Kansas Bio “Hot Topics In Science” April 1, 2010 “Key Life Science Provisions of the Healthcare Act of 2010”

1. Kansas Bio “Hot Topics In Science”April 1, 2010 “Key Life Science Provisions of the Healthcare Act of 2010”

2. Kevin R. Sweeney Chair, Life Sciences Practice Group Corporate Finance Group Direct Dial: 816/572-4638 krsweeney@polsinelli.com Patrick Woolley Chair, Science & Technology Group Direct Dial: 816/3960-4280 pwoolley@polsinelli.com Polsinelli Shughart PC 700 W. 47th Street, Suite 1000 Kansas City, MO 64112 Kansas City St. Louis Chicago Denver Phoenix New York Washington, DC Wilmington, DE Edwardsville, IL Overland Park Springfield St. Joseph Topeka

3. Health Care and Education Reconciliation Act of 2010 (“HCA”) • Signed by President Obama on March 30, 2010 • Reconciles House and Senate versions of: • Patient Protection and Affordability Case Act (“PPA”) • Student Aid and Fiscal Responsibility Act • Other Acts • 1,000+ pages, greatest impact on healthcare • Focus today on those provisions of the HCA and PPA that impact the Life Science industry most directly

4. Life Science Provisions of the HCA • Qualifying Therapeutic Discovery Project Credit (PPA §9023) • Biologics Price Competition and Innovation Act (PPA §7002) • Economic Provisions: • Expansion of 340B Medicare Coverage (PPA §7101-03) • Filling the Donut Hole in the Part D Drug Benefit (PPA §7101-03; HCA §1101) • Medical Device Tax (PPA §9009; HCA §1191) • Increase in Medicaid Rebate (PPA §3202; HCA §1102(d)) • Branded Drug Manufacturer Fee to Fund HealthCare Reform (PPA § 9008; HCA §1404) • Entities Established: • Patient Centered Outcomes Research Institute • Independent Medicare Advisory Board (PPA §10320) • Cures Acceleration Network (PPA §10409)

5. Qualifying Therapeutic Discovery Project Credit • $1 Billion of tax credits and grants (not subject to appropriation) • US Taxpaying entities with less than 250 employees • = to 50% of expenditures in 2009 and 2010 • For operating R&D expenses in a “Qualifying Therapeutic Discovery Project”

6. Qualifying Therapeutic Discovery Project Credit • Qualifying Therapeutic Discovery Project = • Treat or prevent diseases or conditions by conducting clinical trials, studies, or carrying out research protocols for the approval of a drug under Section 505(b) of the FDA Act or Section 351(a) of the Public Health Service Act; • Diagnose disease or conditions or to determine molecular factors by developing molecular diagnostics to guide therapeutic decisions; or • Develop a product, process or technology to further the delivery or administration of therapeutics.

7. Qualifying Therapeutic Discovery Project Credit • Secretary of Health and Human Services must certify qualifying QDTPs, finding: • Reasonable potential to result in new therapies for: • Unmet medical needs; • Prevent, detect, or treat chronic or acute diseases; • Reduce long-term health care costs in US; or • Significantly advance the goal of curing cancer in next 30 years. • AND the greatest potential to: • Create and sustain high quality, high paying jobs in the US; and • Advance US competitiveness in the life, biological, and medical sciences.

8. Qualifying Therapeutic Discovery Project Credit • Qualifying expenses incurred in 2009 and 2010 that are “necessary for and directly related to” the QTDP: • Excluding: • Pay deemed “excessive” under the IRC; • Interest expenses; • Facility maintenance expenses (mortgage, rent, insurance, utility and maintenance costs); and • Such other expenses as the Secretary of the HSS may determine by regulations. • No double counting for depreciation deductions and expenses that qualify for deductions or credits under other tax provisions • Presumably including: • Salaries and wages; • Equipment and consumables; • Tenant improvements; • IP costs? • Administrative and overhead (directly?).

9. Qualifying Therapeutic Discovery Project Credit • Eligible Taxpayer = • Taxpayer: • Not governmental entities or instrumentalities • Not tax exempt entities • Not pass through entities if any equity owner does not qualify as a taxpayer • Question: U.S. entities with mixed ownership or foreign ownership? • Not more than 250 employees: • At the time of application for the credit/grant • “Single employer” attribution rules

10. Qualifying Therapeutic Discovery Project Credit • Timing and Procedures: • Expenditures must be “incurred” in taxable years beginning in 2009 or 2010: • So last years expenditures qualify • Impact on planning for 2010? • “incurred” = “paid”? Commitments for future payments? • Application timing for 2010: • Not before last day of the taxable year • Not later than the due date (including extension) for the filing • Timing question for 2009 filings?

11. Qualifying Therapeutic Discovery Project Credit • What we don’t know: • Definitions and standards for the qualifications for the credit/grant • How the Commissioner will divide funds among similarly situated projects • How the $1 billion will be allocated: • First come, first served. • When will decisions be made? (30 days to decide?) • Between 2009 and 2010 • Many more details

12. Qualifying Therapeutic Discovery Project Credit • What we can do for now: • Stay tuned: Rules and Regs must be promulgated within 60 days (Question regarding 2009 tax year filings?) • “First in Line” may be important; decisions in 30 days? • Start to evaluate and prepare data on 2009 programs based on what we know • Project forward to 2010 programs to maximize ability to meet qualification criteria • Be ready to move quickly once the forms/ procedures are promulgated

13. Pathway for Biosimilar Products • Biosimilar = • Requires analytical studies that show the biological product is “highly similar” to and “no clinically meaningful differences” from the reference product (“RP”) animal studies, and clinical data regarding safety, purity and potency; • Show same mechanism of action as the RP for a specific condition; • Show that RP has previously been approved as being safe, pure and potent specific condition; • Show that route of administration, dosage, form, and strength are the same as the RP; and • Facility meets safety, purity, and potency standards.

14. Pathway for Biosimilar Products • Interchangeability = • Biosimilar with an RP; • Expected to produce the same clinical result as the RP in any given patient; and • If administered more than once to a patient, then no greater risk of safety or diminished efficacy from switching than from using just the RP.

15. Pathway for Biosimilar Products • Data Exclusivity: • No Biosimilar product relying on RP data may be approved within 12 years after the RP is licensed • 6 month extension for certain pediatric reformulations • No application within 4 years after RP licensed • 1 year exclusivity for first Interchangeable product • Second Interchangeable Biosimilar may not be approved for 1 year • May be extended to up to 18-42 months under certain patent litigation scenarios

16. Pathway for Biosimilar Products • Access to Confidential Information • Biosimilar or FOB developers must provide full copies of their applications to the original biologic product developer companies • This confidential information may be used ONLY for determining whether a claim of patent infringement can be reasonably asserted • Those provided with the information may NOT disclose to anyone • The original biologic product developer company must provide FOB or biosimilar applicants with relevant patents • List of patents which sponsor believes a claim of patent infringement could be asserted • List of patents that the sponsor would be willing to license • Fees and Rules to Come from FDA

17. HCA Provisions With Direct Economic Impact on the LS Industry • Expansion of 340B Medicare Coverage: • Expands entities who can make “lowest price” purchases for outpatient purposes under 340B (children’s hospitals, critical access hospitals, rural referral centers, and sole community hospitals) • Orphan drugs now covered, not for outpatient purposes • Expansions not as broad as proposed in Senate Bill • Increase in Medicaid Rebate to States: 15.1% up to 23.1% • Branded Drug Manufacturer Industry Fee to Fund HealthCare Reform: • Starts at $2.5 billion in 2011 • Increases annually to $4.1 billion from 2012 through 2018 • Returns to $2.8 billion in 2019 and thereafter • Filling the “Donut Hole” in the Part D Drug Benefit: • Drug producers must provide a 50% rebate for purchases in the “hole” (approximately $2,830 to 5,200) • 25% copay, government picks up last 25% over time • Medical Device Tax: • 2.3% of selling price beginning in 2013 • Excludes glasses, contacts, hearing aids and other medical devices purchased at retail for personal use

18. HCA Provisions that Establish New LS Entities • Patient Centered Outcomes Research Institute (“PCORI”): • Nonprofit independent entity • Compare effectiveness of 2 or more alternative therapies; provides information for clinicians to use in practice • Does NOT mandate coverage and reimbursement policies (not government picking winners or losers) • Independent Payment Advisory Board (“IPAB”) : • To examine ways to slow the growth of health costs • Cures Acceleration Network (“CAN”) : • New $$ for NIH grants to accelerate research on “high-need cures” identified by CAN

19. Update on Pending IP Legislation

20. Brief History of Patent Law Reform Act (2009- Present) Patent Reform Act of 2009 (S. 515/S. 610/H.R. 1260) Senate Judiciary Committee Chairman Patrick Leahy (D-Vt.) introduced Patent Reform Act of 2009, on March 3, 2009. Representative John Conyers (Michigan) introduced the House version, H.R. 1260, on March 3, 2009 Patent Reform Act of 2010 Was filed as “Amendment in the nature of a substitute” of patent reform bill S. 515 (Patent Reform Act of 2009). Very Similar to the Patent Reform Act of 2009

21. Patent Act 2010: Notable Patent Law Improvements First-Inventor-to-File Pre-grant submission of prior art Administrative post-grant review of patents Best Mode Inequitable Conduct False Marking Damages Willful Infringement Venue Pilot Program for District Courts Patent Fee Setting Authority and Ending Diversion Micro-Entity Trial

22. Patent Act 2010: Notable Patent Law Improvements First-Inventor-to-File Will eliminate the US unique first-to-invent priority system Will eliminate the one-year grace period unless the inventor was the "first-discloser" Pre-grant submission of prior art Will expand the opportunity for the public to submit information to patent examiners Will help ensure all relevant information is considered during the examination process Administrative post-grant review of patents Post Grant Review would allow patents to be challenged on all issues of patentability Must be requested within 9 months after patent issues If a post-grant review is initiated must be completed within one year

23. Patent Act 2010: Notable Patent Law Improvements Best Mode Best mode requirement would remain Failure to fulfill the best mode requirement would no longer be an invalidity defense Failure to fulfill best mode requirement would no longer be a basis for holding a patent unenforceable Inequitable Conduct Would allow patent owners to request “supplemental examination” to consider any information believed to be relevant to the patent Any patent surviving such re-examination would not be held unenforceable on the basis that such information had not been considered or was incorrect in the initial examination process False Marking Would eliminate the right of "any person" to file a false marking claim

24. Patent Act 2010: Notable Patent Law Improvements Damages Would require courts to identify the “methodologies and factors” that are relevant to the determination of damages Would require the Court and Jury to only consider the determined methodologies and factors when awarding damages Would require all damages contentions to be supported by substantial evidence Willful Infringement Would clarify that a holding of “willful infringement” requires a finding of objective recklessness by clear and convincing evidence Would allow court to increase damages up to three times if the court or jury determines the accused infringer willfully infringed the patent Would make clear that "knowledge alone" is not sufficient for a finding of willful infringement and that any "close case" should be decided against willfulness Venue Would require the court to transfer a patent infringement action if it “is clearly more convenient” than the venue the action is currently pending

25. Patent Act 2010: Notable Patent Law Improvements Pilot Program for District Courts Would create a 10-year pilot program in certain district courts to create judicial expertise in patent protection cases Patent Fee Setting Authority and Ending Diversion Would give the USPTO authority to adjust fees Fee adjustments must be used to recover costs for processing activities, services, and materials related to Patents and Trademarks Micro-Entity Would define a new type of entity called a "micro entity" that has fewer than 5 patent applications that would qualify for even further reduced fees Trial Would create the right to split trial into segments – infringement and validity; damages; and willfulness. This tends to favor defendants

26. Questions and Comments?