By Jeff Swiatek, The Indianapolis Star
Feb. 26–Dr. Michael Goldberg, the head of a tiny company called Emisphere Technologies, doesn’t trust Eli Lilly and Co. anymore.
Not since he concluded Lilly tried to swipe his firm’s best idea — a drug carrier compound worth millions or maybe billions of dollars.
Not since the research contract between the companies fell apart and he found Lilly had set up a secret team to test Emisphere’s compounds in ways that violated the agreement.
And especially not since Emisphere spent millions of dollars defending itself against a breach-of-contract complaint filed by Lilly, a lawsuit that backfired last month when a judge ruled Lilly was the one that breached the contract.
“You can only describe it as a bully trying to beat up on the weaker party,” said an upset Goldberg of his dealings with Lilly. “None of us really believed this could happen. It was really shocking.”
Lilly denies any wrongdoing in the case. Spokesman Philip Belt calls the Emisphere case “an anomaly” at Lilly. It’s the only time in recent years that Lilly has sued one of its research partners, he said, and “shouldn’t be seen as a new trend or indication of how Lilly does business.”
Belt said Lilly won’t discuss specifics of the dispute. He also wouldn’t elaborate on his comment that “there are learnings to be made here” for Lilly.
The ruling by federal judge David F. Hamilton that Lilly breached its contract with Tarrytown, N.Y.-based Emisphere has sent ripples of concern through an industry where trust is the linchpin in thousands of similar exploratory deals.
Details of how Lilly dealt with Emisphere cause some to question whether Indianapolis’ largest private employer can be trusted by its dozens of research partners.
“This is exactly what Lilly doesn’t need. It looks like they are stealing from their partners. There is no question it really does darken Lilly’s reputation,” said Roger Longman, an expert on drug industry research collaborations who is editor of In Vivo, a newsletter for the drug and medical device industries.
Longman said the case surprises him because Lilly “has a fabulous reputation as a biotech partner.” A 2003 survey by IBM Corp. ranked Lilly as the most respected company for its partnering capabilities among 28 large drug companies.
As a result of the court case, small companies may be warier of dealing with Lilly, said Mark Long, president of the Indiana University Emerging Technologies Center, which helps brood start-up businesses. “It will make companies think twice before they do a deal. A potential partner now in particular is going to do a lot more due diligence and potential legal coverage to protect themselves.”
Dozens of partnerships in the drug industry fail every year — many because of management difficulties, others because money runs out, and some because the technology didn’t work.
The Emisphere case is notable because the technology was working. In fact, the technology apparently was so alluring to Lilly and its scientists that they couldn’t keep their hands off it.
What was so alluring? The New York firm has made significant strides toward discovering one of the holy grails of drug research: how to convert large-molecule drugs that can be taken only by injection into pills that can be popped in your mouth.
Emisphere’s patented technology basically takes the active ingredient in injectable drugs and loads it into chemical “carriers.” The carriers are meant to slip through the protective membranes that normally block large-molecule substances from leaving the digestive system and passing directly into the body’s blood supply.
Lilly had compelling reason to be interested in Emisphere’s technology. The Indianapolis drug maker sells several products that are given by injection and could be sold more widely if available as a pill. They include Lilly’s insulins and its growth hormone drug. Finding an effective pill for insulin alone would be a breakthrough worth untold billions of dollars.
The partnership between Emisphere and Lilly, signed in 1997, was supposed to be a hand-in-hand scientific effort to bring something new to patients: an easy-to-take pill form of Lilly’s injectible bone-strengthening drug Forteo. Finding a pill form could vastly expand the popularity and sales of Forteo, which came on the market in 2002.
Emisphere tried to protect its technology with Lilly by limiting its use to work on Forteo only. “Lilly shall not have any rights to use the Emisphere technology . . . other than insofar as they relate directly to the field,” the contract said. The “field” referred to the joint research with Forteo.
The contract called for a joint research committee of six scientists, split between Lilly and Emisphere, to do the work. It was led by a Lilly scientist, Amin Khan.
The committee went to work and reported progress, although both sides expressed after-the-fact dissatisfaction with each other’s contributions.
Goldberg says that he and others at his company became suspicious about Lilly’s actions in 2001. At the time, Lilly suggested broadening the research agreement to include drugs beyond Forteo, but kept finding legal objections to proposals put forward by Emisphere’s attorneys, he said.
What Goldberg didn’t know then was that Lilly had set up a separate research team in January 2001, made up only of Lilly employees, and had begun studying Emisphere’s technology behind its back.
The secret team’s own minutes show it used proprietary information from Emisphere to test materials other than Forteo. Minutes mention Emisphere compounds that no one besides Emisphere and the joint committee knew existed. The team also worked with samples of a pinkish powder provided to the joint committee by Emisphere.
More than a dozen Lilly scientists, managers and an attorney attended meetings of the secret team at Lilly’s Indianapolis campuses.
Who authorized the secret team at Lilly? It remains unclear.
The Lilly executive who oversaw the joint research effort was Richard DiMarchi, a member of Lilly senior management who had the title of group vice president of Lilly Research Laboratories. He reported to Lilly’s top scientist at the time, Dr. August Watanabe. Watanabe, who is no longer at Lilly, reported directly to Lilly’s chief executive officer, Sidney Taurel.
DiMarchi since has retired from Lilly. In an e-mail to The Indianapolis Star, DiMarchi said he is now “too far removed” from the Lilly-Emisphere project to comment on it.
When talks between both sides bogged down over widening the terms of their contract, a lawyer was appointed to the secret team to help develop a strategy for taking its discoveries to market without violating the Emisphere contract. Within months, Lilly constructed a “firewall” around the secret team. The ostensible purpose was to prevent the team from using information Emisphere shared with Lilly under the partnership. One Lilly scientist who served on the joint committee, Henry Havel, also was removed from Lilly’s secret team.
Havel admitted in court that he had freely passed information about Emisphere’s proprietary carrier compounds to the secret team. He testified that his Lilly bosses never told him not to pass information on to the team, or anyone else at Lilly. “I was never instructed on specifics regarding that particular topic,” he said at trial.
The passing of information was so blatant that Havel showed the secret team slides of scientific data stamped “Confidential — Property of Emisphere Technologies.”
Removing Havel from the team and erecting the firewall was supposed to stop the flow of proprietary information.
But the firewall had a gaping hole. The secret team’s leader was none other than Khan, the Lilly scientist who also headed the joint committee and thus was in a position to convey Emisphere’s trade secrets directly to Lilly’s secret team. At trial, Khan denied doing so, and there was no direct evidence presented that he did.
Both Khan and Havel refused to comment on their actions. Both still work at Lilly.
To Goldberg, Lilly’s firewall was “absurd” because it was so porous. Judge Hamilton also apparently thought little of Lilly’s safeguards, referring in his ruling to the “so-called” firewall.
About the time the firewall was established, the secret team shifted its focus from broad research to studying one protein, GLP, which treats diabetes. That research produced promising results quickly, and Lilly began negotiations to license Emisphere’s technology for use with GLP.
During those negotiations, the firewall was removed and Havel was allowed to provide information to the secret team again, according to the judge’s ruling. Also, while the negotiations were ongoing in February 2002, Lilly filed for a patent on the GLP carrier, listing Khan — not Emisphere’s scientists — as the inventor.
Still, Goldberg and other Emisphere officials knew nothing of the secret team.
Goldberg said he became concerned that same year when Lilly hired away one of his top scientists, Godfried Owusu-Ababio, whom Emisphere had hired about a year earlier at the urgings of DiMarchi, the Lilly executive.
Worried Ababio might disclose sensitive information to Lilly, Goldberg said he got DiMarchi’s assurance that Ababio would be limited in his work at Lilly to matters that didn’t impinge on Emisphere technology.
Goldberg said he found out later that Lilly almost immediately put Ababio to work researching pill forms of injectable drugs. Ababio also was listed as attending meetings of the secret team, although in a deposition he claimed the minutes were in error and he actually didn’t attend any secret team meetings, said Colin A. Underwood, an Emisphere attorney.
Ababio, who still works for Lilly, did not respond to requests for comment and Lilly would not make him available.
The renewed negotiations to license Emisphere’s technology for GLP also broke down, and Emisphere was growing suspicious. Goldberg said his lawyers told him at the time, “It really makes me wonder what they’ve done in the past year or two, and what they’ve actually been using your technology for.”
The relationship finally began to fall apart in September 2003, when Lilly’s application for the patent was published.
That was enough to prompt Emisphere to send notice to Lilly that it believed its contract had been breached.
Lilly responded by pre-emptively suing on the same grounds. Lilly said it was worried that Emisphere wanted to license its pill carrier technology to a Lilly rival, Novartis.
As legal proceedings developed, Emisphere did turn to Novartis as its new partner, and the Swiss company gave Emisphere a $10 million upfront payment, much of which was used to pay Emisphere’s legal fees in the lawsuit with Lilly.
“But for that, I don’t think we would have had the financial ability to resist the pressure Lilly was putting on us to settle,” said Goldberg. He said Lilly offered “a few million dollars” to settle the case, and wanted no restrictions on research it could do on pill carrier technology. Goldberg found that unacceptable, because Emisphere stood to lose control of its most valuable technology.
Throughout the legal wrangling, Goldberg and other Emisphere officials still knew nothing of the secret team. It wasn’t until Lilly’s suit went to trial in January 2005, in U.S. District Court in Indianapolis, that Goldberg found out about the team. “A Perry Mason moment,” he calls it now.
At trial, Lilly witnesses testified that the drug maker formed the team to better understand how Emisphere’s carrier compounds work. Havel said no Emisphere scientists were asked to join the team because Lilly “didn’t have any confidence” they would contribute much of value.
That explanation amounted to Lilly saying, “We had to steal the technology in order to help them use it better,” said Underwood, Emisphere’s attorney.
The judge wasn’t buying it.
Lilly’s explanation for forming the secret team “was offered first at trial and it is not supported by contemporaneous documents or other evidence,” Judge Hamilton wrote. “Lilly managers were very much aware of potential problems with Emisphere resulting from this secret… research project.”
At trial, Khan, a central figure who headed both the partnership and the secret team, was evasive, even denying at one point that he was chairman of the joint research effort.
That prompted Emisphere’s attorneys to confront Khan with his own resume, on which he had listed himself as chairman of the joint research effort.
In one of several strange twists revealed at the trial, Emisphere happened to possess Khan’s resume because Khan had tried to get a job at Emisphere a few months before the trial started.
“The whole thing just got sillier and sillier,” Goldberg said of the incident.
Hamilton’s 60-page ruling amounts to a judicial spanking of Lilly. The company “actively concealed for several years” the research it did using Emisphere- supplied materials and later created “a sanitized paper trail” to make it seem like the secret research didn’t draw on proprietary Emisphere technology, the judge said.
With the partnership now dead, Lilly must turn over to Emisphere materials and data it was given during the partnership, said Underwood, the Emisphere attorney. “Getting it back from Lilly doesn’t really mean a whole lot,” he added. “And I’m not sure Emisphere has any great confidence Lilly will abide by those restrictions” to cease working with the carrier technology.
The judge has yet to rule on Emisphere’s charge of patent infringement against Lilly. Emisphere also is expected to ask the court to order Lilly to pay damages, which are as yet unspecified but could be substantial, Goldberg said.
Either company could appeal after the judge’s final rulings.
Despite the bitter falling-out, Goldberg said he would be willing to revive the partnership with Lilly.
On one condition, that is.
“If Lilly could stand up and say, ‘This is wrong. We disavow this. This is not how we treat our partners,”” Goldberg said.
So far, nothing close to that has happened.
ELI LILLY and EMISPHERE
Eli Lilly
–Founded: 1876
–Headquarters: Indianapolis, Indiana
–Revenue: $14.6 billion
–Employees: 43,000
–Products: Insulin, Antipsychotics, Cancer drugs, Osteoporosis treatments, Growth hormone, Male impotence pill
Emisphere
–Founded: 1986
–Headquarters: Tarrytown, New York
–Revenue: $2 million
–Employees: 120
–Products: None
TIMELINE OF DEAL GONE SOUR
A promising partnership between Eli Lilly and Emisphere ended in a lawsuit.
–February 1997: Research partnership signed to develop pill form of Forteo.
–1999: Research put on hold to study Forteo cancer scare in rats.
–2000: Research resumes.
–January 2001: Lilly forms secret research team to test Emisphere’s technology on drugs besides Forteo.
–Early 2001: Lilly negotiates to broaden research to include more drugs.
–Mid-2001: Lilly erects “firewall” around secret team to break its links to joint research.
–2002: Lilly hires away Emisphere scientist, puts him to work with secret research team.
–Mid-2002: Negotiations to broaden agreement break down.
–February 2003: Lilly files for international patent based on Emisphere technology.
–September 2003: International patent published.
–October 2003: Lilly sues Emisphere for breach of contract.
–December 2003: Lilly serves Emisphere with lawsuit, but joint research continues.
–August 2004: Emisphere tells Lilly it’s terminating contract, will work with Novartis instead.
–January-February 2005: Case goes to trial.
–January 2006: Judge rules Lilly breached contract.
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