BIO Statement Regarding Commercial Development of Pluripotent Stem Cells

EXECUTIVE SUMMARY

Pluripotent stem cells research provides the hope of a new generation of therapeutics. Using cell transplants instead of drugs, biologics and other current therapies, provides new hope for patients with cancer, spinal cord injury, stroke and degenerative diseases. As the federal government has not to date provided funding for pluripotent stem cell research, the biotechnology industry has taken the lead in funding it. For industry to continue to fund this research, and for this research to be developed into products at the bedside for patients, patent protection must be available. For the vital partnership between industry and academic biomedical researchers to remain strong, the terms of technology transfer agreements must be commercially reasonable.

STATEMENT

The Biotechnology Industry Organization (BIO) represents 832 companies, state and affiliated organizations engaged in biotechnology research on medicines, diagnostics, agriculture, pollution control and industrial applications. BIO appreciates the leadership of the Subcommittee in providing strong support for research on pluripotent stem cells and for this opportunity to participate in this hearing.

Pluripotent stem cell research is a very exciting, cutting-edge area of scientific research whose promise has captured the imagination of the research community, patient advocates, and the American public. We urge the Subcommittee to continue to lead the way in supporting this research and the policies that will speed it to market for the benefit of patients.

Over the last 50 years, the only constant in medical innovation has been that scientists are constantly trying to treat human diseases through new approaches. The newest approach which we are here today to discuss is using embryonic or pluripotent stem cells (early human cells) to treat degenerative cell based diseases. (We have attached to the end of this document two figures to help explain stem cells' place in embryonic development and the new method of generating these cells). Stem cell research is intended to find treatments which do not depend on chemical compounds, rather they use living cells as the treatment or cure.

It is anticipated that these cells will be differentiated into blood, skin, heart, or brain cells and may be able to treat cancers, spinal cord injuries, heart disease and potentially many other diseases.

The Science of Stem Cells

There are 200 different kinds of cells that make up most of the human body. These cells are differentiated, which mean that they have a distinct morphology (shape and size), and have achieved a specialized function such as carrying oxygen or transmitting "nerve" signals. For years scientists have known about "blood stem cells" (cells that can become one of several different blood cells such as white blood cells or red blood cells) and the potential uses of umbilical cord blood.

However, late last year the Geron Corporation announced that its research had, for the first time, successfully derived human embryonic stem (ES) cells and maintained them in tissue culture. This was a great step forward in this area of research.

Stem cells are the earliest precursor of human differentiated cells. These cells come from an embryo, and, therefore, have been defined as embryonic stem cells (ES). These cells, ES cells, have the capacity to become virtually any cell or tissue in the body. These cells are "pluripotential" – that is these cells can be used to form almost any tissue. These cultured ES cells are special as they have the capacity for self-renewal, meaning they can produce more of themselves without limit.

The excitement in the research and patient community is understandable. There are two ways that ES cells are an advancement: first, as a research tool to study developmental biology; and second, as the starting point for therapies to create cures to some of the most deadly diseases. The excitement and promise of this advancement is seen in the letter that 52 patient and medical professional societies sent to Members of the Senate on December 2, 1998, which supported stem cell research and development (letter attached).

Although many see the benefits of stem cell research, we understand that for some people this new area of research raises ethical issues. These issues range from the ethics of conducting research on human fertilized eggs to patenting research procedures.

Stem Cell Research

In compliance with current law requirements and concerns of the public and the use of public funds to support research projects that raise ethical concerns, the federal government has not sponsored research to derive pluripotent stem cells. Now that these stem cells have been derived, the government is determining whether it can and should fund research on these cell lines.

Recent studies have documented that government funded basic research is an important precursor to innovation by the biopharmaceutical industry. ¹ In addition, public funding stimulates additional investment by the drug companies and enhances the effectiveness of their R and D expenditures as well. ² According to a study of connections between pharmaceutical firms and publicly funded scientists in academia and government, these relationships have a large impact, raising the level of private sector research productivity by as much as 30-40%. ³ (See "Federal Funding for Biomedical and Related Life Sciences Research, FY 1999," by Federation of American Societies for Experimental Biology.) In addition, research that is funded by the Federal government is subject to a variety of oversight mechanisms.

Technology Partnership Mechanisms

Technology transfer is a process by which amorphous areas of scientific research are defined (generally through patents), then sold or licensed to others. This process promotes the commercial development of products as it is designed to provide for the capturing of the value of basic research by the basic researcher (generally a non-profit university researcher), and the shifting of the research to organizations that are better able to assume the financial risk associated with developing a commercial product (generally a corporation).

In biotechnology, technology partnerships take a number of forms depending on whether they involve the NIH, NIH-funded research, or in the case of stem cell research, non-government support of research. In each case the biotechnology industry pays royalties for the patent rights to medical technologies. For your information, the principal technology partnership mechanisms are listed below:

Cooperative Research And Development Agreement (CRADA) – A CRADA is an agreement through which researchers at the NIH and private companies negotiate terms for cooperative research and define the rights of the parties to use licenses for any patents which might be created as a result of the research. CRADAs are the cornerstone of the basic biomedical research partnerships between the NIH and the biotechnology and pharmaceutical industries. In many cases the corporate partner provides funding and other resources to conduct research at the NIH. This corporate partner will then take the new technology and develop a marketable product.

Bayh-Dole Agreements – Bayh-Dole Agreements are agreements between universities or medical institutes and biotechnology companies or pharmaceutical companies in which the parties define the licensing rights to patents and agree on how to share funds and materials. Similar agreements exist between intramural government researchers and licensees.

Technology Licensing – In the absence of federal funds, organizations are free to license technology as they see fit, without oversight of any Federal office. This freedom to license insures that research organizations are able to capture the value of the research. Generally these agreements are in accord with the mission of the organizations involved. Anti-trust considerations sometimes play a role.

Licensing of Patents

The partnerships that are formed are based upon the licensing of patents to basic biomedical research discoveries. These licenses are critical to the relationship between biotechnology and pharmaceutical companies and their research partners. Without patents to protect the taking of an invention by a competitor, a company cannot justify its research investment. For instance, any company would be competitively disadvantaged by investing in stem cell research if other companies could freely acquire it. It is crucial that the basic research institution secures patents on their inventions so companies that invest money in developing these inventions can benefit from their investment. These licenses generally require companies to make royalty payments to the proprietary owner of the license, or licensor, based on any sales of products attributed to the licensed patent. These arrangements allow the research organization to gain a benefit from the research while not bearing the risk associated with the continued and expensive research and development program. While protecting investment and rewarding risk-taking, patents also act as a powerful spur to competitors to improve on the patented technology or provide alternatives.

In this regard, the biotechnology industry anticipates the assumption of the risk and hopes to pay royalties as a part of a license agreement. Companies frequently license technology from one another and the norm is to include royalty payments. Restrictive future licensing provisions will merely diminish the value of the licensed technology. Logically, in some cases, restrictive practices would prevent the licensing of some technology and thereby prevent its development.

Patents and Stem Cells

Prior to the licensing of technology, the nebulous boundaries of a technology must be defined so that the intangible assets can be handled by the U.S. business and our legal system. In general that is done through the patent system. A U.S. patent is defined by claims that provide sharply defined borders to technology. These boundaries give clear notice to others so that the area can be avoided or licenses can be taken to practice what is defined. The claims can be directed to products and compositions of matter. Once boundaries are established and claims granted in an exciting field such as stem cells, patents provide a powerful stimulus to competitive academic groups and companies to improve on technologies and/or find new routes to achieve the same effects. In this way, patents increase the range of effective products available to treat intractable diseases and improve social welfare.

There may be no industry which is more sensitive to patent protection than the biotechnology industry. The rate of investment in research and development in this industry is higher than in any other industry. Any law which undermines the ability of biotechnology companies to secure patent protection undermines funding for research on deadly, disabling and costly diseases. Capital will not be invested in biotechnology companies if they are not able to secure intellectual property protection to recoup the substantial investments they must make in developing a product for market.

Our industry's position on patents follows from one simple fact about the biotechnology industry; most of our firms fund research on deadly and disabling diseases from equity capital, not revenue from product sales. Without investors taking the risk of buying the stock of our companies, much of our vital research would end. Almost without exception our industry cannot borrow capital.

Our principal, and for most of us, our only source of capital, is equity capital.

Intellectual property protection is critical to the ability of the biotechnology industry to secure funding for research because it assures investors in the technology that they will have the first opportunity to profit from their investment. Without adequate protection for biotechnology inventions, investors will not provide capital to fund research. There is substantial risk and expense associated with biotechnology research and investors need to know that the inventions of our companies cannot be pirated by their competitors.

Our industry's general position on patents is identical to our industry's position on stem cell patents. In regard to stem cell research, patents are vital and they should be freely transferable. These patents are essential to the continuation of stem cell research. No money has yet been made from selling stem cell products. It is unreasonable to expect any money to be made for many years to come from this research.

"Research Exemptions"

This position is entirely consistent with the continued existence of a "research exemption." ⁴ (This exemption is different from the statutory Bolar ⁵ exemption that provides additional protections for non-patent holders. Bolar is not relevant to stem cell research at this time as no therapeutics are nearing submission for regulatory approval). The courts and BIO recognize that it is important that patents do not block academic research that move a field forward and which do not compete in the marketplace. Accordingly, the courts have created the "research exemption" as a defense against patent infringement for academic research – the type of research typically done by universities. The biotechnology industry supports this exemption. The industry benefits from the knowledge that is created by the research being done on technology that the industry has patented. This judicially created doctrine and the support of the doctrine from the biotechnology industry has in having no biotechnology company ever suing a university for performing academic research on patented technology.

In large part due to the patentability of new areas of research like stem cell research and the transferability of patents, the United States leads the world in biomedical research. The competitiveness of the U.S. biotechnology industry means that the most vulnerable U.S. patients have hope. It means that they can look to American biotech companies to develop the therapies and cures which will ease their suffering.

Summary of Commercial Development Issues Regarding Stem Cell Technology

The partnerships between NIH and NIH-funded grantees and the biotechnology and pharmaceutical industries stand at the center of the world's most productive biomedical research enterprise. Following is a summary of BIO's views on the commercial development issues associated with stem cell and other biomedical research.

An exclusive license gives a company a greater incentive to invest its resources in the development of technology and this means that the companies are able and willing to pay a higher royalty rate to the NIH or an NIH-grantee. Exclusive licenses are particularly appropriate in cases where substantial risk and expense are involved in the development of basic research into a marketable product.

• NIH and NIH-grantees have entered into a broad array of research agreements and licenses. These agreements and licenses typically provide that intellectual property generated by NIH and NIH-grantees is licensed or sold to biotechnology and pharmaceutical companies in exchange for royalty payments on any sales.



• Central to these relationships are patents which ensure that the results of the university and industry investments are not misappropriated by those who did not make the investments. Without patent protection no company can persuade its investors to put their capital at risk, and NIH and its grantees would have nothing to license. The patentability of inventions is determined by the Patent and Trademark Office under well established guidelines.



• Universities filed over 3,000 new patent applications in FY 1997 in the expectation that they could generate revenues in the form of licenses and royalties. The availability of patents – which grant an inventor 17 years of protection from competitors – leads to an intense competition in the development of life-saving drugs, biologics and devices. Patients in need of new medicines and devices are the beneficiaries of this competition.



• Patents do not block university researchers from conducting research on patented inventions. These researchers are protected from a patent infringement action by an "experimental use" exemption from an infringement action because they are not competitors with a commercial motivation.



• Licenses can be exclusive or non-exclusive (i.e. sold to one, or more than one entity). Each type of license may be appropriate depending on the circumstances. About 10% of NIH's licenses are exclusive. Academic researchers not engaged in research for commercial use are not affected by the existence of an exclusive license. The Association of University Technology Managers (AUTM) Licensing Survey, FY 1997, found that universities executed 2,665 licenses and options of which 1,377 were exclusive (52%) and 1,288 were non-exclusive (48%); U.S. hospitals and research institutes executed 361 licenses and options, of which 208 were exclusive (58%) and 153 were non-exclusive (42%); and Canadian institutions executed 198 licenses and options, of which 139 were exclusive (70%) and 59 were non-exclusive (30%).

• In 1997 NIH received approximately $40 million (1,000 licenses) and its grantees approximately $300 million (5,000 licenses) in royalties from its licenses to biotechnology and pharmaceutical companies. This income helps to fund additional research.



• In 1997, of all federally funded grantees, the top ten recipients of royalty income include: University of California System ($67.3 million), Stanford University ($51.7 million), Columbia University ($50.3 million), Florida State University ($29.9 million), Massachusetts Institute of Technology ($21.2 million), Michigan State University ($18.3 million), University of Florida ($18.2 million), W.A.R.F/ University of Wisconsin-Madison ($17.2 million), Harvard University ($16.5 million), Carnegie Mellon University (13.4 million). This income helps to fund additional research.



• In 1996, separate from licensing royalties, industry sponsored $1.5 billion in research at U.S. universities, hospitals and research institutes, the overwhelming portion of which is in biomedical research (such as conducting clinical trials, including $41 million at Massachusetts General Hospital and $26 million at the Mayo Clinic). This income is vital to the biomedical research efforts of these institutions.



• From 1980 through 1997 these technology partnerships between federal government agencies and university-based research were reported (many aren't reported) to have led to the founding of 1,521 U.S. companies.



• These technology partnerships, and the patents on which they are based, are particularly important to small biotechnology companies. These companies tend to focus their research on breakthrough technologies that come from basic biomedical research. They also must have strong patent protection to justify the risks they take. Most of these companies have no revenue from product sales to fund research, thus, they depend on venture capital and public market investors. In 1997, the biotechnology industry lost $4.1 billion. Previous years have had similar financial losses (1996, $4.5 billion loss; 1995, $4.6 billion loss; 1994, $4.2 billion loss). The biotech industry hasn't ever had a profitable year.

Conclusion

BIO appreciates the opportunity to present these views on this important issue. We look forward to working with the Subcommittee to support policies that will speed the development of pluripotent stem cell research into products for the benefit of patients.

1 Andrew. A. Toole, "The Impact of Federally Funded Basic Research on Industrial Innovation: Evidence from the Pharmaceutical Industry," Madison, Wisconsin: Lauritis R. Christensen Associates (1997).

2 Andrew A. Toole, "Public Research, Public Regulation, and Expected Profitability: The Determination of Pharmaceutical Research and Development Investment," Madison, Wisconsin: Lauritis R. Christensen Associates (1997).

3 Iain Cockburn and Rebecca Henderson, "Public-private interaction and the productivity of pharmaceutical research," National Bureau of Economic Research (1997).

4 Popenhusen v. Falke, S.D.N.Y. 1861, 19 Fed.Cas. 1048, Northill Co. V. Danforth, D.C.Cal. 1943, 51 F.Supp. 928, Chesterfield v. U.S., 1958, 159 Supp. 371, 141 Ct.Cl. 838, Norfin, Inc. v. International Business Mach. Corp. D.C. Colo., 1978, 453 F.Supp. 1072, affirmed 625 F.2d 357, Ares-Serono v. Organon Int. B.V., D.Mass. 1994, 862 F.Supp. 603

5 Roche v. Bolar Pharmaceutical Co., Fed. Cir 1984, 733 F.2d. 858 and see 35 U.S.C. 271(e).