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Hazards Abound when Negotiating the Rough Waters of Bioinformatics Licensing

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As if bioinformatics companies weren’t having a difficult enough time these days, it seems they face an additional hurdle when trying to close those life-saving deals: intellectual property issues that may stall or even halt the licensing process.

Patenting of bioinformatics software, algorithms, and other methods is becoming common practice in the industry, but doesn’t make the licensing process any easier, according to Peter Tu, director of intellectual property at Princeton, NJ-based Physiome Sciences. Speaking at a seminar in New York last week called “Legal Issues in Bioinformatics,” Tu warned the attorney-heavy audience of around 40 that bioinformatics licensing has a number of “quirks” that set it apart from both general purpose software licensing and the licensing of other types of biotechnology IP.

The seminar, sponsored by law firm Brown Raysman Millstein Felder & Steiner, offered an overview of the IP issues facing bioinformatics. Indeed, the field must seem like a jackpot to practicing patent attorneys. Because bioinformatics is still a nascent industry, standard licensing practices have yet to emerge. Unlike the chemical industry, where an accepted range of royalties and fees is well established, there is no agreed-upon royalty system or licensing agreement for bioinformatics software, algorithms, or databases, so IP attorneys practicing in the field are blazing new trails.

But conquering new turf doesn’t come without a few battles, and Tu was eager to give his audience a glimpse of the challenges ahead.

Because bioinformatics straddles the worlds of software and biotech, Tu said pharmaceutical companies and other potential licensees tend to view the technology as either one type or the other — traditional software like Microsoft Word, which doesn’t have the value of what many bioinformatics software firms claim their tools provide, or “product”-based biotech IP that will lead directly to a marketable drug. As a research tool, “the benefit of bioinformatics technology is often not realized until years later,” he said, which gives bioinformatics companies very little leverage in negotiating licensing terms, even for patented technology.

In addition, while licensees may be resistant to pay large up-front fees for software that won’t necessarily provide measurable near-term results, getting them to agree to a fee structure based on downstream revenues enabled through use of the licensed technology may be even more difficult. Patent protection on a tool used in the discovery process does not extend to the discoveries themselves, leaving software companies in a tight spot when negotiating licensing terms that will help them capture downstream value. Options available in this situation include grant-backs, in which the software company is licensed back certain rights to further develop discoveries made using the licensed tool; or reach-through provisions, which provide the software firm with royalties based on discoveries made using the tool.

Each option has its pros and cons, according to Tu. In the case of grant-backs, not only are pharmaceutical firms resistant to part with downstream IP, but unless a software firm has its own drug development, manufacturing, and sales capabilities, the discovery is of little value. Royalties from reach-throughs offer more incentive for licensees — if the software doesn’t result in a discovery, they haven’t wasted an up-front payment — but also offer some disadvantages. Customers try to avoid “stacking” reach-through-based enabling technologies that could add up to quite a payout if they do lead to a promising discovery. In addition, a 1999 NIH policy that discourages NIH-funded researchers from signing reach-through agreements has become the status quo in the field.

One of the most critical problems in the bioinformatics legal realm, according to Tu, is the difficulty in recovering damages. It’s next to impossible to prove which specific tools were used to discover a particular drug, making it difficult for bioinformatics companies to ensure payback on any reach-through royalties they may be entitled to. Arguably, a patent holder may be able to sue for lost profits on a drug that was discovered using its software, but Tu said that very few cases involving infringement of research tool patents have been litigated so far, with mixed results, and none of these cases has yet involved a bioinformatics patent. Obviously, litigation is very expensive, and it’s up to the patent holder to determine whether the damages expected via the lawsuit would be worth the time and expense required.

But although a bioinformatics patent is no guarantee that the licensing negotiations will proceed smoothly, Tu said patenting does offer a number of advantages. For one, pharmaceutical companies and venture capitalists often judge a company’s technology based on its patent portfolio. In addition, although very few bioinformatics patents have been issued so far, Tu predicts we’ll see the first litigation in the field in around five to ten years, putting companies like Physiome, which is pursuing “an active patent procurement strategy,” in a good position. While a copyright or trade secret protection gives a bioinformatics company the right to license its technology, only a patent permits the licensor to sue for infringement. If the bioinformatics sector follows in the footsteps of the lawsuit-happy biotech industry, patent protection will soon be just as important as a strong balance sheet for companies who want to survive.

— BT

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