Today, if a patient wants the latest technology, they go to Cologne, Germany’s stem cell hospital, or India’s Wockhardt hospital system, or the United Kingdom’s Queens Medical Centre in Nottingham, or South Korea’s Wooridul hospital in Seoul. All four use technologies that are more advanced than those available in the United States. Because of the way the U.S. regulatory system is designed, U.S. companies have to seek predicates to pre-1976 devices in order to get indications for clearance under the 510(k) rules. The rest of the world has no such constraint. Because U.S. surgeons are presented with devices that have been cleared according to pre-1976 technologies, they often find themselves in the position of going “off-label” in order to deliver proper patient care. If their European or Korean or Brazilian colleagues have data showing the proper, legitimate, and successful use of a device that is NEW and if the U.S. surgeon decides to follow where the data is leading, they are then risking litigation, censure from politicians, and, potentially, censure from their own surgeon societies for such “unapproved” indications. Broken FDA The classic example is InFuse. This recombinant bone morphogenic protein was approved for use in the U.S. with Medtronic’s LT spine cage in the lumbar spine using an anterior approach. Every time a surgeon uses InFuse in two levels, in a manner that is not with an LT Cage or is not in the lumbar region or with a posterior approach, he/she is going “off-label.” We estimate that upwards of 70 percent of InFuse use is off-label. Probably the poster child for what is wrong with the FDA/CMS system is the Menaflex story. Is the FDA really going to retract a 510(k) clearance—not because the product in question was unsafe or in any way failed to perform in the marketplace, but rather because their process is, to paraphrase the FDA, “broken”? In 2004, after about a decade of conducting a clinical trial under the FDA’s PMA (premarket approval) guidelines, a New Jersey company named ReGen Biologics submitted the first module of a PMA application for a product called Menaflex. Menaflex is a collagen implant to treat partial menisectomies. In 2005, the company decided to switch from a PMA submission to a 510(k) approach. The company believed that a pre-1976 predicate device existed that was substantially similar to Menaflex and therefore could form the basis for 510(k) clearance. The FDA, with the PMA data in hand, twice refused to grant clearance under the 510(k) approach, saying that the device was not substantially equivalent to other legally marketed devices. Believing that its treatment by the FDA was capricious and, potentially, purposefully unfair, the company reached out to its congressional representatives. The congressmen and senator then signed and sent a letter urging FDA Commissioner von Eschenbach to review ReGen’s submission to ensure a “fair and equitable process.” The accusation on the table is that ReGen, by going to its congressional representatives, applied excessive pressure on the FDA. But ReGen argues that the letter, which was vetted by the Senate Ethics Committee before being sent to the FDA, was not a request to clear the product; rather it was a request for a fair process. Finally, at no time during the entire process was the safety of Menaflex in question. Nor, as it turns out, was its efficacy in question. Instead, this technology, which has now been studied for more than 15 years, is at risk of being pulled from the U.S. market. Given this risk, what is ReGen doing? It is focusing its Menaflex sales effort in Europe. Going to Europe The EU model is very different from the U.S. model. The EU, surprisingly we guess, appears to be quite comfortable with private industry involvement, specifically through the Notified Bodies process. The European FDA-like entities are referred to as “Competent Authorities” and they determine risk categories for devices—basically, low, middle, and high. The high-risk devices require clinical trials, which are governed like FDA trials. Lower-risk devices, however, are farmed out for approval (or clearance) to private organizations that are responsible to the Competent Authorities. These private organizations are audited on a regular basis and are paid by the companies to do an evaluation of the product as well as make sure the company is in compliance with European regulations for manufacturers of medical products. Compared to the fundamentally adversarial system in the U.S., this is a breath of fresh air. The European model of medical technology review has proven to be faster, less expensive, and more receptive to physician input with regards to technology evaluation than the U.S. system. Who benefits? The patients, for starters. EU patients get access to the latest medical innovation. U.S. patients who want access to the latest technology or biologics either go overseas or go without. The situation may be worsening. Such common and critical surgical products as bone cements, interbody cages, vertebral body implants, and similar technologies, which have no material design or composite changes from technology predicates and were cleared years ago, are now being asked by the FDA to submit to NEW supplemental studies or biomechanical testing. Routine 510(k) applications are now taking 6 to 18 months to complete and add cost burdens that routinely exceed $1,000,000 per device. Lumbar Disc Arthroplasty Example Lumbar disc arthroplasty (LDA) is one of the most advanced technologies for spine care and it was approved in the U.S. a couple of years ago. Patients who suffer from severe spinal disability and receive disc arthroplasty have reported substantial, long-term benefits, including minimal disability. Four U.S. pivotal trials were completed to study LDA. Each showed similar patient outcomes, at an estimated cost of $200,000,000 and, cumulatively, 20 years of patient experience. Here’s the kicker: While companies were spending such huge sums in the U.S. to approve the early generations of this new technology, European surgeons had progressed beyond these early versions and are now using fourth and fifth-generation disc arthroplasty devices. In fact, there are now 15 new lumbar disc technologies currently under development or study in Europe. If these were all in the U.S., it would require, we estimate, an increase in clinical study costs of at least $750,000,000, and require five to seven more cumulative years of experience for each of these technologies! Costs will likely be passed along to the consumer, with no meaningful gain to be realized by the clinical community. The U.S. regulatory pathway today is more unpredictable and non-transparent than it was five years ago. Today’s FDA is a large and onerous tax on the U.S. medical system and, taking the migrating entrepreneurs and scientists at their word, is the most powerful reason they are moving their business and technologies to Asia and Europe. How can this system be fixed? Here are three simple reforms that came from another good friend, Charles E. Schneider, vice president of reimbursement at the Musculoskeletal Clinical Regulatory Advisers, LLC, in Washington, D.C. First, the FDA must restructure its current 510(k) and PMA approval process to reduce cost and time to market. The European model, which incorporates MORE clinician and manufacturer input, is a great first step. The system must find a way to combine clinical study requirements so that they can meet both FDA and Medicare evidence needs. Second, FDA staff must not treat industry or clinicians as the “enemy” and find ways to work more interactively with surgeon/scientists and the technology industry. Under the current system, time is sincerely wasted because of recurring requests from the FDA. The requests can clearly be more efficiently addressed by agency personnel with phone calls and, sad to say, a better understanding of technology and anatomy. Third, FDA staff must be better trained. At a minimum, FDA staff should spend time in actual clinical practice. Reviewers who are just entering the review process almost always lack relevant clinical or technical experience and therefore the capacity to make informed decisions, or even ask the right questions! Candidly, I suspect it will take the exodus of a fair number of the best and brightest of our medical entrepreneurs before change can occur. It’s called the Brain Drain and it refers to intellectual capital moving from one location to another. In this case, out of the U.S. and towards the EU, China, and elsewhere. Companies, engineers, and scientists are going to those markets that encourage medical technology innovation and advancement. Until the current FDA system can fix these issues, the U.S. appears to be destined to become the equivalent of a medical technology bedroom community to the world. Robin Young is the founder and publisher of RRY Publications, the parent of Orthopedics This Week. He is also a founder of PearlDiver, a provider of services including search and analysis software and database technologies, consulting services, and information-based strategic advisory services for life science companies. PearlDiver’s mission is to improve the ways surgeons, product manufacturers, hospitals, and regulators connect with and utilize healthcare-related information. Mr. Young has a CFA and was an equity research analyst with extensive experience in the life sciences industry. Mr. Young was named “Best on the Street” by the Wall Street Journal and even earlier than that was identified as one of the top 10 analysts in the United States by Institutional Investor Magazine. www.ryortho.com
Reprinted with permission from Orthopedics This Week. Experiences from Antitrust Review of Medical Device Deals in 2009 By Lindsey Wilson, Associate (Washington, D.C., Office) In 2009, the Federal Trade Commission (FTC) was actively involved in the investigation of a number of medical device mergers, and its involvement in three matters in particular exemplifies both the extent to which the FTC will review even the smallest medical device deals, as well as the manner in which the FTC typically analyzes them:
These investigations highlight three issues that often play a significant role in the FTC’s review of medical device deals: (1) the FTC scrutinizes parties and deals of all sizes, even where one or both parties are relatively small; (2) the FTC typically focuses on very narrow competitive markets in order to identify potential anticompetitive harms that could result from the consummation of a given transaction; and (3) the FTC analyzes whether regulatory barriers exist that could prevent the entry of competitors who could potentially alleviate the competitive harms that result from a particular medical device deal. Small, Non-reportable Deals Continue to Be Subject to Intense Antitrust Scrutiny In June 2009, Endocare terminated its agreement to acquire Galil Medical as a result of the failure of the FTC to close its investigation of the proposed acquisition.1 The deal, signed in November 2008, was not reportable under the Hart-Scott-Rodino Act,2 but nevertheless led to an intensive FTC investigation. After more than six months, however, Endocare announced that it had abandoned its pursuit of the unconsummated merger as a result of the FTC’s failure to close its investigation.3 In a joint statement issued by three FTC commissioners, the agency made it clear that mergers between two “small” companies are subject to no less antitrust scrutiny or burden than larger parties: “The Commission’s position is that the application of the Merger Guidelines’ framework does not depend on the size or resources of merging parties. . . . Additionally, we know of no special rule or [] principle that exempts two small companies with small scientific/engineering staffs and limited resources from meaningful antitrust review.” 4 Thus, it appears that small medical device companies will be no less accountable under the antitrust laws, and, should they become the subject of an antitrust merger investigation, they will be treated no differently than larger companies. Continued Focus on Narrow Product Markets to Identify Potential Competitive Harms Medical device companies contemplating mergers must recognize that the FTC typically focuses on whether the parties compete, or potentially could compete, in any narrow product market, in order to identify any potential harm that could result from the transaction. Moreover, the FTC often relies on sophisticated customers—including doctors and hospitals—who are able to explain their understanding of the market to the FTC and differentiate among the alternative therapies and technologies that may be implicated by the merger at issue. Such customers inevitably have a substantial impact upon the FTC’s ultimate determination of the contours of the relevant product market, and whether any harm could come to that market as a result of the transaction. For example, in July 2009, the FTC challenged the proposed $282 million acquisition of HeartWare International by Thoratec Corporation, alleging that the merger would substantially lessen competition. Specifically, the FTC focused on the U.S. market for left ventricular assist devices (LVADs), which are surgically implantable miniaturized blood pumps designed to support and sustain patients suffering from end-stage heart failure.5 In doing so, the FTC identified why LVADs were significantly distinguishable from other products used to treat heart failure, including other medical devices: “LVADs are used only after all other potential treatments, including drugs, surgery, and other medical devices, have been exhausted. For that reason, other products used to treat heart failure are not substitutes for LVADs.”6 Ultimately, the FTC found that Thoratec, the only company with LVADs approved for sale in the U.S., had a monopoly in the market.7 Moreover, in spite of the fact that there were several other companies working to develop competing products, the FTC found that HeartWare’s device, which was in the latter stages of clinical development, was poised to be the first and most significant threat to Thoratec once its product was approved.8 The parties were forced to abandon the merger as a result of opposition from the FTC. Similarly, in the FTC’s January 2009 consent order relating to the acquisition of Datascope Corp. by Getinge, the FTC identified and defined concerns in the market for endoscopic vessel harvesting (EVH), rather than a larger vessel-harvesting market. Specifically, the FTC determined that these devices are used in coronary artery bypass graft (CABG) surgery, most often to remove veins or arteries from the leg or arm in order to use them as conduits to bypass blocked coronary arteries.9 The FTC found EVH procedures to be distinguishable from other vessel-harvesting methods: “Because it is a minimally-invasive procedure, EVH provides several benefits over the other two vessel harvesting methods (open and bridging) both of which are more invasive, cause more pain and scarring, and carry a greater risk of infection. As a result, neither of the other methods is considered a viable economic alternative for EVH devices.”10 Thus, even though some CABG procedures were being performed using other vessel-harvesting technologies, the FTC differentiated among them and defined a market to include only “minimally invasive” EVH devices, due to the diminished impact of EVH procedures on patients. The FTC’s decision to focus narrowly on EVH devices is consistent with its analysis in prior cases, and highlights the continued importance of market definition in medical device mergers. In short, medical device companies contemplating mergers are well-served to remember that the FTC’s typical modus operandi is to identify narrow bands of competition between the parties, often to the surprise of companies that perceive themselves to be competing in a much broader competitive context. Regulatory Barriers to Entry Are a Critical Component in the FTC’s Analysis In assessing the competitive effects of mergers, the FTC determines whether entry from other companies into the market potentially could deter or counteract any possible anticompetitive effects of concern. In the medical device context, the FTC historically has viewed regulatory hurdles, and FDA approvals in particular, as significant barriers to such entry: “Developing and receiving FDA approval . . . is difficult, time-consuming and expensive. It can take hundreds of millions of dollars of research and development, significant funding for clinical trials, and an extensive amount of time to reach even the stage of seeking FDA approval. The regulatory process itself can also be time-consuming because the FDA reviews the volumes of materials and data a company submits in support of its application for approval.”11 Entry is a pivotal question in these transactions, in large part because the FDA process is both long and uncertain. Moreover, the process is rigorous and fairly routine, making it apparent to the FTC how far competing therapies are from commercialization, and how likely they are to ever become substitutes for products already on the market. For example, in challenging Thoratec’s proposed acquisition of HeartWare, the FTC noted that entry into the merging parties’ market was unlikely to prevent or defeat the anticompetitive effects of the proposed merger: “[T]here are several other companies working to develop LVADs. Each of these firms faces significant challenges before their LVADs can be approved. . . . De novo entry would take more than two years and is difficult, costly, and risky because of the research, development, and regulatory hurdles that companies seeking to market medical devices, such as LVADs, typically face. The FDA classifies LVADs as Class III medical devices, which are subject to its most rigorous medical device approval process.”12 Thus, the fact that other companies may have competing medical devices in their product pipelines will not always allay FTC concerns. Rather, the FTC will continue to take a close look at the timeliness and likelihood of those products’ introduction into the market, especially when viewed in light of the significant regulatory obstacles that exist for medical device approvals. Conclusion For medical device deals, 2009 was a significant year, proving once again that the FTC applies a rigorous, careful, and educated review to acquisitions of all shapes and sizes. 1 Endocare, Inc. Form 8-K, Filed June 5, 2009, http://www.sec.gov/Archives/edgar/data/1003464/000095012309012047/a52819e8vk.htm.
FDA Test Program Focuses on New Drug Names By Mark S. Warnick, Associate (Palo Alto Office) The Food and Drug Administration (FDA) is now undertaking a two-year pilot program to review new names for pharmaceutical drugs. The new test program, which allows drug companies to take a more active role in the name-review process, serves as a timely reminder of the careful due diligence that drug makers should follow in order not to run afoul of federal regulations and trademark law. Drug Names Require Federal Approval Brand names for new pharmaceutical drugs in the United States typically undergo two distinct governmental reviews before the products are marketed to medical professionals, pharmacists, and consumers: a mandatory review by the FDA and, generally, a separate review by the U.S. Patent and Trademark Office (PTO). Pharmaceutical manufacturers need to keep both reviews in mind as they move forward with developing and marketing their new drugs. The FDA and the PTO serve different but vital roles in the drug-naming process. The FDA, which must approve a name before it can be used in connection with a prescription or over-the-counter drug, analyzes whether the name is likely to be confused by medical practitioners and pharmacists with other pharmaceutical trademarks. The PTO, meanwhile, analyzes whether a proposed name should be approved for a federal trademark registration by assessing whether consumers or others are likely to be confused about the drug or its source. It’s important for drug companies to remember that neither federal review affects the other. There is no guarantee that if the name is accepted by one agency, it will be approved by the other agency as well. FDA Goal: Minimize Medication Errors In reviewing proposed drug names, the FDA’s goal is to minimize medication errors that could result from use of a certain name. Because it’s crucial that a drug name is not confusing for doctors and pharmacists, the FDA reviews names to ensure they don’t look or sound like other marketed drug names, other medicinal products, or commonly used medical abbreviations, medical procedures, or lab tests. Before the agency approves a new name, two reviews are required: an initial review, which takes about two months to complete, followed by a supplemental review 90 days before product approval, which should take no longer than 30 days. An appeals process is also available. At the end of Phase II of clinical trials, companies seeking FDA approval for drug names typically submit two proposed names for review. These proposed names are submitted in order of preference—if the preferred name is accepted, there will be no review of the second name. If the first choice is rejected, the alternate name will be reviewed. For example, the FDA discourages the use of names that incorporate or suggest a particular dosage form (such as Nametabs or Namecaps), names that incorporate medical abbreviations and coined abbreviations, and names that include or suggest the composition of the drug product. In 2002, the FDA’s rejection rate was 31 percent. Under its traditional review process, the FDA uses a variety of methods and databases to determine whether a proposed name would be confusing. It searches computers and textbooks for confusingly similar names; consults experts; simulates prescriptions to identify names with potential similarities in handwriting, prescribing patterns, or pronunciation; and analyzes each name to make sure it isn’t misleading to consumers or too similar to the generic name assigned to the drug. The FDA publishes detailed regulations concerning drug naming and drug labeling with which pharmaceutical companies should be familiar. FDA Begins Drug-Name Pilot Program for Pharmaceutical Manufacturers In an attempt to increase the effectiveness and efficiency of its proprietary name-review process, the FDA has begun a voluntary two-year pilot program that allows participating companies to take a more active role in the review of drug names by evaluating their own proposed proprietary names and submitting the data generated from those evaluations to the FDA for review. Participating companies will be expected to perform various testing procedures and analyses designed to address promotional and safety considerations associated with their proposed names. During the program, the FDA will use two different reviewers to evaluate the results obtained from its traditional process and those obtained from data provided by the sponsors. At the end of the pilot program, the FDA plans to evaluate the results to determine whether a process that allows the pharmaceutical industry to conduct its own reviews and submit the results to the FDA for review is preferable to the traditional process that calls on the FDA to conduct independent evaluations, testing, and data analysis. The program’s results and any recommended additions and changes to the FDA’s name-review methods will be discussed in a future public meeting. Pharmaceutical companies interested in participating in the pilot program should contact the FDA at least 120 days prior to their planned name-submission date. While the FDA is seeking a cross-section of applicants, from large to medium to small companies, participation will be limited—the FDA said it hopes that 25 to 50 proposed proprietary name submissions will be received and reviewed under the pilot program. Companies might be encouraged to participate because of the possibility of increased interaction with the FDA during the name-review process. On the other hand, companies’ participation in the pilot program may be costly, insofar as they are required to spend money performing tests and analyses otherwise handled by the FDA. For more information on the pilot program, please visit http://frwebgate.access.gpo.gov/cgi-bin/getdoc.cgi?dbname=2009 _register&docid=fr01oc09-98. PTO Goal: Avoid Consumer Confusion in the Marketplace In contrast to the FDA, the PTO reviews federal trademark applications to ensure the proposed trademark is enforceable and not confusingly similar to a previously filed trademark associated with similar products and/or services. A federal trademark registration is not mandatory but it provides several significant advantages to trademark owners: it gives them a presumption of enforceable nationwide trademark rights; it blocks subsequent applications for identical or confusingly similar marks; it may have deterrent value, discouraging adoption of similar names by others; it provides benefits for U.S. Customs enforcement; and it allows the owner to use the symbol ® with the mark, informing the public of the mark’s registered status. Significantly, the PTO allows trademark applications to be filed prior to the mark being used in commerce. This process, known as an “intent-to-use” application, is valuable for drug manufacturers, who obviously want to assess their trademark rights early in the development process. An intent-to-use trademark application can be filed any time—once the mark receives preliminary approval from the PTO, the applicant has up to three years to prove it’s using the mark. The intent-to-use application thus allows trademark applicants to save their place in line once they identify a name they like and prior to placing the related product on the market. Filing a trademark application with the PTO also triggers the start of a foreign priority filing deadline, which in many cases allows applicants who file trademark applications in foreign jurisdictions within six months of their U.S. filing to back-date their foreign filing date to the date of the U.S. application. This provision can be strategically valuable, given that most key foreign jurisdictions give priority to first-to-file trademarks. Trademark and Advertising Counsel Available Clients with questions about the drug-naming process or interested in developing a branding strategy for pharmaceutical products should contact a member of Wilson Sonsini Goodrich & Rosati’s trademarks and advertising practice.
The Effects of Government Grant Applications on the Patentability of Life Science Technologies By Vern Norviel, Partner (Palo Alto Office), and Clark Lin, Associate (San Diego Office) Many (or even most) companies in the life sciences industry are founded on the basis of ideas licensed from grant-funded university research. Many life sciences companies also apply for federal government grants to fund the development of their technologies once they are formed. With the Freedom of Information Act (FOIA) allowing requests for certain documents from government agencies, it is very important for a company—or a venture investor in a company—to be certain that patent rights have not been compromised by grant applications that have supported the underlying research. In the United States, an abstract of a grant application generally is made available at the time the grant is funded. Clearly, this abstract will therefore be “prior art” to any patent application filed by the institution at the time the grant is funded. In the U.S., the institution still may file the patent application within a year after the abstract is made available. However, the abstract of a grant application immediately will be prior art in most other countries of the world.1 Worse yet, once the abstract has been published, the possibility arises that the entire grant application could be requested under FOIA. In such cases, even if such a request is never made, the entire grant application would be considered prior art in the U.S. and other countries. This could undermine the value of, for example, a university patent. However, even in cases where a grant was funded before the filing of a patent, all may not be lost. While the U.S. District Court for the Northern District of California has held that a grant proposal and application submitted to the National Science Foundation (NSF) and National Institutes of Health (NIH), respectively, are considered publicly accessible and subsequently serve as prior art, this case may no longer be applicable in many circumstances today. This article details how federal regulations have allowed agencies to implement protective barriers against the wholesale disclosure of grant documents, as well as how the Bayh-Dole Act provides an exemption to an FOIA request when the government might have an interest. “Sufficient Accessibility to the Public” Is the Determination for Prior Art A printed publication in the United States or a foreign country is prior art if it was published prior to the applicant’s date of invention or if it was published more than a year before the filing date of the patent application.2 The phrase “printed publication” has been interpreted to mean that before the critical date the reference must have been sufficiently accessible to the public interested in the art; dissemination and public accessibility are the keys to the legal determination of whether a prior-art reference was “published.”3 Courts analyze “sufficient accessibility” to the public on a case-by-case basis and will consider underlying facts such as indexing and cataloging of the reference, scope of dissemination and nature of the audience, and reasonable diligence to find the reference. In E. I. du Pont de Nemours & Co. v. Cetus Corp.,4 the plaintiff claimed that Cetus’ two polymerase chain reaction (PCR) patents were invalid due to an NSF grant proposal and an NIH grant application that were accessible more than one year prior to the filing of the applications for the PCR patents and moved for summary judgment. The defendant, Cetus, countered and opposed the motion by arguing that a material issue of fact existed as to whether the grant proposal and application were prior art. The district court analyzed whether the NSF grant proposal and NIH grant application were sufficiently accessible to members of the public who were interested in the art and determined that, as a matter of law, the two documents were printed publications and therefore prior art.5 In support of its decision, the court noted that (1) the NSF grant proposal was filed and indexed by title, author, institution, and grant number in the NSF’s published indices of grants and awards beginning in 1973, according to the deposition testimony of the section head of NSF grants and awards; and (2) the proposal was available upon request from the NSF well before the March 18, 1984, date of the application of the PCR patents under the regulations stemming from FOIA. Similarly, the NIH grant application was also available under FOIA pursuant to 45 C.F.R. § 5.72(b), which provided that a number of records pertaining to the Department of Health, Education, and Welfare, predecessor to the Department of Health and Human Services (DHHS), including grant applications, were available to the public. 6,7 Executive Order 12600 and Pre-notification Procedures A reading from the du Pont case alone would give one pause before submitting any grant applications or proposals to a federal agency. However, since the du Pont case, agencies with grant-conferring programs have amended their regulations regarding FOIA requests pursuant to Executive Order 12600.8 This order clarifies how agencies should interpret exemptions to FOIA requests, stating that FOIA requests do not apply to matters that are “trade secrets and commercial or financial information obtained from a person and privileged or confidential.”9 Executive Order 12600 also requires agencies to enact procedures to notify submitters of confidential information to the agencies, provide an opportunity for the submitters to object and give reasons for nondisclosure, and allow the agencies to consider and honor the objections. For example, the DHHS has implemented pre-notification procedures pursuant to the Executive Order to apply to records where the DHHS has “substantial reason to believe that the records could reasonably be considered exempt” under FOIA Exemption 4 (e.g., trade secrets, commercial, or financial information).10 In addition, DHHS policy dictates that the department follow a balanced approach to FOIA requests that acknowledges the right of public access to information within possession of the department, but also recognizes the interests of persons who have submitted records to the department. Moreover, the DHHS has no discretion to release records such as confidential commercial information, which is prohibited from release by law.11 As for NIH grant applications, NIH policy states that “Before releasing a funded grant application, we will ask the grantee for advice concerning patent rights and other confidential commercial or financial information. We will consider that advice and, if we agree, we will remove that information from the application before we release it.” Further, NIH policy lists types of information that are routinely redacted from funded grant applications, such as “patentable or other commercially valuable information.”12 Similar procedures exist for other agencies. NSF now allows a grant-proposal submitter the opportunity to respond to an FOIA request. The submitter can submit a statement to withhold a portion of the grant and show why the information is a trade secret, or commercial or financial information that is privileged or confidential.13 The National Aeronautics and Space Administration (NASA) also gives notice to a submitter when the information has been designated as information deemed protected from disclosure under FOIA Exemption 4, or the agency otherwise has reason to believe that the information may be protected from disclosure.14 In sum, the agency implementations of FOIA Exemption 4 since du Pont create additional barriers to public accessibility by allowing the grantee to be involved in designating what information in a grant application is available in response to an FOIA request. While the NIH and other agencies still have the discretion to ignore the grantee’s designation to make portions of the grant application or proposal confidential, pre-notification procedures allowing grantee intervention greatly limit public accessibility to a grant application. This limited accessibility is therefore a new factor that courts now may consider in deciding whether granted applications are printed publications. The Bayh-Dole Act and Confidentiality of Inventions The Bayh-Dole Act provides additional protections against the disclosure of government grant applications and proposals. The legislation, passed in 1983, permits small business, educational institutions, and nonprofit organizations to elect title or share title with the government on inventions conceived or first actually reduced to practice in the performance of funding agreements with federal agencies. Another FOIA exemption prohibits disclosure of information that is specifically exempted by other statutes.15 While FOIA does not recite which statutes exempt disclosure, the confidentiality provision of the Bayh-Dole Act has been found to be applicable. The confidentiality provision authorizes agencies to keep confidential any information regarding inventions in which the government may have an interest for a reasonable time in order for a patent application to be filed.16 Moreover, 37 C.F.R. § 401.13(c) further affirms that the Bayh-Dole confidentiality provision authorizes agencies not to disclose information about inventions in which the government may have an interest in response to an FOIA request prior to the filing of a patent application. Accordingly, the Bayh-Dole Act supports the notion that federally funded grant proposals and applications that have patentable subject matter are not publicly accessible and therefore not available prior art. Conclusion and Practical Considerations In the end, it is important for life sciences companies to be aware of government grant proposals and applications, as well as their implications for patentability if they are available to the public. While agency pre-notification procedures and the confidentiality provisions of the Bayh-Dole Act prevent disclosure of grant information, there are additional steps the company can take, such as developing an internal policy for how to respond to an FOIA request. If licensing a technology from an institution or university, the licensee should find out how that particular institution handles FOIA requests and whether there have been past FOIA requests regarding that particular technology. In preparing grants, it is recommended that any grant documents—whether included in an application or progress report—be labeled confidential pursuant to the Bayh-Dole Act. Finally, be mindful of the sections of a grant proposal or application that are automatically made public. For example, the title, grant number, investigators, keywords, and abstract are all available online and searchable for NIH grants. A careful eye towards the content of these sections could prevent the premature prior-art disclosure of an invention. 1 Some countries have very limited exceptions. For example, in Japan, the inventor’s own work may not be prior art if extraordinary measures are taken.
Life Science Venture Financings for WSGR Clients
*This includes one transaction of approximately $100 million **This includes one transaction over $100 million By Scott Murano, Associate (Palo Alto Office) Venture financing activity in the life sciences industry increased during the second half of 2009, as illustrated by the table above, which includes data from life science transactions in which Wilson Sonsini Goodrich & Rosati clients have participated over the past two years. Specifically, the table compares—by industry segment—the number of transactions, the total amount invested, and the average amount raised across the first half of 2008, the second half of 2008, the first half of 2009, and the second half of 2009. It includes data from both preferred stock and convertible debt or “bridge” financings led by venture capital firms and angel investors. Following a year and a half of relatively static venture financing activity, the table shows that venture financing activity increased significantly during the second half of 2009, with the number of completed deals increasing by 81 percent compared to the first half of the year. In addition, the total amount invested in the second half of 2009 compared to the first half of 2009 increased by 142 percent, and the average amount raised per transaction increased by 33 percent. However, unlike the strong improvements in number of deals and total amount invested, the increase in the average amount raised per transaction during the second half of 2009 only represents a return to 2008 levels. Though not reflected in the table above, it’s also interesting to note from our data that the total number of Series A financings of life science companies completed in the second half of 2009 compared to the first half of 2009 increased by 64 percent, from 14 to 23 transactions. In addition, the total number of all financings of life science companies that were initiated by venture capital firms grew by 127 percent over the same period, from 26 to 59 transactions, representing a substantial increase in financings initiated by professional investors. The data suggests that access to venture capital improved significantly for life science companies during the second half of 2009, and may be on the rise in 2010. In addition, other data compiled from transactions in which Wilson Sonsini Goodrich & Rosati clients participated shows that the life sciences industry experienced a surge in venture financing activity from 2008 to 2009, as compared to other industries such as software, media and information services, and communications and networking, which experienced a decline in venture financing activity over the same period. This suggests that life science remains an attractive industry for investment as compared to other sectors. While the data indicates that access to capital has improved and may be on the rise for life science companies, many still are finding it difficult to raise money in the current economic environment—likely the result of an ongoing, disproportionate supply of deals relative to investor demand. Companies should continue to plan ahead and leave as much lead time as possible when fundraising, as transactions continue to take a long time to syndicate and close.
Recent Life Sciences Transactions Ethicon Acquires Acclarent for $785 Million
Amgen Enters License Agreement with MedGenesis Therapeutix Edison Pharmaceuticals Licenses Drug from Centocor for Rare Diseases Ophthotech Secures $30 Million in Series B Financing SpinalMotion Secures $27.4 Million in Series D Financing Simcere and OSI Pharmaceuticals to Market KDR/Kit Inhibitor in China Wilson Sonsini Goodrich & Rosati’s Medical Device Conference Wilson Sonsini Goodrich & Rosati’s 18th annual Medical Device Conference, aimed at professionals in the medical device industry, will feature a series of panels and discussions addressing the critical business issues facing the industry today. Phoenix 2010: The Medical Device and Diagnostic Conference for CEOs Phoenix 2010 will mark the 17th annual conference for chief executive officers and senior leadership of medical device and diagnostic companies. The event will provide an opportunity for top-level executives from large healthcare and small venture-backed companies to discuss strategic alliances, financing, and other industry issues.
Click here for a printable version of The Life Sciences Report This communication is provided for your information only and is not intended to © 2010 Wilson Sonsini Goodrich & Rosati, Professional Corporation |
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