This story originally ran on April 12 and has been updated to include comments from a Correlogic official.
Quest Diagnostics last week filed an objection seeking to stop Correlogic Systems' auction of its assets as part of its ongoing bankruptcy proceedings.
In the objection, Quest asserted that before Correlogic can sell its assets, determination of the extent of Quest's interests in Correlogic's technology must be "considered in the context of an adversary proceeding."
Quest maintains that it has rights to Correlogic's technology under section 365(n) of the Bankruptcy Code, which provides certain protections to intellectual property licensees from disruptions in business arising when a licensor seeks to reject a license agreement as part of a bankruptcy petition.
Quest, along with Laboratory Corporation of America, signed licensing agreements with Correlogic in 2002 for rights to its protein biomarker-based ovarian cancer diagnostic OvaCheck. When Correlogic filed for bankruptcy last summer, it sought to reject these licenses, claiming that uncertainty over the validity of the agreements was an impediment to obtaining new investment and was hampering its reorganization efforts.
In October, the US Bankruptcy Court in the District of Maryland ruled in Correlogic's favor, allowing it to reject the licenses (PM 10/08/2010).
The question remained, however, of Quest and LabCorp's rights under section 365(n). Since the 2002 licensing agreements, Correlogic has moved the OvaCheck test from a mass spectrometry-based platform to a new immunoassay version. At the time of the October ruling, Correlogic CEO Peter Levine told ProteoMonitor that the company believed the new platform wasn't "really covered at all under the original agreements."
Levine also noted that section 365(n) applied only to intellectual property that existed prior to the company's bankruptcy filing on July 16, 2010.
In a conversation prior to the October ruling, Levine said that Quest's and LabCorp's rights under 365(n) would allow them to take a mass spec-based assay to market (PM 09/03/2010), telling ProteoMonitor that "if [Quest and LabCorp] want to go to market with a mass spec-based ovarian cancer assay, we don't disagree that that's in the scope of the original license and 365(n) would allow them to do that. Where we do disagree is whether or not the original agreement covers multiplex immunoassay."
Quest, however, has continued to assert rights to the OvaCheck technology, including the immunoassay versions developed after the 2002 agreement. According to the objection it filed last week, in December the company sent a letter to Correlogic requesting, pursuant to section 365(n), all of the licensed technology, "including but not limited to mass spectrometry technologies, immunoassay technologies, and any embodiment of the licensed technology."
On March 25, Correlogic filed a motion seeking "approval of the sale of substantially all of its assets by auction free and clear of liens, encumbrances and interests…" It filed at the same time a motion to shorten the objection period for the motion to twelve days, claiming that "unless an auction sale is consummated in the near term, there will be a significant deterioration in the value of [the company's] intellectual property."
Such a sale, Quest asserted in its objection, would violate its rights to the OvaCheck technology, which, it said, "must be considered in the context of an adversary proceeding."
Quest also maintained that determining the extent of its interest would require "extensive discovery" beyond a reading of the companies' original license and development agreement, including "an examination of [Correlogic's] technology both before and after" its change in the OvaCheck platform.
Quest said in the filing that it has paid more than $8.2 million toward the development of OvaCheck. Of this $8.2 million, however, only $1.2 million was for the licensing and development of OvaCheck. The remaining $7 million purchased a 16.9 percent equity stake in Correlogic.
Asked why, given its interest in a quick sale, Correlogic hadn't initiated an adversary proceeding in December upon learning of Quest's decision to pursue rights to the technology under 365(n), Levine told ProteoMonitor that the firm had hoped to resolve the dispute out of court to avoid additional legal fees.
"Yes, either side could have initiated the adversary proceeding," he said. But "for Correlogic, that would involve another $15,000 worth of legal fees for a company that's in Chapter 11."
Levine said that delaying a sale would devalue the company's assets for a variety of reasons, including the ongoing cost of patent maintenance; the potential development of similar ovarian cancer diagnostics by other firms; and the possible loss of key scientific staff still with the company.
Originally designed as a CLIA-based laboratory-developed test, OvaCheck has existed in a state of regulatory limbo since 2004 when the US Food and Drug Administration informed Correlogic that it might have purview over the test. In December 2008, the company filed a 510(k) application with the agency, but was told by FDA that the patient population used in the clinical trial for the test was not satisfactory.
The company had been working on a "second arm" of the trial, which involved patient populations being treated by non-specialists; however, that work has been on hold for the last several months pending financing.
According to its March 25 motion, Correlogic no longer has the capital to "further develop its intellectual property in the long term," and has "determined that the immediate sale of substantially all of its assets is in the best interest of [its] creditors."
Were the company able to find buyers for substantially all of its assets, "Correlogic would functionally cease to exist," Levine noted. However, he said he could also envision a scenario in which the company sold only its ovarian cancer assets and used those funds to continue work on it other programs, which prior to its bankruptcy filing included research on colorectal, breast, and prostate cancer.
In February, Correlogic reached a settlement with Korean drugmaker Ahn-Gook Pharmaceutical in another dispute over OvaCheck. Under the terms of that agreement, Correlogic sold to AGP patent rights related to the OvaCheck test in Korea, China, Japan, Malaysia, and Singapore in exchange for $80,000, enabling AGP potentially to market in those countries an ovarian cancer diagnostic based on OvaCheck's eight-protein-biomarker panel (PM 02/25/2011).
That dispute began in November 2010 when AGP sued Correlogic, claiming it had defaulted on a loan agreement between the two companies by making material misrepresentations regarding OvaCheck (PM 11/19/2010).
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