Patents at the Core: the Biotech Business
Esteban Burrone, Consultant, SMEs Division1
“Life sciences and biotechnology are widely regarded as one of the most promising frontier technologies for the coming decades.”2
After information technology, biotechnology is increasingly recognized as the next wave in the knowledge-based economy. A recent estimate of the European Commission suggests that by the end of the decade the global biotechnology market could amount to over 2,000 billion Euro. Despite the capital intensity of the industry, the growth rate of the biotechnology industry during the 1990s, and to a lesser extent, the beginning of the 21st century has been impressive. Biotechnology has been at the core of a number of important developments in the pharmaceutical, agrochemical, energy and environmental sectors. In particular, progress in the field of molecular biology, biotechnology and molecular medicine has highlighted the potential of biotechnology for the pharmaceutical industry.
This article will look at some of the reasons why patents are so crucial for biotechnology companies in the pharmaceutical sector. By looking at the biotechnology business model, the article will seek to identify some of the reasons why this sector relies so heavily on patents and the role intellectual property rights, and patents in particular, play in investment decisions in this sector.
Patenting in the Biotechnology Sector
“Protection of intellectual property is at the core of the business for biotechnology firms.”3
The strong growth of the biotechnology industry in recent years has been mirrored by a higher than average growth rate for patent applications and patent grants that relate to biotechnology inventions. According to the OECD, the number of patents granted in biotechnology rose 15% a year at the United States Patent and Trademark Office (USPTO) from 1990 to 2000, and 10.5% at the European Patent Office (EPO), against a 5% a year overall increase in patents.4 The growth in the number of patents in the field of biotechnology is largely due to the importance that life sciences and biotechnology companies attach to intellectual property, particularly patents.
Why are patents so important for companies in these sectors? It is difficult to understand this without taking a look at how the industry operates. In the first place, biotechnology is probably one of the most research-intensive industries. Compared with other major industries that also rely on research and development (R&D), such as the chemical industry, for which the ratio of R&D expenditure to total revenues is approximately 5%, or the pharmaceutical industry, for which the equivalent figure is generaly no more than 13%, biotechnology companies generally invest a significantly higher proportion of their revenues in R&D (often between 40% and 50%). As in any research-based industry, the protection of research results becomes a major issue.
A second important point to bear in mind about the biotechnology industry, is that there are generally very high costs for the development of new products and processes, but relatively low costs of imitation. The costs of performing biotechnology research are to be considered in the context of the high risks involved in any research project. It is hard to predict at the outset whether years of research will lead to breakthrough innovations with a great market potential or may simply leave a company empty-handed with results that are unlikely to bring revenues. Given the high costs involved in R&D, the relative ease of imitation is an issue that is of great concern. According to the founders of Nordic Biotech, “the present reality in drug development (…) is that almost any technology or compound can rapidly be reverse engineered.”5 Adequate IP protection becomes a means to ensure that biotechnology companies can appropriate their R&D results and reduce the likelihood of imitation by competitors.
A third issue to note is that, contrary to many other sectors, in which there is a clear distinction between the basic research performed in universities and public sector R&D institutions on the one hand, and the applied research and development undertaken by private enterprises on the other, in biotechnology, basic and applied research are often profoundly inter-linked. Research undertaken in academic research institutions is often the basis for the establishment of biotechnology spin-offs. Similarly, biotechnology companies are often involved in (and are actively patenting) what some consider to be basic research.
A fourth element is that the biotechnology industry, in most countries, consists mainly of recently-established SMEs, an important number of which have yet to take a product to market. In many cases, biotechnology SMEs are established on the basis of one or more patents developed within, or in partnership with, public research organizations or universities.
Finally, a point that derives from some of the above is that for some biotech companies intellectual property rights are actually the final product. It is not uncommon, in fact, to find biotechnology companies that develop innovative inventions, patent them and then license them to larger companies that have the resources to take the product to market. Such companies may actually never sell a product in the traditional sense of the word but base their revenues on their ability to develop, protect and license innovations.
What to Patent
“In no other fields is the relationship between patent protection and the incentives to innovate so strong.” 6
One of the key issues for any biotech firm that is seeking to patent its inventions is what type of biotechnology inventions can be patented. The answer to this question is extremely complex as well as specific to each jurisdiction. As is the case with any new technological field, biotechnology has brought new challenges for the patent system. In many countries (or regions), recent guidelines, directives or legislation have sought to clarify what can or cannot be patented in the life sciences.
As in any other field, inventions in the field of biotechnology need to fulfill the three basic requirements of patentability of novelty, inventive step or non-obviousness, and industrial application or utility. The question has been how to interpret these requirements in the field of biotechnology. Is it sufficient to isolate or purify biological material from an organism to satisfy the inventive step requirement? Different countries have taken different approaches. Similar debates have arisen with the other requirements. For example, in view of the number of patent applications claiming partial DNA sequences or protein sequences with unclear utility or industrial application, some patent offices have stressed the importance that patent applications should clearly state a “specific, credible, and substantial utility” for the invention. In addition, the debate on what can be patented in the field of biotechnology has also focused on ensuring that claims in patent applications are not broader than is justified by the invention disclosed in the patent so that no patent owner is accorded undue exclusivity. These issues need to be borne in mind by biotech companies not only while drafting patent applications but also while devising their R&D strategy, particularly if patents over the R&D results will be crucial for the company’s profitability.
For companies in the biotech sector it is also important to understand that there are strong differences amongst countries concerning what is considered an invention and what type of inventions are considered patentable subject matter. In the United States of America, in the context of the landmark case Diamond v. Chakrabarty, the Supreme Court ruled that patentable subject matter included “anything under the sun made by man.” In many other countries, certain inventions are expressly excluded as unpatentable subject matter, such as, for example, therapeutic or diagnostic methods or processes for cloning human beings. It is important to consult the applicable law as well as any jurisprudence on the subject matter that may facilitate the interpretation of such exclusions or exceptions.
As for the sufficiency of disclosure requirement, which is present in most national patent laws, patents that relate to micro-organisms may require the deposit of the micro-organism at a recognized depositary institution. Further details on this may be obtained from the national patent office.
Concerning what is actually patented by biotech companies, a recent OECD report identified at least three common categories of patents in the specific field of genetic inventions, namely, (1) DNA coding for industrially useful expression products (2) Genes as diagnostic tools, and (3) Genes which control biological pathways.
In the Shoes of Investors
“Anyone, I would imagine, who has tried to create a biotech company knows just how important patents are. You learn this when you’re studying, and again at your first job, and if you haven’t done so before, you realize it the first time you meet potential investors.” (Mads Øvlisen, Chariman of the Board of Directors, Novo Nordsik). 7
While applying and obtaining patent protection is a key element of the strategy of any biotech company (or research institution seeking to transfer biotechnology inventions to the private sector for commercialization), getting the patent is only half the job. Possibly an even greater challenge is how to turn the patented invention into a profitable asset.
Biotechnology companies are very capital-intensive and investments have a long payback period. This has often proven a problem for the development of the biotechnology sector in many countries. For example, a recent report of the European Commission has shown that while Europe has been very successful in creating new biotechnology companies, a large proportion of those companies are now facing the need to renew their financing in a very difficult financial market. The European Commission’s advisory Biotechnology and Finance Forum estimated a potential funding gap of up to $1 billion during 2003.
In a number of countries, venture capital funds have developed that are focused exclusively on the biotech sector. In India, for example, the recently established Biotechnology Venture Fund (of the Andhra Pradesh Industrial Development Corporation) is the first such venture fund in the country and, with resources equivalent to US$ 37 million, is designed to meet part of the funding gap. According to its managing director, the key issues that are important for investing in a biotech start-up are the presence of a strong and capable managing team, a risk-diversified approach and the ownership of innovative IP-protected technology or processes.
Investors in biotechnology firms are well aware of the centrality of patents in the industry and will generally conduct a thorough due diligence prior to taking the decision to invest in a company. Their main concerns are generally two-fold. Firstly, determining the company’s own IP position. In other words, does it fully own its IP? If not, has it obtained it through a licensing agreement and what are the terms and conditions of such an agreement? Is there likelihood of a dispute over ownership? Have the patents been granted? How wide is the geographical coverage? How broad is the protection and how efficient will they be to keep competitors from copying the product?
Secondly, investors will seek to determine whether the company will have freedom to operate, i.e. whether it will be able to commercialize the product without infringing on the IP rights of others. This wil be important for investors to minimize risk of investing in a biotech company.
The business model of biotech firms often relies heavily on intellectual property rights, in particular patents, as they are often the most crucial asset they own in a sector that is extremely research-intensive and with low imitation costs. Investors in biotech companies are generally well aware of the centrality of patents and the survival of such companies may very well depend on their ability to convince investors that they have a solid IP strategy and that risks are reduced to a minimum.
Copyright Esteban Burrone 2006. All rights reserved.
1 The views expressed in this article are those of the author and do not necessarily represent those of WIPO. Comments, suggestions or any other feedback concerning this article may be sent to firstname.lastname@example.org. Many thanks to Guriqbal Singh Jaiya for his most valuable guidance and comments.
2 European Commission, Life Sciences and Biotechnology – A Strategy for Europe, 2002
3 Swiss Federal Institute of Intellectual Property, Research and Patenting in Biotechnology - a Survey in Switzerland
4 OECD, Genetic Inventions, IPRs and Licensing Practices, 2002.
5 Medicon Valley Patent Guide, 2002 http://www.mva.org/media(3,1033)/Medicon_Valley_Patent_Guide.pdf
6 OECD, Genetic Inventions, IPRs and Licensing Practices, 2002.
7 Medicon Valley Patent Guide, 2002 http://www.mva.org/media(3,1033)/Medicon_Valley_Patent_Guide.pdf