This is pretty far off the mark from my usual subject matter, but there’s a huge patent law case that’s just been decided, and the subject interests me, not just because I own a lot of stock in little Ariad Pharmaceuticals, but because what’s at stake is so mind-bogglingly huge that it defies decription.

In a nutshell, Ariad has just been awarded (by a unanimous jury decision) a significant payment of about 65 million from drug giant Eli Lilly, based on back royalties due to a patent infringement case they initiated back in 2002. They’ve also been awarded a 2.3% annual royalty of net sales on Lilly’s big drugs Evista and Xigris until the year 2019. The total amount due to Ariad from all of this could be more than 400 million by the time the patent expires.

While the money isn’t incredibly significant to Lilly, which brings in billions every year, it’s a transformative event for tiny Ariad, which has yet to make a profit and has an entire market cap of around 400 million total. This royalty stream will keep Ariad afloat while it continues to develop its own drugs for cancer (which are pretty impressive), one of which will enter pivotal phase 3 trials this year.

What’s REALLY remarkable about this verdict is that it upholds Ariad’s broad patent on methods surrounding the regulation of the NFKB pathway in the body.

NFKB was discovered about 20 years ago by one of the most respected names in science, Dr. David Baltimore. But at the time, the discovery wasn’t a big deal; nobody knew how important this biological pathway really was. Dr. Baltimore, with the help of several friends in the industry, patented a number of different methods of introducing a drug that would inhibit NFKB, and after 15 years or so of tweaking, the US Patent Office granted the patent and all it’s 200+ claims. An exclusive license was given to Ariad Pharmaceuticals by Dr. Baltimore.

Here’s the thing: during those 15 years since its discovery, scientists have found out a lot more about NFKB’s role. It turns out that NFKB is involved in many, many different processes in the body, and manipulation of this pathway could affect everything from arthritis to cancer. Asprin’s mechanism of action is to inhibit NFKB, for example.

With me so far? Great. Now here’s the bombshell: there are hundreds of pharmaceutical and biotech companies working on drugs that regulate NFKB. Some of them already have drugs on the market, like Lilly, Amgen and Millenium. Others are still in development. Immediately after the patent was granted, Ariad initiated the litigation against Lilly, claiming that Evista and Xigris worked by regulating NFKB and therefore Lilly was infringing and owed royalties. They also sent a letter to 50 other companies offering a license.

What this lawsuit does is send notice to those other 50 companies essentially saying, “pay up or you’ll be sorry.” Very rough estimates of the total royalties potentially owed to Ariad by all these companies are in the billions. Needless to say, this is a pretty big deal to a tiny biotech company struggling to keep its head above water. But it’s also a landmark case in patent law.

Lilly (and many others) have framed this case as being about whether or not a company should be able to patent a natural biological pathway in the body. If this is upheld, they argue, many other companies will rush to patent every naturally occuring process they can. This will (hypothetically) stifle innovation, as other companies will not want to pay royalties and so won’t develop drugs that target those pathways.

But this simply isn’t the case. First of all, studies have shown that patents do not stifle drug development at all; in fact, they may encourage it. And most importantly, this is a methods patent, which protects certain ways of interacting with the NFKB pathway. It does NOT patent the pathway itself, nor should it. Sure, Ariad’s methods are broad, and the patent itself covers everything but the kitchen sink. But methods patents are pretty standard things. That’s how you protect inventors, and encourage academic research.

Lilly’s lawyers have said that by granting this patent, Ariad has essentially been allowed to “patent water flowing downhill.” And now, they say, all the owners of hydroelectric power plants along the river will have to pay up to use the water for their own purposes. Not true, I say; using that analogy, Ariad discovered water flowing downhill and then patented the hydroelectric power plants. And that’s a BIG difference, folks. Clearly the jury felt the same way.

So what happens next? Lilly has asked the judge to set aside the verdict, and the patent office to reexamine the patent. They’ve also said they will appeal. While the chances of the judge overturning the verdict are slim, the patent office could invalidate the patent, and the verdict could be overturned during the appeals process.

I’d like to think the little guy wins out here. But there’s a lot of money behind the Lilly side, and the pressure will be intense. Ariad’s taken the first major battle, but there will be more, and more companies will join the fight. Time will tell who comes out on top at the end.

Stay tuned. I know I will.

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