As much as the landscape for biotechnology startups has changed over the last decade, one thing that hasn’t changed is this: Intellectual property is the beating heart of a business. But as more parties get involved in funding early-stage development of new technologies, locking down and protecting the rights to intellectual property has also become much more complex.
John Chant, a biotech entrepreneur in the San Francisco area, learned that the hard way when he ended up in a three-way legal battle with a major research institute and a Big Pharma company. With the help of a great legal team and an alternative form of funding that’s gaining steam, he and his company made it out the other end.
In 2009, Chant, who had previously founded G-Zero Therapeutics (now G-One Therapeutics), heard about some tremendously promising technology being developed by researchers at the Dana-Farber Cancer Institute. It was a cancer drug candidate called WZ-4-002 that showed promise in treating kinds of non-small-cell lung cancers that became resistant to other drug treatments on the market.
The market for the lung cancer drugs was good, the science behind the compound was relatively straightforward and the path to commercialization was clear, so in March of 2009, Chant and four of the Dana-Farber researchers who had worked on the technology founded Gatekeeper Pharmaceuticals to commercialize it. Chant, the CEO of the newly formed startup, arranged an option agreement with Dana-Farber whereby the company could obtain a license for the patent on the technology if it could secure at least $250,000 in initial financing.
By April of the following year, Chant had secured that funding and notified the institute that Gatekeeper was ready to exercise its option for the patent. Except now there was a problem – a great big, multi-billion dollar problem called Novartis.
Novartis Institutes for BioMedical Research Inc., a wholly owned subsidiary of Novartis, had established a research agreement with Dana-Farber back in 2005 and had been contributing funding to some of its researchers in the form of project grants. One of the researchers on Gatekeeper’s founding team had received a grant from Novartis to work on researching kinase inhibitors, as had another Dana-Farber researcher whose work was key to the discovery of WZ-4-002. Novartis had recently learned that Gatekeeper was developing the compound and was now claiming that, under the terms of its research agreement with Dana-Farber, it had first rights to the patent that the startup’s entire business was riding on.
During a previous investigation, Dana-Farber had determined that the research behind the compound did not fall under its agreement with Novartis. But after being confronted by the company and conducting a follow-up investigation, it changed its mind and determined that Novartis did indeed have first rights to license the patent.
When Chant informed his investors of this, they withdrew their money. “That essentially put us out of business,” he said.
A series of lawsuits followed among the three parties over the next several months, and the decision of who had rights to the license fell into the hands of the court. In October 2012, a U.S. district court in Massachusetts issued a summary judgment concluding that Novartis could not prove it was entitled to a license to the technology under the research agreement.
“The court concluded Novartis did not fund the invention, which was the most hotly disputed issue, but we still had to get from there to trial on some claims against Novartis for delaying our entry to market for two years,” Chant said. “We were in a difficult situation, because my business partner and I had already worked on this company for about a year and a half. The mode of operation was to work for equity and not be paid.”
Without investors, the company had very little cash to fight one of the world’s largest drug companies. So Chant began exploring the possibility of a relatively new form of funding called litigation finance, where investors bankroll plaintiffs or defendants in a legal case in exchange for a piece of their potential winnings.
After interviewing a few different firms, Chant found a match in Lake Whillans, who worked with him and his lawyers at King & Spalding to create a deal that would cover expenses that law firms don’t normally cover, like trial and witness expenses, and provide some corporate funding for the company to pay down debt. The firm typically invests $2 million to $10 million in cases.
“Some of the other firms we looked at for litigation financing wanted to do a lot of work that might damage our attorney-client privilege,” Chant said. With the team at Lake Whillans, he felt like he knew exactly what he was getting and was able to stay in control of the situation.
“They were hands-off in the sense that we made the decisions; they didn’t dictate anything we did,” he said. “On the other hand, they have some very accomplished people and they were willing to spend a lot of time with us giving us input that was valuable.”
After negotiation of terms and some months of due diligence, the deal was set. Chant and his team of attorneys were then able to reach a settlement with Novartis that delivered some much-needed financing to Gatekeeper and, thus, a return to his litigation financers as well.
Despite this, Gatekeeper had been out of business for almost four years, and the four researchers who had served as directors for the company had resigned during the dispute, so Chant felt the company couldn’t go any further in this competitive area. He found a sub-licenser for the technology in Clovis Oncology, which is advancing a somewhat similar lung cancer therapy to market, and Gatekeeper received a royalty payment on that.
Despite the challenges of the last four years, Chant remains committed to the company, which he called “an egg waiting to be hatched,” and positive on the experience of taking litigation financing. “It was very helpful to us,” he said, “and it worked out well for us in the end.”