1-Hormones: More about the patent fight over recombinant human insulin

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TITLE:  Cancer Center, Drug Firm Fight Over Biotech Riches
SOURCE: Los Angeles Times, USA, by Denise Gellene
        http://www.latimes.com/business/la-082801patent.story
DATE:   August 28, 2001

------------------ archive: http://www.gene.ch/genet.html ------------------


Cancer Center, Drug Firm Fight Over Biotech Riches
Lawsuit: $500 million may be at stake in the battle over royalties from 
historic research.

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 "We've had this very long-standing relationship with City of Hope and 
interpreted the contract one way all these years. It is interesting that no 
one raised these issues until recently."
Sabrina Johnson, spokeswoman for Genentech
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A little-noticed lawsuit that goes to trial today in Los Angeles County 
Superior Court marks the culmination of a decades-long conflict over the 
enormous riches from the invention that launched the biotech revolution. At 
stake is as much as $500 million, an extraordinary potential windfall for 
City of Hope National Medical Center in Duarte, as well as a possibly huge 
financial blow to biotechnology giant Genentech Inc. City of Hope, a world-
renowned, nonprofit cancer center with an annual budget of $328 million, 
pioneered bone marrow transplants for cancer patients and recently opened a 
facility to make small batches of experimental drugs for untreatable 
diseases. But it was its groundbreaking work in biotechnology in the late 
1970s that helped launch an industry--and spawned an epic feud. Two City of 
Hope biologists, funded by Genentech, at the time an obscure start-up, were 
the first to produce human insulin, the world's first biotechnology drug. 
The 1978 breakthrough brought incredible wealth to City of Hope and to 
scientists Arthur D. Riggs and Keiichi Itakura, and fueled Genentech's 
growth. Twenty-three years later, City of Hope claims Genentech has cheated 
it out of hundreds of millions in royalties stemming from its discovery. It 
alleges that Genentech repeatedly violated the 1976 contract that 
established the collaboration that led to the landmark drug. Genentech, 
based in South San Francisco, denies the allegations. "We've had this very 
long-standing relationship with City of Hope and interpreted the contract 
one way all these years. It is interesting that no one raised these issues 
until recently," said Sabrina Johnson, spokeswoman for Genentech, which had 
sales of $1.7 billion last year.


Conflict Dates Back to Genesis of Biotech

The contract gave Genentech the patents on the technique Riggs and Itakura 
used to produce human insulin in common bacteria. City of Hope, in return, 
agreed to accept a 2% royalty on sales of products that resulted from the 
patents--though which products fall under the contract is in dispute. 
Complicating the matter is the fact that it was chiefly negotiated by a 
former City of Hope administrator who suffers from memory loss, and a co-
founder of Genentech who is dead. Genentech argues the agreement is limited 
to proteins that City of Hope scientists helped develop: human insulin, 
human growth hormone and somatostatin, which was never commercially 
produced. Through 1999, court records show, City of Hope received $270 
million from Genentech in royalties for insulin and human growth hormone. 
But City of Hope maintains the contract is far-reaching. It believes it is 
entitled to royalties from up to 27 patent licensing agreements between 
Genentech and third parties. Court records show Genentech licensed the 
patents it obtained from City of Hope to GlaxoSmithKline for hepatitis B 
vaccine and to Schering-Plough for its Intron A interferon, among others. 
City of Hope general counsel Glenn L. Krinsky said the amount in dispute 
exceeds the $200 million Genentech paid UC San Francisco to settle a 1999 
patent suit. It very likely is "in the $500-million range," he said, an 
amount large enough to plunge Genentech into the red for the year. The 
lawsuit doesn't involve insulin royalties, which ended in 1998. The 
patents, according to court documents, expire in 2004. The conflict goes 
back to the genesis of biotechnology. Backed by Genentech, City of Hope 
scientists Riggs and Itakura raced against teams from Harvard and UC San 
Francisco to be the first to genetically engineer insulin. Awaiting the 
victor was a contract with Eli Lilly & Co. The world's largest provider of 
insulin, Lilly derived the drug from cows and pigs and did not want to lose 
its market to a new technology. It took two years for Itakura and Riggs to 
complete the task. They worked with glass beakers and test tubes in a small 
City of Hope laboratory that, with its wooden cabinets and black counter 
tops, is reminiscent of high school. The first step was to build a 
synthetic gene--a sequence of DNA made in a test tube from chemicals 
purchased from a supply house. A gene functions as a set of instructions 
for a protein. The next step was to "splice" the man-made gene into E.coli 
bacteria in just the right spot, so that the organism would "read" the 
instructions and produce the desired protein, such as insulin. Itakura, a 
brilliant technician, painstakingly mixed chemicals to build correctly 
sequenced strands of DNA--genetic instructions for a specific human 
protein. Riggs, more of a theorist, puzzled out where inside the bacteria 
to splice the synthetic gene so it would produce the protein they wanted. 
Itakura and Riggs first tested their methods with somatostatin, a protein 
that lacked the commercial promise of insulin but was easier to work with. 
Fourteen months later, in 1978, they and a team of Genentech scientists 
used the same technique to win the insulin marathon. Lilly immediately 
signed a multimillion-dollar, 20-year contract with Genentech, opening a 
financial spigot that has spilled controversy ever since. Under the 
previously secret deal which surfaced in court documents, Lilly agreed to 
pay an 8% royalty on insulin sales--6% for Genentech and 2% for City of 
Hope. Though the percentages appear small, the deal was a windfall for City 
of Hope and Genentech, which had no products, sales force or laboratory of 
its own in 1976. Sales of Lilly's Humulin steadily climbed from its 1982 
launch, reaching $1.1 billion last year. Royalties flowed in lock-step. For 
City of Hope, the money averted a financial crisis at the hospital in the 
mid-1980s as health-care costs rose. But since 1992, most of the money has 
flowed into its Beckman Research Institute--the laboratory that employs 
Riggs and Itakura--as a result of a lawsuit filed against City of Hope by 
the scientists. Riggs, in a 1986 letter to City of Hope administrators, 
called the medical center a "black hole" that was consuming resources he 
thought should go to research.


Second Thoughts About Royalty Split

Nonetheless, City of Hope's former business administrator, in a deposition, 
called the royalty stream "incredibly meaningful." "It allowed for 
continual growth of the research institute. . . . It was a very, very 
precious commodity," said former business manager Karen M. Warren. "We were 
the envy of cancer centers all over the country." From the start, documents 
indicate, Genentech had second thoughts about its royalty split with City 
of Hope. During initial negotiations, Genentech co-founder Robert A. 
Swanson considered capping City of Hope's royalties at $1 million. He wrote 
the medical center in 1980--three years before Humulin's launch--offering 
to "prepay" what he called "potential future royalties." He proposed giving 
City of Hope $400,000 for its "immediate cash needs." In exchange, he asked 
that the medical center reduce its royalty rate to 1% so Genentech would 
have more money for clinical trials. City of Hope rejected the offer, which 
would have cost it in excess of $100 million in royalties. Swanson died of 
brain cancer in 1999. City of Hope faced internal squabbles over the money 
as well. Minutes of Beckman Institute committee meetings, filed as part of 
the scientists' suit against City of Hope, reflect a tug-of-war between the 
research institute and the medical center. "It's urgent that we not 
transmit any kind of greedy attitude in this discussion," minutes from a 
July, 1987 meeting said. Riggs and Itakura sued City of Hope in 1990 after 
being unable to reach an agreement with the institution over their share of 
the royalties. The settlement, reached in 1992, together gives them 10% of 
Genentech royalties, an amount that runs into the millions annually. As 
part of the settlement, they agreed to donate money to Beckman "from time 
to time." In fiscal 1997, according to public documents, Riggs received 
royalties of $1.2 million, nearly 10 times his salary as chairman of the 
biology department. Itakura's royalties totaled $2.1 million for the same 
period, 18 times his salary as a research scientist. (The scientists split 
the insulin royalties while Itakura receives the entire amount from human 
growth hormone).


Relationship Soured Between Hospital, Firm

Riggs and Itakura also received stock options in Genentech, which were 
worth about $50 million each when the company went public in 1980, 
according to court filings. Should City of Hope prevail against Genentech, 
the scientists stand to make millions more. Itakura did not respond to 
requests for an interview. Riggs would not answer financial questions 
related to Genentech on advice of City of Hope attorneys. The relationship 
between City of Hope and Genentech rapidly deteriorated after the insulin 
breakthrough, court documents indicate. Between 1981 and 1982, Genentech 
withdrew funding for Itakura projects involving interferon and a protein 
called insulin-growth factor. Genentech said the fragments of insulin-
growth factor DNA that Itakura synthesized were unusable. Itakura discarded 
an interferon fragment that Genentech wanted after the company pulled the 
plug on his project. Riggs, meanwhile, told Genentech in a 1980 letter he 
was abandoning a project "for now and probably forever." He recommended 
transferring the remaining $13,000 in his budget to antibody work pursued 
by one of his post-doctorate researchers, Shmuel Cabilly. That effort paid 
off. Genentech in 1989 received a patent on a technique for making 
antibodies that resulted from the research, conducted jointly by City of 
Hope and Genentech scientists. The technique is used to produce the 
Genentech cancer drug Herceptin, among others. But there is also a dispute 
over royalties under that patent, which is in arbitration.



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