More recently, Incyte has begun to provide its databases to leading biotechnology and academic researchers. This year, Incyte began to make its information products available on-line, and plans to make all of its information products available through this medium by the end of this year. Incyte also has a vast network of distributors who distribute its products in Europe and Asia. All of these distribution channels are dedicated to the broad dissemination of Incyte's genomic discoveries and their use to alleviate disease.

Based on revenue generation, Incyte has for several years been named as one of the fastest growing companies in Silicon Valley, a region noted for spectacular growth. Based on its 1999 revenues of about $157 million, Incyte had more revenue than any other genomic information company, confirming our position as the number one genomic information company.

Incyte's nonexclusive business model enables it to derive its revenues by providing useful discoveries to researchers more efficiently than would be possible were they to generate the discoveries themselves. In this way, Incyte has developed a business that leads the world in its sector, while at the same time accelerating the genomics revolution that promises unheard-of benefits for health care.

The Genomics Revolution

Human genes have obviously existed at least as long as humans. In over 10,000 years of modern civilization, however, humans have never been able to use genes to diagnose, cure or predict disease until now.

In the last several years, companies like Incyte Genomics have isolated, purified, sequenced and discovered a commercial utility for genes and put them into commercially useful formats for development of drugs and diagnostic tests. It is this transformation of a gene as it occurs in nature into a purified, isolated commercially viable product that entitles companies like Incyte to patents on these discoveries.

By providing its customers with a systematic understanding of the structure and function of ALL of the genes in the genome, Incyte is helping researchers to focus their efforts on genes known to be in classes that are important to disease or drug response. This enables researchers to avoid much of the trial and error that previously characterized pharmaceutical research. This increased efficiency should result in less expensive drugs and diagnostic products. This systematic understanding of the structure and function of genes will also enable the development of safer drugs. Because the interaction of drugs and genes will be better known, undesirable side effects that sometimes accompany drug treatment will be reduced and make patients less subject to unanticipated results that have long plagued drug use treatments.

By providing its information products nonexclusively to those who are in the best position to utilize the information, Incyte is making a substantial contribution to the increased efficiency of drug and diagnostic development. Under this model, Incyte is able to focus its efforts on its core competency. As a result, its customers avoid the inefficiency and duplication of effort that would be required if they were to engage in target identification and validation on their own.

In this way, the evolution in the pharmaceutical industry parallels the demise of the old vertical computer industry. Until the early 1980's, the computer industry was characterized by a high degree of vertical integration, as illustrated by the following chart:

Under this model, computer companies developed their own microprocessors, operating systems, computer designs and in many cases, their own applications programs. They sold their integrated products through their own dedicated sales forces. Because of the duplication of effort and high overhead associated with this model, computers were generally very expensive, and only researchers in government, academic institutions and large corporations could afford to use them.

Beginning in the early 1980's, a new, horizontal computer industry began to emerge, as illustrated by the following chart:

Similarly, the health care industry has historically been characterized by a high degree of vertical integration, as illustrated below:

Like the old vertical computer industry, this vertically-integrated model is characterized by a high degree of inefficiency and duplication of effort. For example, individual pharmaceutical companies engaging in target discovery and validation largely duplicate the effort of their competitors.

In contrast, the emergence of genomics companies like Incyte Genomics, coupled with other related trends in health care, promise the creation of a new pharmaceutical industry, which might eventually look like the following:

This new, horizontal pharmaceutical industry will be much more efficient, which should result in lower costs. By making use of standard, off-the-shelf genomics products, health care researchers will increasingly be able to avoid costly, time-consuming duplication of effort, which will speed drug development. The ultimate result will be to make new drugs available to health care consumers, at lower prices and with greater assurance of safety, than would otherwise have been possible.

The systematic understanding of the molecular basis for disease and drug response will also enable dramatic increases in the pipeline for new products. At the current rate, it is conceivable that by the year 2010, the genomics revolution will have enabled the understanding of the molecular basis for most major human diseases.

The potential, in terms of lives saved and health care cost reductions, are enormous. Recent developments provide evidence that the benefits of this revolution are already beginning to manifest themselves. Examples include the following:

In 1999, CV Therapeutics, an Incyte collaborator, was able to use Incyte gene expression technology, information about the structure of a known transporter gene, and chromosomal mapping location, to identify the key gene associated with Tangiers disease. This discovery took place over a matter of only a few weeks, due to the power of these new genomics technologies. The discovery received an award from the American Heart Association as one of the top 10 discoveries associated with heart disease research in 1999. In an April 9, 2000, article published by the Bloomberg news service, an Incyte customer stated that it had reduced the time associated with target discovery and validation from 36 months to 18 months, through use of Incyte's genomic information database. Other Incyte customers have privately reported similar experiences. The implications of this significant saving of time and expense for the number of drugs that may be developed and their cost are obvious. In a February 10, 2000, article in the Wall Street Journal, one Incyte customer stated that over 50 percent of the drug targets in its current pipeline were derived from the Incyte database. Other Incyte customers have privately reported similar experiences. By doubling the number of targets available to pharmaceutical researchers, Incyte genomic information has demonstrably accelerated the development of new drugs.

In a May 26, 2000, article in the Wall Street Journal, one Incyte customer stated that by using Incyte's database, it quickly discovered a new histamine receptor gene which had long eluded researchers, and which is being used to develop an effective drug that is specific for brain tissue. In fact, after isolation of the gene and using high-throughput screening, a candidate drug was identified in less than a month. Again, by making new drug targets available to the pharmaceutical industry, Incyte helped the company go from picking a target receptor to developing a potential drug in just 18 months, a process that typically takes five years or more, clearly accelerating the drug discovery process by three-fold or more.

As these examples demonstrate, the inventions of Incyte Genomics and others are already having a dramatic impact on the acceleration of drug and diagnostic test development. They give confidence that the 21^st century will truly be the Genomic Age.

The genomic revolution is in its infancy. With the availability of a first draft of the human genome, discoveries in the field promise to accelerate. Incyte believes that the following discovery time line, while aggressive, is achievable:

If this schedule is achieved, the implications for health care are enormous. The investments that pharmaceutical and biotechnology companies make in discovering drug targets will no longer be necessary, saving them and consumers untold billions of dollars. Using rapid, accurate technologies, it will be possible to test drugs for toxicity and effectiveness against known classes of genes, thereby eliminating many costly drug failures late in the drug development cycle. By understanding the role of genetic diversity in disease and drug response, safer, more effective drugs will be developed and health care providers will be in a position to tailor therapies to the genetic profiles of individual patients, resulting in personalized medicine.

The obvious result of this revolution will be safer and cheaper drugs that will be administered more efficiently and effectively. Perhaps even more importantly, diagnostic tests and new therapies will be developed for diseases that are currently untreatable.

The Importance of Gene Patents in the Development of Genomics Technologies

Gene patents play a critical role in providing the incentives and legal infrastructure to support the role of genomics in accelerating drug development, thereby promising to deliver more drugs that are safer and cheaper.

The availability of patents to support the massive investment in genomic research is essential to capital formation. Investors in genomics companies require assurance that these companies will be able to profit from their research and development investments.

The recent announcement by President Clinton and Prime Minister Blair on the issue of the public availability of genomic information from the Human Genome Project vividly illustrates this point. This announcement was erroneously interpreted by the investment community as signaling a governmental decision to eliminate gene patents. Within hours of this announcement, Incyte and other genomics and biotechnology companies lost billions of dollars in their market capitalization.

The swift reaction of the investment community demonstrates the importance that investors place on patents as a vehicle for profiting from private sector research and development. In the absence of patents, it will become much more difficult for companies like Incyte to obtain access to capital. This in turn will inevitably slow the development of genomic information and technologies, which will have a seriously negative impact on the promised acceleration in health care research.

Patents also encourage the broad dissemination of genomic information in two ways. First, to obtain a patent, a patent applicant is legally required to disclose enough information about his/her invention and its use to enable someone with reasonable skill in the art to use the invention. This disclosure requirement enables other researchers to learn the teaching of the patent, and to conduct their own research that will enable further innovation and invention.

Patents also provide a system of legal rules that encourage the patent owner to distribute his/her invention broadly. In the absence of patent protection, the only legal protection for genomic information is through trade secret protection. To be eligible for trade secret protection, the owner of information must demonstrate that it has taken reasonable steps to protect the secrecy of his/her information. This means that access to and use of the information must be restricted, and confidentiality agreements are required with those who have access to the information. These requirements are obviously antithetical to the broad dissemination and use of genomic information that are critical to the business models of companies like Incyte, and that are essential to the promised Genomic Revolution.

By way of example, during the year 2000, Incyte plans to make all of its information products and clones available to customers over the internet. This broadening of the market for Incyte products will further accelerate the impact of Incyte's genomic information on health care research. In the absence of patent protection for genes, on-line distribution of proprietary information becomes much more problematic, as this method of distribution is arguably inconsistent with the preservation of trade secret protection.

For these reasons, the availability of gene patents provides crucial support for the acceleration of health care research.

Gene Patents are Consistent with the Goals of the Patent System, and Are Helping to Accelerate Research

Under Article III of the United States Constitution, Congress is authorized to establish a patent system to provide incentives to inventors, with the goal of promoting "progress in science and the useful arts." Given this goal, genetic inventions, which enable further innovation in health care research, are particularly deserving of patent protection.

Gene patents are enabling a revolution in health care.

Given the role of gene patents in creating incentives for genomic research, gene patents can be credited with dramatically increasing the efficiency of health care research, with the attendant promise of delivering new drugs that are safer and cheaper than otherwise would have been possible.

Critics of gene patents claim that they will retard innovation. Those who make this argument have no concrete evidence to support this hypothesis. Indeed, the evidence to date indicates that genomic research, supported by the patent legal system, has accelerated innovation in health care research. Instead of identifying drug targets on an individual basis, health care researchers, armed with a systematic understanding of the structure and function of genes, are able to bypass previously-expensive and time consuming steps in the drug development process.

"Research tools" like gene patents are particularly deserving of patent protection.

Critics of gene patents often argue that they are merely research tools, and as such should not be eligible for patent protection, to avoid the risk of making research more expensive. Upon examination, this argument falls apart.

First, as mentioned above, under the Constitutional standard, inventions that enable further scientific progress are particularly deserving of protection. As one might expect, then, nothing in the history of the patent law or in court decisions interpreting it supports the distinction between unpatentable "research tools" and other patentable inventions.

Second, virtually any invention that improves productivity or efficiency, from a computer to PCR to the technology that was the subject of the famous Cohen-Boyer patent, are "research tools." Consequently, if one were to accept the premise that "research tools" are somehow inappropriate subject matter for a patent, then a number of these fundamental inventions which have enabled tremendous growth in knowledge, and which in some cases are responsible for the development of entire markets, would not have been eligible for patent protection.

Gene patents do not represent real invention.

The amount of science required to identify and characterize genes is substantial. To date Incyte alone has spent upwards of $200 million to identify and characterize expressed genes. The fact that companies like Incyte have applied industrial principles to create high-throughput "factories" that make these inventions does not render the inventions somehow less significant or useful.

Some argue that the invention is not complete until the precise biological activity of an individual gene is identified; indeed, there is some indication that the Patent Office intends to apply the new guidelines in this way. This argument ignores the real world utility, described above, associated with the isolation, sequencing and identification of genes and their classification into categories whose general functions are known. If this standard were to apply, then only those companies that adhered to the inefficient, vertically-integrated pharmaceutical industry model would be entitled to patents. This approach would be at odds with the evolution of the pharmaceutical industry, with its attendant efficiencies.

Patent licensing issues that may or may not arise from the grant of gene patents should be addressed as licensing issues, not by misguided attempts to codify health care policy into the patent law by changing patentability standards that apply to only one category of invention. Some have argued that the grant of patents on full-length or partial genes will create licensing complications that threaten research. See, e.g., M.A. Heller and R.S. Eisenberg, Science 280:698-701 (1998). Unfortunately, these arguments apply equally to any fundamental invention that leads to further invention.

For example, the invention of both the transistor and the integrated circuit enabled the microprocessor industry, which has seen innovations by and patents issued to countless inventors. While many of these inventions overlap, the industry has been able to work out cross-licensing arrangements that have enabled the delivery of unprecedented computing power to the general public. If one applied the reasoning of commentators like Professor Eisenberg, then patents on the transistor and integrated circuit should never have been granted. The difficulty with this reasoning, then, is that those inventions that are most fundamental, and are presumably most worthy of patent protection, would be denied protection on the basis that they are most likely to block further innovation by others.

United States patent law has generally left licensing practices unregulated, on the basis that markets will in most cases determine the most efficient incentives for the exploitation of patentable inventions. Incyte's business model demonstrates that market forces are accelerating the use of genomic inventions to the benefit of health.

As mentioned above, Incyte's nonexclusive business model has resulted in the use of its discoveries by a worldwide network of pharmaceutical, biotechnology and academic researchers. The effect of this model has been to accelerate the adoption and use of genomic inventions in health care research.

In addition, all of Incyte's agreements with its database collaborators include a provision in which they grant back to Incyte and its other collaborators non-exclusive freedom to operate under gene patents discovered by database collaborators through their use of Incyte databases. This arrangement, which Incyte refers to as the "IP Trust," creates an efficient method for companies to share intellectual property that they derive from a common source; it is in many ways akin to the "open source" licensing terms that the Linux software community and other segments of the software industry have adopted.

It is important to keep in mind that the availability of gene patents has enabled Incyte to negotiate these nonexclusive patent sharing arrangements with its customers, which in turn help to accelerate the sharing of genomic discoveries while minimizing intellectual property disputes and their attendant effects on health care research.

The Patent Law Should Apply to Genes and Other Genomic Inventions in the Same Way It Has Been Applied to Other Categories of Inventions

Over the past 200 years, the patent laws have been applied, with minimal modification, to a range of new technologies that have accompanied major changes in the economy, including the industrial revolution and the emergence of information technologies as key drivers of economic growth. It is clear that the perceived stability of the patent system, and the incentives it provides, have been key elements of the United States' economic success.

Each time an enabling new technology has emerged, some have argued that the law should be modified to address issues that are perceived to be unique to that technology. In general, the United States has resisted the temptation to modify the patent laws in ways that are industry- or technology-specific. As a consequence, the courts have repeatedly demonstrated their ability to apply longstanding principles to new technologies in a fair and consistent manner. At the same time, emerging segments of the economy have demonstrated their ability to develop licensing practices that maximize the overall benefit derived from their inventions and discoveries.

The patent system is playing a key role in the genomics revolution. The benefits that genomics companies have delivered to date pale in comparison to those that we believe to be imminent. Given this promise, and the demonstrated ability of the patent laws and market forces to adapt to new categories of inventions, policy-makers, whether in Congress or the Patent Office, should be extremely circumspect in applying different legal standards to gene patents in a misguided attempt to address problems that are at this point only theoretical, and are in fact highly unlikely to occur.

Given the importance of the patent system to the genomics industry, Incyte believes that the role of the Patent Office in examining and issuing gene patents is critical. To serve this function, it is crucial that the Patent Office have the necessary resources. For this reason, Incyte is concerned about recent attempts to reduce the Patent Office's budget, which we believe will be harmful to its performance of its constitutionally-mandated role.

For similar reasons, Incyte has generally supported the recent attempts by the Patent Office, to clarify existing law in the Interim Utility and Written Description Guidelines, in particular as they apply to Expressed Sequence Tags (ESTs). We favor this clarification of the proper application of current law to a new category of genomic inventions.

Incyte has concerns, however, about unattributed quotes that purport to announce a Patent Office "decision" to limit the issuance of gene patents. Some of these quotes suggest that the Patent Office will issue patents on genes only if the specific biological activity of the genes is disclosed in the patent application. These quotes, if true, may reflect one interpretation of a few isolated statements, primarily in the training materials that the Patent Office has distributed to its examiners to assist in their application of the new guidelines, and presumably do not accurately reflect actual Patent Office policy.

These statements indicate that in some cases, where the asserted utility in a gene patent application would apply to a category of genes, the utility is not "specific" enough to entitle the applicant to a patent. This is simply not the law; if it were, the inventor of a new and useful fishing pole would not be entitled to a patent because the utility (catching fish) applies to an entire category of inventions (nets, clubs, dynamite, etc.), as well as to the catching of all unspecified fish.

Other portions of the training materials appear to reflect a hostility to patents in which the claimed utility contemplates use as a "research tool." Nothing in the patent law or the cases interpreting it, however, indicate that research tools are inherently unpatentable. In fact, the real world uses of Incyte's genomic inventions are more than adequate to meet the applicable legal standards.

Incyte firmly believes that these quotes and statements, if anything, merely reflect the inherent difficulties faced by the Patent Office in its ongoing process of fine-tuning appropriate legal guidelines to accurately apply to a rapidly advancing and complex area of technology. We trust that the Patent Office will continue its long tradition of maintaining the highest level of service to both the public and to its customers, and that the final guidelines and training materials will fully reflect the correct legal standards regarding utility and written description. In particular, Incyte commends the Patent Office for soliciting and giving due consideration to input from the public in perfecting the final documents.

To the extent that concerns emerge about the effects of gene patents on health care, Incyte believes that they should be addressed through those legal regimes that are intended to apply specifically to the behavior in question. For example, the antitrust laws are available to address the use of patents in ways that are anti-competitive or abusive. Similarly, while Incyte firmly believes that the genomic revolution, with the support of the patent system, will reduce health care costs over time, if specific cost-related issues arise, they can be addressed through health care funding mechanisms.

Conclusion

Private sector genomics companies are making substantial contributions to a revolution in the ability to detect, prevent and treat disease. Patents provide critical incentives to the private investment necessary to enable this revolution. They also encourage the dissemination and use of discoveries. Patent owners like Incyte Genomics have a responsibility to utilize their patents in a way that benefits both their investors and health care for the public. Incyte's nonexclusive licensing model, and the IP trust that it is developing based on that model, are accelerating the adoption and use of genomic discoveries. Incyte believes that the application of existing patent law principles to genomic inventions will support the continued acceleration of genomic research, resulting in an increase in the pipeline of new drugs that are safer and less expensive than has previously been possible.