Sunday, December 9, 2012

The bloody patent battle over a healing machine - Fortune Management

A patent royalty is a beautiful thing. It is so much sweeter than found money because it is more than just good luck. It means that one party is paying another to use an invention. And before the lawyers got to arguing over claim constructions and prior art, before the government regulators and hospitals screamed enough was enough, and before the Russians came to Texas to explain Soviet-era library policies, there were few things more beautiful or lucrative in the world of patent royalties than the VAC.
It's pronounced "vack" and stands for vacuum-assisted closure. Here's what it is: You cut a piece of foam to size and place it in a wound as a barrier and protector. Then you cover the wound and seal it up. One end of a tube goes through the seal and the other goes into a small pump. The pump produces negative pressure, creating an even vacuum through the foam, and the wound is pulled together and heals. If it sounds simple, it's because it is simple.
For much of the past 20 years this device was controlled by a San Antonio company called Kinetic Concepts Inc. The VAC transformed KCI from a second-tier medical manufacturer into a global juggernaut.
For Wake Forest University, which licensed the VAC patents to KCI, the device has meant about $500 million in royalties. Based almost entirely on the VAC deal, the university was ranked fifth by the Association of University Technology Managers in its most recent survey of licensing income, trailing only Columbia, New York University, Northwestern, and the University of California system. In recent years the KCI payments have propped up the bottom line of the university's medical center, and the VAC money has paid for research, recruiting, and construction that probably wouldn't have happened otherwise.
As you might imagine, all that success gave KCI and Wake Forest a powerful incentive to build a fence, to protect the patents at all cost. And it gave everybody else an equally powerful incentive to find a way through the fence.
This is the story of what happens when there are billions of dollars wrapped up in a prosaic piece of technology that at its core is closer to your kid's science-fair entry than the Human Genome Project, one that despite all the commercial success and some 4 million or so patients still has its share of doubters in the medical community. It's a story about luck and timing and the squeezing of the health care dollar. It is about betrayal and wrangling over patents. And mostly it is about invention, the tenuous and uncertain act of breathing life into an idea that may or may not have been yours all along.
Dr. Louis Argenta says he invented the VAC, and he has the patents to prove it. He's a plastic surgeon at Wake Forest Baptist Medical Center in Winston-Salem, N.C., but is quick to point out that he isn't that kind of plastic surgeon. He deals with messy and nasty injuries that often can't or won't heal on their own. One night in the late 1980s, he was lying in bed and unable to sleep. He was reading The Gulag Archipelago and was worried about a patient who was slowly dying from an infected wound that couldn't be closed with surgery because the stitches would make things worse. "And, just suddenly," he would say later, "the concept of just using a giant vacuum -- we had played with vacuums in the laboratory a little bit, but this was the concept of using a giant vacuum to pull this whole thing together." He sketched a rough drawing in the margins of his book, and his wife told him to go back to sleep.
The next morning he talked to his lab manager, Michael Morykwas, a biomedical engineer, and they began working on a prototype. They tried it with success on pigs. But before they could put a device on a patient, they needed the approval of the hospital's ethics committee, which hemmed and hawed but eventually consented. The primitive VAC, Argenta would say, saved his patient's life.
For the next few years Argenta and Morykwas tinkered with their invention. In 1991 the university applied for a patent on their behalf and began shopping the device around. Wake Forest agreed to pay them half of any royalties, which to date has meant about $120 million apiece. But back then, getting rich seemed like a pipe dream. The leading medical journal for plastic surgery rejected a paper on their research, and there was little interest from the health care industry's biggest players. A licensing deal was struck in 1993 with KCI, which had a business renting and selling medical beds with air chambers. It already had products that used pumps. This would be one more. The first VAC hit the market in 1995, two years before the patents were granted and any research was published.
Negative pressure is suction, and suction has long been used to drain wounds and draw infections to the surface. What's different in wound therapy is that the pressure is maintained. Before the VAC came on the scene, the prevailing belief was that long periods of suction would damage the healthy skin that surrounds a wound.
By 1999, KCI had built a $50-million-a-year VAC business through word of mouth, a go-go sales force, and top-notch customer service. That's nothing to sneeze at, but it was only the beginning. In late 2000, Medicare began reimbursing for the use of the VAC, and suddenly a therapy on the fringes came with its own revenue stream as doctors used the devices to treat diabetic ulcers and pressure sores. With the government's seal of approval, VAC revenue climbed to nearly $500 million by the end of 2003, on the way to becoming a billion-dollar product line.
That brought the money. Respect came in the field hospitals for U.S. troops in Iraq and Afghanistan.
In clinical language, the immense destruction caused by an improvised explosive device, or IED, is referred to as a high-energy soft-tissue injury. These can be devastating wounds, prone to infection and hard to close. Slight variations in healing can mean the difference in whether or where a limb is amputated. Dr. Chris Coppola operated on these wounds during two trips to Iraq. The dust and sand swirled everywhere, forcing the surgeons to use shipping containers as ORs. The VAC became such a critical part of their treatment that the medical staff pushed the military brass to give the device quick clearance for use during the airlift of wounded soldiers from the field to hospitals in Germany.
"We got our Ph.D. in the VAC over there," Coppola says, and there is little enthusiasm in his voice when he remembers this education. Now a pediatric surgeon in Danville, Pa., Coppola has written two memoirs of his time in Iraq, and he was one of the authors of a widely circulated medical journal article on the use of the VAC for treating traumatic injuries. "Little by little we gain knowledge," he says, "and it's a quite sad reality that we learn more about surgery and trauma during the years of war than we do in the time between wars."
It is not surprising that a low-tech product with such a fantastic combination of margin and mission would attract attention from competitors. Medical devices are particularly vulnerable to being copied because, unlike pharmaceuticals, the patents tend to build on previous discoveries and they don't rely on a unique molecule. And over time, as a company fights to hold on to its patents, it is forced to draw an ever sharper line between what's covered by the patent and what isn't.
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