Select Developments in Biotechnology Law and the Biotechnology Industry

Is Biotech Bubbly?

In the last full week of March, biotech stocks slumped around 7%—that's how much the iShares Nasdaq Biotechnology ETF, which tracks 150 U.S. biotech and pharma companies, lost in just one work week. That fall makes Federal Reserve Chair Janet Yellen's comments last summer seem prescient: she had stated that biotech valuations were getting “substantially stretched.” Biotech's fall helped drive the broader Nasdaq composite down 3%, shaving half its year-to-date gain.

However, even given the fall off, biotech is still doing fine—not only is it outpacing the broader market, but it's doing so handily: much of the iShares Nasdaq Biotechnology ETF, even after its recent drubbing, is still up 12.5% for the year, for example.

It's not surprising that biotech would be volatile—there are significant challenges to trying to value the companies in the sector. That's because with long R&D times and time to market, and a great many new entrants to the field (a result of the opportunities created by rapid scientific advantages and the burgeoning health-care market), the biotech sector includes a great many companies which aren't making any money yet. That in turn means that many of the traditional tools used to value companies, like price-to-earnings multiples, are simply irrelevant, and assigning value is often little more than inspired guesswork. That being the case, it's hardly surprising that values can climb and fall very quickly.

House Agriculture Committee Holds Hearings on Biotechnology Labeling Laws

There are a lot of people who want mandatory labeling of food and agricultural products created using biotechnology. These are people harboring deep fears of genetically modified organisms (GMOs) and “Frankenfood.” However, as House Agriculture Committee Chair Mike Conaway (R-TX) said in his opening statement to hearings on the issue, “[b]iotechnology is an essential tool for farms to have in the toolbox if we plan to feed an estimated 10 billion people by the year 2050 in an environmentally sound, sustainable and affordable way.” Biotechnology can increase crop yield and nutritional value, while reducing necessary resource inputs—none of which will matter if significant numbers of people will be unwilling to buy or eat foods grown or made with biotechnology. That's why Rep. Conaway's comments should be heartening to the industry—the committee Chair appears to understand the potential value of biotech to the food sector. After his comments, the committee heard from witnesses who spoke to the harm that mandatory labeling could do the acceptance—and hence use of—biotechnology.

House Judiciary Committee Hears Testimony on the Troll Toll

Executives from four major companies from a spectrum of industries (Internet retailer; software app developer; credit union) told another congressional committee that patent trolls are taking a toll on them. For example, Overstock.com's general counsel, Mark Griffin, said that the company spends millions of dollars fending off patent trolls, but that other, less-well-heeled companies can't afford to fight and settle instead. Either way, the cost of dealing with the trolls effectively constitutes “a tax on innocent operating companies,” Griffin said.

“Patent trolls” acquire patents—some of them quite old (but obviously still valid)—in shell companies, which don't actually manufacture, develop, produce, sell, provide, etc., anything: all they do is shake down other businesses, ones actually engaged in productive economic endeavors, by threatening litigation for patent violations if they (the trolls) are not paid “royalties” for the use of their patents.

Trolls possess a structural advantage in the U.S. legal system: it's comparatively easy to file a lawsuit that's good enough to withstand an initial motion to dismiss, ¹ and it's often less expensive to sue than to defend against a suit. These facts mean that even if, at the end of the day, a troll's patent infringement suit would come to naught, they still can force companies to spend hundreds of thousands (or more) of dollars, plus hundreds of hours of top executive time, defending lawsuits. Since it's very rare for the winner of a lawsuit to recover its legal costs from the loser in the U.S. system (another advantage possessed by those who would bring spurious suits seeking a settlement—they can be confident they won't have to foot their victims' legal bills), these amounts are unrecoverable; that forces businesses to weigh whether paying the trolls is less costly than fighting them. And since business is (generally) in the business of making money, not righting wrongs, if paying the extortion is significantly less expensive than fighting the good fight, many or most companies will opt to pay and move on, rather than engage in litigation.

How many trolls are there? There are not good statistics, though Overstock's Griffin estimated that 64% of 2014's 499 patent cases were filed by trolls.

Congress has considered measures to reducing the troll toll, such as—

However, in the past, reform measures have not made it very far, so it's not clear that they'll be passed this time. Part of the issue is that changes to hurt the patent trolls may make it easier for patent infringers. For example, take the idea of protecting downstream customers from patent infringement actions—that could allow overseas patent violators to sell their knock-off products in the U.S. with impunity, since it would take away the only effective recourse, suing the retailers who sell the infringing products.

Europe May Become More Biotech IPO Friendly—Though not Just Yet

Recently, France has had some large biotech initial public offerings (IPOs), such as the £53.4 million IPO of Cerenis Therapeutics (developer of high-density lipoprotein therapy), or the €21 million IPO of OSE Pharma S.A. (which develops immunotherapies), However, much of Europe is not participating in biotech IPOs—only the Euronet Paris and London AIM exchanges are doing so to any appreciable degree. Overall, Europe has a low number of biotech IPOs.

What makes Europe unattractive for biotech IPOs? Cost. Europe has high regulatory and administrative costs associated with going public. These costs can eat up 10% of an IPO that raises less than £50 million—as much as 15% (or more!) of small IPOs (€6 million or less). However, fewer biotech IPOs means less biotech activity in Europe in general, and that's something that comes with its own economic and societal prices—biotech is too important to discourage. That's why an IPO Task Force was created, drawing on experts from a broad consortium of European exchanges and investment groups, to recommend ways to make Europe more attractive to biotech IPOs. Their chief recommendation is to reduce costs, ideally by 50%, and they've begun lobbying the European Commission to do so. As the chair of the IPO Task Force, Philipe de Backer, said: “The European IPO markets need to work better for the real economy. Although Europe continues to build and grow businesses with the potential to be world class, the failure of the IPO market to facilitate their access to capital hampers their growth and ultimately their potential to create jobs.”

BASF Heads up Consortium to Use Biotech Production Methods to Decrease Manufacturing Costs

Also in European news: SPIRE (the Sustainable Process Industry through Resource and Energy Efficiency) is an initiative of the European Commission. Its sixth project is a consortium, led by global chemical giant BASF, to lower the production costs of biotechnology products—and also increase manufacturing energy efficiency while reducing energy consumption. The project (called PRODIAS, for PROcessing DIluted Aqueous Systems) has received £10 million from the European Union, which constitutes the bulk of its €14 million budget. In putting its money where its mouth is by funding projects like PRODIAS, the European Union is showing a commitment to biotechnology. Other members of the international consortium include Cargill Haubourdin, Alfa Laval, GEA Messo PT, Xendo, UPM, Enviplan, the University of Kaiserclautern, and the Imperial College London.

India Actively Courting Biotechnology

India's biotechnology sector has grown explosively. Over the course of a decade (from 2003 to 2013), it went from US$530 million to US$4.3 billion, an eight-fold increase, ² making it the third-largest bio-economy in the Asia-Pacific region. Some analysts project 30% annualized growth for the next decade, to US$100 billion by 2025. Not surprising to anyone who's followed the pharma or biotech industries, India has the most U.S. FDA-approved manufacturing plants of any nation other than the United States itself.

India has a number of advantages when it comes to biotech: a strong educational system, with a focus on math and science, resulting in a deep talent pool of scientists and engineers; comparatively low wages (compared to Western nations), resulting in inexpensive manufacturing. However, there are negatives, too, such as an overly strict patent system, one which makes it difficult to patent new inventions and processes—and a patent regulatory regime reluctant to give patents to large Western pharmaceutical companies.

However, one of India's greatest assets may be its government's focus on attracting and fostering biotechnology companies. The 2014–15 Union budget includes the following incentives for biotechnology and pharmaceutical companies:

• A service tax exemption for critical bio-medical waste management services;

All of which goes to show that government is not the enemy of enterprise—it can support it, so long as the will is there.