Sonus wins patent infringement suit

May 24, 2000

Companies agree on rights and royalties Four companies are joining in a complex multiparty agreement to penetrate the nascent ultrasound contrast agent market, closing a long chapter of back-and-forth patent infringement lawsuits.Most

Companies agree on rights and royalties

Four companies are joining in a complex multiparty agreement to penetrate the nascent ultrasound contrast agent market, closing a long chapter of back-and-forth patent infringement lawsuits.

Most recently, Sonus Pharmaceuticals of Bothell, WA, and its patent licensing partner, Nycomed Amersham of the U.K, sued Molecular Biosystems of San Diego and its marketing partner, Mallinckrodt of St. Louis, in a Seattle court for patent infringement. A U.S. District Court judge in that case eventually found that Molecular Biosystems and Mallinckrodt had infringed on two of Sonus's patents.

Sonus manufactures EchoGen, a fluorocarbon-based liquid emulsion that reflects ultrasound signals. It is approved in Europe but not yet sold there, and is under review by the FDA in the U.S.

The rash of litigation over ultrasound contrast products started in 1997, when MBI and Mallinckrodt sued Sonus and several other companies in Washington, DC, to invalidate contrast agent patents. During proceedings in that case, Sonus filed the Seattle suit against MBI and Mallinckrodt, alleging that MBI's Optison, an agent for assessing cardiac wall abnormalities, infringed on Sonus's patents. When the judge dismissed Sonus as a respondent in the District of Columbia suit, the Seattle case proceeded, according to company spokesperson Pamela Dull.

The Sonus gases in the challenged patents were perfluoropentane, which is included in EchoGen; perfluoropropane, which is included in Mallinckrodt's Optison; and perfluorobutane and perfluorohexane, which Sonus CEO Michael Martino believes are being used in products under development by competitors.

Under the four-way Seattle agreement, Sonus receives a $2.5 million one-time payment from Nycomed and royalties on future sales of ultrasound contrast products that fall under the Sonus patents and are produced or sold by MBI, Mallinckrodt, and Nycomed in all countries except those in the Pacific Rim. In addition, the Seattle judge dismissed counterclaims by MBI and Mallinckrodt against Sonus.

In a separate matter, Sonus said it has reached an agreement on an insurance coverage dispute with the company's insurance carrier. The dispute was related to the lawsuit, Dull said. Under this agreement, Sonus will receive an insurance payment of $1.75 million. With the Nycomed payment, Sonus received $4.25 million in the settlement.

At the most recent American Institute of Ultrasound in Medicine conference, held in San Francisco, clinicians said the use of contrast agents is the next step for better ultrasound imaging quality. However, ultrasound contrast agents have been slow to take off.

Although Nycomed is Sonus's patent licensing partner in this settlement, Nycomed is also a Sonus competitor. Sonus will not cross-license perfluoropentane to Nycomed, according to company officials. Bracco, Alliance Pharmaceuticals, and Du Pont Pharmaceuticals also develop ultrasound contrast agents.

Sonus is a small intellectual property company that would rather spend its time and money in research and development, Martino said.

When Sonus sued MBI and Mallinckrodt in 1998, Nycomed was not part of the picture. But when Sonus and Nycomed signed a patent cross-licensing agreement in 1999, Nycomed assumed all legal costs in the lawsuit. Martino estimates that Nycomed paid some $300,000 to $500,000 per month in legal fees over the last seven months of the trial. As part of this month's settlement agreement, Nycomed will also protect and enforce Sonus's patents. Nycomed gave Sonus a $10 million licensing fee as part of the agreement.

"We now have the freedom and cash to focus on what we do well, which is the discovery and creation of contrast agents," Martino said. "We realize the value of our company. (Nycomed) has the funding and wherewithal to extract the value of the patents better than we do."

Mallinckrodt will pay Nycomed a $10 million up-front license fee as well as royalties from future contrast media sales. The two companies will collaborate on further joint development and marketing of Optison, sharing the profits and costs equally. The same agreement applies to Nycomed's Sonozoid contrast agent, said Barbara Abbett, Mallinckrodt spokeswoman. Sonozoid is currently undergoing regulatory review in both Europe and the U.S.

In return, Nycomed grants Mallinckrodt a nonexclusive license under the Nycomed and Sonus patents, while Mallinckrodt and MBI grant Nycomed and Sonus the right to use elements under their patents.

The settling of the lawsuit also shifts the business relationships of the respondents in the case.

A few days after the suit was settled, MBI and Mallinckrodt restructured their Optison agreement. MBI will receive an ongoing 5% royalty on sales of the agent by Mallinckrodt and Nycomed in all countries except Japan, South Korea, and Taiwan. In addition, MBI will pay $7 million to Mallinckrodt as part of the intellectual property settlement, $3 million of which will be paid up front.

MBI had to restructure its agreement with Mallinckrodt because of mounting legal expenses and disappointing Optison sales, said Bobba Venkatardi, MBI's chief executive officer.

Abbett said the company's only comment on the judge's findings is that Mallinckrodt officials are happy to put it behind them and move on. She added that as regulatory procedures for pharmaceuticals take longer and longer, costs go up. This agreement will enable the companies involved to share costs, she said.

"This business model is extremely appropriate and desirable in today's environment of complex regulatory issues and increasing healthcare costs and needs," said Ray Holman, Mallinckrodt chairman and CEO.

However, MBI and Mallinckrodt are challenging five Sonus, Nycomed, and ImaRx patents, according to Abbett. The challenges ask the U.S. Patent and Trademark Office to review the patents for validity, she said.

Settlement of the Seattle lawsuit affected Sonus's first quarter financial results. For the quarter ended March 31, 2000, Sonus reported a loss of $2.2 million compared to a loss of $1.4 million in first quarter 1999. Sonus doesn't have any revenue this quarter because the company has no products on the market.

Sonus's operating expenses were $2.5 million for first quarter 2000 compared to $3.2 million in the first quarter 1999. Company officials attribute the $700,000 decrease to a lower level of research, development, and clinical trial spending, as well as lower legal costs as a result of the transfer of patent litigation responsibilities to Nycomed.