Drugs giant accused of $500m 'swindle'

Genentech, one of the world's leading biotechnology companies, has found itself at the centre of a bitter legal battle that could drag in some of the world's biggest pharmaceutical companies.

Later this week, Genentech will be appearing in court in California to defend itself against claims that it has cheated a non-profitmaking hospital out of $500m (£330m) in royalties over the past 20 years. The legal wrangle was initiated by the Los Angeles City of Hope National Medical Center, and arises from a 1978 project to clone insulin.

That research led to one of the earliest breakthroughs in the biotechnology field – insulin is still considered the first "biotech" drug – and was the trigger that shot Genentech to the top ranks of the industry.

At that time, fledgling biotech concerns were in a rush to discover and market medicinal proteins. In 1976, Genentech signed a contract with two City of Hope researchers, effectively to work for it on the insulin project. The contract gave City of Hope a 2 per cent royalty on sales of insulin and human growth hormone, the fruits of that collaboration.

But Genentech also made significant amounts of money from the research by licensing the patents that emerged. The lawsuit claims that Genentech sold around 20 licences to third parties, including GlaxoSmithKline, Roche and Schering-Plough.

City of Hope says its decision to file the suit came after it "learned of the existence of relationships between Genentech and third parties" that had been "actively concealed". The reason those deals were concealed, says City of Hope, is that Genetech wanted to cheat it out of a share of that additional revenue, likely to be hundreds of millions of dollars.

City of Hope's lawyer Glenn Krinsky said: "There are 20 products they have been getting revenue from and we haven't gotten a penny from any of that." Genentech says the contract gave it full control of the patents and any subsequent revenue from them and it owed the hospital only for the insulin and growth hormone products.

But analysts believe the case – expected to last until mid-November – could damage the big pharmaceutical companies with whom the licensing deals were struck.

"Everyone likes to hit out at them and here is a good reason," said one Wall Street drugs analyst. "If it comes out that Genentech was making secret patent deals, people are going to assume the drugs companies knew they were secret too. That is not a way investors like to see companies behaving even when the result makes money."

The case also provides yet another example of a growing pattern within the biotech industry. Increasingly, companies are finding themselves embroiled in complex legal conflicts whose outcomes are turning the industry into one of the most litigious in the world. The past few years of biotech research, particularly that associated with the mapping of the human genome, has witnessed a "land grab" to snap up the patents on genes, proteins and human stem cells.

As more and more of this intellectual property gets converted into commercial products, the financial rewards available are attracting increasing numbers of organisations to the law courts.