West Coast Editor

Though an appeal is due shortly, Tercica Inc. nailed a $7.5 million court victory over Insmed Inc., in a case that involves three patents for Increlex, the drug for children with short stature due to severe primary insulin-like growth factor 1 deficiency (IGFD).

Terrence McMahon, lead attorney for Tercica and licensor Genentech Inc., called the verdict "a clean sweep," and said he would file for an injunction to block Insmed from selling its competing product, Iplex.

"They've infringed every claim we asserted on all three patents," said McMahon, of Palo Alto, Calif.-based McDermott Will & Emery, adding that past damages have yet to be worked out. "Iplex came on the market in late May. They're just ramping up."

Insmed's stock (NASDAQ:INSM) fell more than 12 percent Thursday, closing at $1.15, down 16 cents. Shares of Tercica (NASDAQ:TRCA) rose 34 cents to end the day at $6.24. Genentech's stock (NYSE:DNA) dipped 25 cents, closing at $82.94.

The FDA approved Brisbane, Calif.-based Tercica's rhIGF-1 Increlex (mecasermin) in the summer of 2005 for long-term treatment of severe primary IGFD, and Tercica launched the product in January. Insmed's Iplex, a complex of recombinant human IGF-I and its binding protein IGFBP-3, was cleared as a once-daily treatment for children with the same condition.

Under the decision, Insmed must pay a $7.5 million up front payment, as well as 15 percent royalties on past sales of up to $100 million, with the royalties rising to 20 percent on past sales greater than $100 million, though Iplex sales year-to-date have reached only $382,000.

Geoffrey Allan, president and CEO of Richmond, Va.-based Insmed, noted in a conference call with investors that U.S. District Court Judge Claudia Wilkins has yet to rule on what future royalties will be, if she does not enjoin sales of Iplex. She could boost the royalty-rate damages as much as threefold, since jurors found that Richmond, Va.-based Insmed willfully infringed one of the patents.

Allan said he was "personally disappointed, but we don't feel that this is going to be an impediment to moving forward with the business as we've described it to you in the past," though analyst Matthew Osborne of Lazard Capital Markets in New York, wrote in a research report that he expects the firm to end 2006 with about $20 million to $22 million in cash. That's not enough to fund operations in 2007, Osborne wrote, anticipating Insmed will raise more next year.

The firm might also have to pay attorneys' fees for Tercica/Genentech, though details likely will not be hammered out until the end of February, said McMahon, who tried the closely watched case with colleague William Gaede. "These were pioneering, fundamental patents," McMahon said. "It wasn't [a case where] we've come up with a new nut that fits on this screw."

Seven women and two men deliberated for about seven days after an 11-day trial in Oakland, Calif. "We had to teach the jury what recombinant DNA is all about, and IGF-1, and BP-3," said McMahon, who called the panel "wonderfully intelligent." Judge Wilkins had tried biotechnology cases before and "knew the technology cold," he said.

Allan, for his part, sounded less thrilled with the panel.

"We believe our defense litigation team mounted a good argument and, unfortunately, this very complex set of issues was left up to a jury to decide," he said.

McMahon said South San Francisco-based Genentech's solid science, with patent filings as far back as the 1980s, gave Tercica's attorneys confidence, and the youthful patient population made the case "one where we definitely felt like we had the white hat on." Increlex and Iplex target a market that includes about 6,000 children.

In the third quarter, net revenue from Increlex jumped by 90 percent compared to the second quarter, from $166,000 to $316,000. New prescriptions rose from 89 to 123.

Christopher Raymond, analyst with Robert Baird & Co. in Chicago, pointed out in a report that pediatric endocrinologists who would prescribe Increlex are "by nature conservative, and tend to wait for some time (about a year in many cases, and often longer) to monitor growth and decide on what therapy is appropriate for short stature."

The drug is likely to continue slow but steady growth, selling $9 million worldwide next year, and $132 million by 2010, by Raymond's estimate. In a deal worth up to $123.6 million, Tercica this summer granted exclusive overseas Increlex marketing rights to Paris-based Ipsen SA, which, as part of the arrangement, got $62.6 million for cross-licensing its acromegaly product, Somatuline Autogel, to Tercica. (See BioWorld Today, July 20, 2006.)