By Randall Osborne


Big fish eat little fish. It's a cliche of industry, and of free enterprise in general, and it's as true in the biotech sector as any other. Maybe more true.

The big eat the little. And when we're talking about chips computer chips, that is it seems nobody can eat just one. Bioinformatics, which exploded with the mapping of the human genome, is shaping up as a veritable litigation feeding ground, where only the strongest will survive. They will do it by devouring the smaller, weaker, less well-protected firms, often in big, wide-jawed gulps.

Unless, that is, cooler and less voracious heads prevail.

"It's hard to find a law firm in Silicon Valley that isn't affiliated in one way or another with these lawsuits," said Vicki Veenker, an attorney in the Menlo Park, Calif., office of New York-based Shearman & Sterling, which is one such firm. Veenker, who has represented Incyte Genomics Inc. and worked on behalf of five or six other genomics and proteomics companies, jokingly calls the current state of bioinformatics "almost a 'Lawyers' Full Employment Act.'"

Because bioinformatics deals with methods for sorting, isolating and manipulating data, its methodology is harder to classify, identify and protect in any foolproof, or lawsuit-proof, way.

To patent a gene, complicated as that may be, is nothing compared with trying to put a legal fence around some approach to bioinformatics which isn't just genetic libraries, as investors may have regarded it a few years ago, anymore.

It was a few years ago, in fact, when a court fight began between Affymetrix Inc. and Incyte Genomics (which changed its name in March from Incyte Pharmaceuticals) and Synteni Inc. The fight over high-density arrays, which began in January 1998 with Affymetrix firing the first volley, drags on today, and makes regular appearances in Incyte's quarterly reports.

In September 1998, Affymetrix filed another lawsuit related to other patents. One patent in that case is related to the arrays, and the other has to do with Synteni and Incyte's GEM microarray technology to conduct gene expression monitoring using two-color labeling.

About a year ago, a judge declared Hyseq Inc., also named by Affymetrix in a patent-infringement lawsuit, would argue jointly with Synteni, Veenker said.

Hyseq had filed suit against Affymetrix in March 1997. Affymetrix filed against Hyseq in August 1998.

Attached to the lawsuit mentioned in Affymetrix's financial reports are ominous (for investors) sentences such as, "Regardless of the outcome, this litigation has resulted and is expected to continue to result in substantial expenses and diversion of the efforts of management and technical personnel," along with warnings that "there can be no assurance that any license that may be required as a result of this litigation or the outcome thereof would be made available on commercially acceptable terms, if at all."

Doesn't sound good.

But whether the companies truly end up eating each other alive, with only a well-financed few left standing, remains to be seen. Veenker said she is doing what she can to make the war sensible.

"That's something to say, for someone who makes her living off [the conflicts]," she acknowledged. All indications are, though, that there will be plenty of work to go around.

"It's interesting to note that investors have tolerated a tremendous outlay for lawyers," as shown in the financial reports of companies such as Affymetrix, Veenker said. "But I think, of late, that tolerance has waned, and stock prices have suffered for some players, based on litigation without a lot of results," she added.

Because of her ties in the industry, Veenker declined to name any of those bruised players. "If I didn't know as much as I know, I'd feel more free [to comment]," she said, and stock prices are affected by many influences, anyway.

Many observers have noted the broad 52-week price range of litigation-mired Affymetrix. Trading at about $70 late last week, the stock has been as high as $163 and as low as $36 during the past year.

The company recently won a favorable appellate court ruling in a patent licensing case against Oxford Gene Technology Ltd., in the United Kingdom, followed by an unfavorable ruling in a battle against the same company, regarding infringement, earlier this month in Delaware.

Paperwork is flying fast, and the bioinformatics melee can hardly be sorted out before it becomes more complicated yet again. In August, Incyte also sued Gene Logic Inc., Veenker said, "which is more of a direct competitor than Affymetrix, since both Incyte and Gene Logic sell access to genomic databases," Veenker said. Late last year Incyte filed suit against Gene Logic alleging infringement for technology used in the creation of gene expression data.

But Incyte and Affymetrix remain the major forces, she said, not only in terms of active judicial combat, but in terms of size of their customer lists, and thus in terms of impact on the wider industry. An uncalculated impact of bioinformatics patent battles, Veenker said, will strike third parties that is, those who buy the services of the firms going to court.

"It's an awkward circumstance for many of them, while this is pending," she said, and such cases tend to "pend" for a long time. "They're asking, 'Do I license with one, both or neither?' Purchasers of products are concerned about whether their supply will be cut off. The power of patents is that injunctive relief [as ordered against the other litigant by the court] is virtually certain if you prevail," Veenker said, adding that, in the present case, Affymetrix has more judicial recourse before such relief is levied. Validity and enforceability must be decided before damages are.

In other words, the final outcome is pending.

Investors are not so much sympathetic as baffled. Like the bioinformatics firms' customers, they have questions, although somewhat more complicated questions, such as: "Do I invest with one, both or neither? And, if neither if I decide to put faith in some other biotech concern do I also seek out a company that relies on neither, and relies for genomic data on no firm that is similarly vulnerable to patent lawsuits? And, if so, where can I find one like that?"

Veenker has no pat answers, although it's a measure of conditions in bioinformatics that investors, or the media serving them, would consult lawyers for guidance.

She urges investors to "look for companies taking a sophisticated view of each others' patent rights," who are willing to undertake "creative and productive cross-licensing" in order to avoid needless, revenue-draining battles.

"You can't fight every fight," she said. "You want to look for companies who seem to be savvy and thoughtful about enforcing their key technology patents, but are creating synergistic relationships on other technology."

Meanwhile, at least one other patent lawyer suggests that investors look elsewhere altogether. Antoinette Konski, with the firm of Baker & McKenzie, of Palo Alto, Calif., advises not to fill up on chip companies.

"It's hard to manufacture those chips, and other technologies give you the same information," she said. "I don't see [Affymetrix or Incyte] being players in the long run, either of them."

She says the database companies "that can manage them and make sense of them" are where the gold lies in genomics namely, Celera Genomics and Millennium Pharmaceuticals Inc.

"Celera has the hardware patents, and a good management team," Konski said. "Millennium was one of the first in the field. They've been around for how many years now?" The company was founded in 1993.

"Based on what I know," Konski said, "I'd put my money on those two." *