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On March 16, 2013, a judge in Delaware will hear the arguments of the two parties from the Markman patent construction hearing in the on-going litigation battle between Celgene Corporation (NASDAQ:CELG) and Cyclacel Pharmaceuticals, Inc. (NASDAQ:CYCC). The eventual decision will define the framework within which the case will be argued in front of a jury in mid-2014 and as such will shed greater light on the likely outcome of the two-year legal dispute. In a Markman hearing, the judge examines evidence from both parties on the appropriate meanings of relevant words in a patent claim, known as claim construction (interpretation). The precedent case, Markman v. Westview Instruments, Inc. 517 U.S. 370 (1996), established that the claim construction is an issue of law to be determined by the court, not the jury. "The construction of a patent, including terms of art within its claim, is exclusively within the province of the court." The court's findings, thus, play a significant role in guiding the likely outcome for the patent infringement case. Almost a decade after Markman, in Phillips v. AWH Corp., 415 F.3d 1303 (Fed. Cir. 2005), the Federal Circuit court reaffirmed that the claims of a patent are "of primary importance" in defining the invention. Markman hearings are critical in patent cases to establish the meaning and scope of the claims, further facilitating the subsequent determination of infringement or claim validity.

A History of Istodax and the Cause for Litigation

As a result of the merger between Cylcacel Group plc and Xcyte Therapies Inc. in December 2005, Cyclacel owns four Xcyte patents (known as the Skov Patents). In a separate transaction, Invitrogen Corporation bought Xcyte's T-cell expansion technology known as the "Xcellerate Process," for $5 million. In January 2010, Celgene acquired Gloucester Pharmaceuticals for a total consideration of $640 million, including its novel HDAC Inhibitor, romidepsin, known commercially as Istodax. Istodax obtained FDA approval for the treatment of cutaneous T-cell Lymphoma (CTCL) in patients who have received at least one prior systemic therapy in December 2009 and for peripheral T-cell Lymphomas (PTCL) in 2011. It has since generated decent revenue for Celgene as its fifth marketed product. According to company estimates, Istodax reported 4Q12 revenues of $18 million with analysts estimating on average full year 2012 sales ranging between $60-$80 million. Furthermore, consensus analyst projections see sales reaching between $120-$190 million by 2015. Romidepsin is an HDAC Inhibitor, a prodrug that interferes with the function of histone deacetylase in order to restore normal expression of genes, which can lead to cell cycle arrest, differentiation, or apoptosis.

Following the launch of Istodax in early 2010, Cyclacel approached Celgene with the intention of granting them a license to sell romidepsin. Celgene responded by initiating a lawsuit against Cyclacel, seeking declaratory judgment or for the four patents to be deemed invalid. On June 18, 2010, Cyclacel filed a countersuit, charging Celgene with infringement of each of the four Cyclacel-owned Skov Patents and seeking damages for Celgene's infringement as well as injunctive relief. The four patents directly involve the use and administration of Celgene's Istodax (romidepsin for injection) product. In the up-coming Markman hearing, the judge, more specifically, will decide to frame the case around either parties proposed claim construction of the Skov Patents. The court's decision on the opening claim construction briefs will not only define the nature of the trial, but will also guide the direction both parties must pursue. This article should serve as a brief explanation of the patent lawsuit and the impact of the court's findings for both companies.

In recent news unrelated to the Istodax lawsuit, Cyclacel announced on February 12, 2013 the issuance of US and European patents that claim combination treatment of sapacitabine with HDAC (histone deacetylase) inhibitors, explicitly claiming twelve HDAC inhibitors including romidepsin. The announcement suggests that when Cyclacel acquired the Skov Patents back in 2005 it saw a potential strategic fit with sapacitabine.

Claim Construction of the Patents-In-Suit

In their respective opening construction briefs, both parties argue the interpretation of sixteen disputed terms of United States Patent Nos. 6,403,555 (the "'555 Patent"), 6,548,479 (the "'479 Patent"), 6,828,302 (the "'302 Patent"), and 7,041,639 (the "'639 Patent").

As an illustration, Celgene's proposed construction construes the limitation "immune response" to include a non-specific or inflammatory response while Cyclacel's focuses on "preventing or suppressing a T-cell immune response or T-cell mediated response". In simpler words, the construction briefs suggest Cyclacel's claim is centered on the mechanism of action on T-cells, known as T-cell mediated response, while Celgene's focuses on the implications of the disease. The additional fifteen claims are equally at opposite ends of interpretation, making it likely the court will decide clearly in favor of one party. The findings will serve as a pivotal moment in the two-year litigation battle the impact of which will have implications for both companies in principle, but significantly more meaningful for Cyclacel if the findings lean in its favor.

What is the Impact on Cyclacel

Without delving further into the minutiae of the hearing or predicting the court's decision, it is clear that Cyclacel has put itself in an advantageous position. There is little doubt that an outcome from the hearing in favor of Cyclacel's proposed construction would be an early victory for the small biotech. Not only would it prove to investors its ability to defend its IP, but it may also provide a source of non-dilutive capital in the near-term. Moreover, given the recent pattern of legal disputes, Celgene might consider the less expensive option of a settlement.

In the case brought by Elan Corporation, plc (ELN), for example, "Elan sued [in 2006] Abraxis BioSciences (later acquired by Celgene), claiming that technologies used in the development of Abraxane infringed on Elan's NanoCrystal patents. In 2008, Elan was awarded $55mm and 6% royalties on Abraxane sales, but Abraxis appealed. Under the [final] settlement, Elan received $78mm as a full and final payment [without] royalties. In turn, Celgene [received] exclusive worldwide rights to certain US and foreign Elan patents as they pertain to Abraxane." Similarly, in September 2012, Celgene settled with the University of Pennsylvania in the matter of Agios Pharmaceuticals, Inc. for an undisclosed amount. Should Celgene in this case decide otherwise and pursue a trial, it runs the greater risk of losing and thus paying a higher patent infringement penalty in addition to a continuous stream of royalty payments.

And as long as Celgene remains tied up in court with Cyclacel, competitors may have the opportunity to bid and obtain control of Cyclacel. In March 2012, Cyclacel's largest institutional investor bought $3 million of stock to specifically fund the cost of this litigation, reflecting a substantial vote of confidence in the company's legal as well as its clinical development strategy.

A settlement could allow Celgene to consider Cyclacel in a strategic context including a collaboration or buyout since Celgene's strategy is evidently to combine Celgene drugs with other active, competing compounds such as sapacitabine. We find from clinicaltrials.gov that Celgene is currently funding five trials of romidepsin in combination with Revlimd or Velcade for the treatment of patients with multiple myeloma, Celgene's main therapeutic focus and the area in which it derives the lion's share (roughly two-thirds) of its revenues.

The litigation aside, positive news from the phase 2 updated survival data in MDS at ASCO in June and the DSMB's recommendation after reviewing safety and efficacy of Cyclacel's phase 3 study for AML later this year could be an important catalyst that raises the interest of Big Pharma, increasing the chances of a collaboration or buyout. Considering the above, the Markman hearing may prove to be the turning point for undervalued Cyclacel.

Source: Celgene Corporation Vs. Cyclacel Pharmaceuticals, Inc.: The Markman Hearing And Its Likely Outcome