It wasn't exactly a "shot heard 'round the world," but Genentech Inc.'s balking earlier this month at paying full royalties to Protein Design Labs Inc. on the asthma drug Xolair may have been the opening salvo in a significant global war.
Wall Street seemed to fear as much. PDL's shares dipped 25 percent the day the firm disclosed that it had not reached an agreement regarding whether Xolair (omalizumab) requires a license under the cross-licensing pact entered in the fall of 1998, and no decision had been reached about extending what's called the Patent Licensing Master Agreement.
Xolair is a monoclonal antibody for asthma that targets immunoglobulin E. It's the subject of a three-way deal between Genentech, Tanox Inc. and Novartis Pharma AG.
The arrangement between PDL and Genentech gives each party the option to take a license to the other's patents for up to six antigens or products. It's set up so that each has the option to extend the agreement, holding onto its patent licensing option on the remaining antigens for a certain payment or upping the number of antigens for a bigger payment.
PDL reported that Genentech had provided the amino-acid sequence of Xolair, which - according to Genentech - suggests the drug is not covered under PDL's humanization patents. But PDL said that, based on a review of the sequence, it does not agree with Genentech and does not understand why Genentech is taking that position.
Talks are ongoing. The conflict, which may end up in court, has potentially wider meaning to which investors reacted, placing a question mark over Genentech's late-stage products, Avastin (bevacizumab) and Raptiva (efalizumab).
With another drug Genentech licensed from PDL - the blockbuster breast cancer therapy Herceptin (trastuzumab) - licensing took place about a month after the launch. But nothing was heard on Xolair, which was approved in June of this year, until Genentech made known its disagreement with PDL in an Aug. 13 letter.
PDL has said it wants to resolve the Xolair issue before going into the question of whether the overall agreement will be extended, and under what terms. Genentech pays a 3 percent royalty rate under the agreement, as compared to the 3.75 percent PDL gets from others, and thus seems likely to renew the deal, said Yaron Werber, analyst with SG Cowen Securities.
The current licensing option between the companies expires in September, and investors expect news about the situation before then. Litigation seems due if nothing happens by November, which is when PDL was to start getting royalties on Xolair sales.
In certain ways, analysts have pointed out, the situation looks particularly bad for PDL. It's up against the behemoth Genentech, which holds many cards beyond size. Genentech humanized Avastin and Raptiva, and if the company were to insist those antibodies are exempt from PDL's patent estate (as some are, such as ILEX Oncology Inc.'s Campath [alemtuzumab] for cancer), then litigation - which Genentech can much more easily afford than PDL - would be the only way to find out for certain.
Genentech alone has the perfectly clear picture, since it did the laboratory work on Xolair. Werber, however, believes PDL's case is good.
"PDL's platform provides for making specific substitutions and changes within the determining region of the antibody, and those are fairly specific," he said. "One can revert to the sequence and investigate those areas. You should be able to tell by looking at the sequence."
Werber said he has begun to inspect medical literature relevant to the case, and his firm was in the process of getting a law firm to help understand it.
"There is prior art and it gets fairly complicated," Werber said.
Another issue: Didn't Genentech, if it believed PDL's patent position unassailable regarding Xolair (and other antibodies), have a good shot at buying PDL when it was trading practically at cash value earlier this year?
"I don't think PDL would have agreed [to that]," Werber said. Nor is it certain Genentech would have wanted the company, even with a solid patent estate, he said.
For PDL, the situation isn't regarded as life or death. The firm gets royalties from four humanized monoclonals including Herceptin. Most notable is MedImmune Inc.'s Synagis (palivizumab) for respiratory syncytial virus, which brings in more than half of those royalty revenues.
Other sources are Hoffmann-La Roche Inc.'s Zenapax (daclizumab) and Mylotarg (gemtuzumab ozogamicin) from Wyeth. The intake from royalties totals about $50 million, paying for about half of PDL's operating expenses.
But the Genentech trouble is hardly a minor matter, either. If PDL failed to get royalties from Xolair, Avastin and Raptiva - especially given what some analysts have tagged as Avastin's billion-dollar promise - the company could be hurting.
"They haven't said much, but I'm expecting that Genentech will renew the agreement," Werber told BioWorld Financial Watch. "That would mean that they're getting insurance. They can renew the agreement and lock in the previous low [3 percent] rate."
But that wouldn't mean anything definitive regarding the potential legal dispute simmering over Xolair and other antibodies. If the case ends up in court, Genentech has enough resources for a long battle - but PDL still is well advised to fight, Werber said.
"It's true that [PDL's four] patents have never been challenged in court in the U.S., but one can also argue that no one has really seen the need to challenge the patents," he said.
Overseas is a different story. The so-called Queen humanization patents (named after PDL's senior vice president of research, Cary Queen) have been challenged successfully in Europe and Japan, and the Opposition Division of the European Patent Office has revoked the broad claims of PDL's first humanization patent there. PDL has appealed.
Eight opposition motions have been filed regarding the second European patent. That prohibits the sale of humanized antibodies in Europe if they've been produced outside Europe where PDL's patent estate is valid. Oral arguments are scheduled for October.
In Japan, three opposition statements have been filed with the patent office, and the Japanese Opposition Board has supported one aspect of the opposition. PDL has appealed to the Tokyo High Court.
Anywhere it's done, of course, litigation is costly - but hardly always a waste.
"If we look at another visible, protracted global case, TKT and Aventis vs. Amgen, that case has been going on for several years and TKT/Aventis has spent on the order of $20 million so far," Werber said. "That's certainly a small amount when compared against the $80 million we estimate Genentech will owe PDL in 2007" on Xolair, Avastin and Raptiva.
Transkaryotic Therapies Inc., Aventis Pharma AG, and Amgen Inc. are battling over erythropoietin products.
"You can't rule out [the possibility] that Genentech is ultimately trying to get a lower royalty rate" by bringing up the Xolair issue, Werber said - but there's no reason to rule that in, either.
"The companies have had discussions up to now, and this has never come up," he said. "One can also argue that by officially notifying PDL that Xolair doesn't fall under the agreement, perhaps they're now infringing the patent and they're in breach of contract, which would be ample reason for PDL to terminate."
September's renewal deadline should bring more light on the subject and the companies may talk further about their respective next steps. For now, "it's tough to say what's going to happen," Werber said.