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Homerun Licensing Deal Becoming Legal Headache for Wake Forest University

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Wake Forest University has become a top-ranked US university in terms of research-related income thanks in large part to royalties it receives on patents that protect a leading wound-care device marketed by Texas-based medical device firm Kinetic Concepts.
 
But the school also finds itself waging a legal battle on several fronts to protect those royalties. Last month, KCI and Wake Forest announced that they had jointly filed two lawsuits against companies for allegedly infringing the patents, bringing to five the number of litigations surrounding the IP.
 
These lawsuits are currently in progress, and KCI, which holds a dominant position in the advanced wound care market, has said that if the IP is found invalid or unenforceable, it would significantly and adversely affect the company’s finances because a large portion of its revenues derive from sales of the technology.
 
The financial blow to Wake Forest, however, could be even bigger, in the millions and possibly tens of millions of dollars.
 
At the center of the legal row are patents covering inventions made by Wake Forest researchers related to a technique known as vacuum-assisted closure, or VAC, which uses negative pressure to stimulate healing in a variety of serious wounds.
 
KCI has had an exclusive license to at least some of these patents since 1993 and in 2005 launched the VAC Therapy system, the technology based on those patents.
 
Trouble first arose in 2003 when KCI and Wake Forest sued BlueSky Medical Group, Germany-based Medela AG, and its US subsidiary, Medela, for allegedly infringing the patents by selling their own vacuum-based wound therapy devices.
 
According to KCI, in 2006 the US District Court for the District of West Texas found that that the Wake Forest patents were valid and enforceable, but that the defendants’ products had not infringed any of the specific patent claims. KCI appealed the decision in 2007 with the Federal Circuit Court of Appeals in Washington, DC; however, the status of that appeal is unclear.
 
That year, BlueSky Medical was acquired by Smith & Nephew, which became a party to the suit. Soon after in 2007, Wake Forest and KCI were awarded a continuation relating to one of the patents, US Patent No. 7,216,651, and immediately filed two new suits: one against Smith & Nephew and BlueSky; and one against Medela (see BTW, 5/21/2007).
 
In September 2007, another company, Innovative Therapies, sued KCI in the Federal District Court for the District of Delaware, alleging that the four patents owned by Wake Forest and licensed to KCI that are at the heart of the VAC Therapy system were unenforceable or invalid, and asked the court to declare that products made by Innovative Therapies do not infringe the patents, according to KCI.
 

“There is nothing unusual about a patent owner defending its intellectual property rights.”

KCI and Wake Forest countered that suit in January 2008 with a patent-infringement complaint against Innovative Therapies in the US District Court for the Middle District of North Carolina (see BTW, 1/16/2008).
 
Last month, KCI and Wake Forest also sued Convatec, Boehringer Wound Systems, and Boehringer Technologies, claiming that Boehringer’s Engenex negative-pressure wound therapy system, for which Convatec has worldwide exclusive global marketing and distribution rights, infringes one or more of the Wake Forest patents (see BTW, 12/31/2008).
 
Lastly, around the time Innovative Therapies sued KCI in 2007, Medela filed patent-nullity suits in the German Federal Patent Court against two Wake Forest patents awarded in Germany in 1998 and 2000 and licensed to KCI.
 
In its 2007 annual report, KCI said of the lawsuits that “if any of our key patent claims were narrowed in scope or found to be invalid or unenforceable, or we otherwise do not prevail, our share of the advanced wound care market for our VAC Therapy systems could be significantly reduced in the US or Europe, due to increased competition; and pricing of VAC Therapy systems could decline significantly, either of which would materially and adversely affect our financial condition and results of operations.”
 
Wake Forest’s financial stake in the cluster of proceedings was not clear at deadline. A spokesperson for KCI this week told BTW that details of its licensing agreement with the school were confidential. Calls made to Wake Forest’s Office of Technology Asset Management were not returned in time for this article.
 
One director of a tech-transfer office from a prominent East Coast medical school, who requested anonymity because he didn’t want to risk involvement in the ongoing legal battle, told BTW this week that his university has typically negotiated royalties of between 5 percent and 20 percent for medical devices. Such rates vary, he said, based on how close the device is to market when it is licensed; the strength of the IP; and the safety issues surrounding the technology.
 
Another tech-transfer official, Stewart Davis, assistant director of the Baylor Licensing Group at the Baylor College of Medicine, has out-licensed several medical devices in the past and told BTW that a royalty rate of 5 percent to 7 percent would be considered reasonable.
 
Indeed, a 2004 Business Week article written by a Standard & Poor’s representative and examining KCI’s investment potential reported that Wake Forest was receiving a 7 percent royalty payment on all sales of the VAC system.
 
According to financial reports, KCI derived approximately $967 million in revenues from combined US and European sales of its VAC product in 2006; and $1.15 billion in such sales in 2007. A KCI spokesperson told BTW this week that for the first nine months of 2008, KCI took in $1.4 billion in revenues from the global advanced wound-care market, which it estimated to be approximately $4.5 billion.
 
Although it may no longer be reliable because royalty rates can change over time, using the reported 7 percent rate reveals that Wake Forest would have derived $67.7 million in revenues in 2006; $80.5 million in 2007; and $98 million so far in 2008. Even using a conservative royalty rate of 5 percent, Wake Forest’s revenues from KCI’s VAC license would have yielded $48.4 million, $57.5 million, and $70 million in ’06, ’07, and ’08, respectively.
 
In any event, Wake Forest’s royalties from its licensing agreement with KCI constitutes a significant portion of its overall licensing receipts. According to the Association of University Technology Managers Annual Licensing Activity Survey for 2006, the last year for which data are available, Wake Forest took in approximately $60.6 million in licensing revenues, which was fourth-highest among reporting schools.
 
In addition, it is unusual for a university to be a principal party in so many patent-infringement suits simultaneously, which can become a heavy financial burden. It is unclear whether Wake Forest is contributing to the cost of the litigation.
 
Asked about Wake Forest’s participation in the suits, a KCI spokesperson told BTW that the company “believes there is nothing unusual about a patent owner defending its intellectual property rights.”
 
A spokesperson for KCI said that all of the lawsuits are in progress. An October 2009 trial has been set for the Smith & Nephew and Medela suits, although that may be subject to change, she added. There are no other firm hearing dates at this time.

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