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Online Extra: A Dispute Hampers Drug Development

By Christopher Palmeri Dylan Shults doesn't have an easy life. The 14-year-old from Huntington Beach, Calif., suffers from cystic fibrosis, a genetic disorder that causes mucus to fill his lungs and sprout deadly bacteria. For three hours each day, Dylan must undergo a treatment that involves inhaling a bitter-tasting antibiotic and wearing a special vest that shakes the phlegm from his chest.

The antibiotic Dylan takes is called TOBI (tobramycin inhalation solution) and it is one of Chiron's (CHIR) top-selling drugs, accounting for $233 million -- about 12% -- of the company's $1.9 billion in sales last year. In trying to justify its merger with Novartis (NVS), scheduled for a vote by shareholders in a special meeting on Apr. 12, Chiron is telling investors it hasn't had much success developing new drugs and that its TOBI business has limited growth potential.

CANDY FROM A BABY. A lawsuit working its way through court in Washington State provides a more detailed view of how Chiron lost some of that growth potential. It's also revealing the dog-eat-dog world of drug development, and how this onetime biotech star turned itself into takeover bait.

Chiron is suing Dr. A. Bruce Montgomery, a research scientist who helped bring TOBI to market. The biotech giant charges that Montgomery, whose employer, PathoGenesis, was acquired by Chiron in September, 2000, improperly took a potential new cystic fibrosis treatment from the company. Two months later, Montgomery started his own firm, Seattle-based Corus Pharma Inc., and filed for a patent on another cystic fibrosis treatment. "It was like stealing candy from a baby," Montgomery allegedly told a potential investor, according to a Chiron court filing.

An open-and-shut case of intellectual property theft? Not quite. In his response to Chiron's complaint, Montgomery says he got the blessing of Chiron's then-CEO Sean P. Lance and chief financial officer James Sulat, who made him sign an agreement that he wouldn't hire any Chiron employees or develop an antibiotic in the same family as TOBI.

DECLINED TO TALK. After that, Chiron put money into Corus three times through a biotech fund in which it is an investor. Montgomery claims he even got permission from Chiron's then-general counsel to use the same patent lawyer he had used on TOBI.

Montgomery declined to speak to BusinessWeek. His attorney, Stuart Gasner, says his client never said anything about stealing candy from a baby. Gasner says he believes that after a new management team headed by Howard Pien came to Chiron in 2003, they decided to sue Montgomery to put pressure on him to either license or sell them his new drug on the cheap. "They're kicking him in the shins," the attorney says. Chiron declined to comment on any part of the suit.

TOBI has helped extend the life of cystic fibrosis sufferers since it was introduced in 1997. The problem with the drug, however, is that the bacteria that causes infections in the patients can develop a resistance to it. For that reason, TOBI is taken only every other month. Cayston (aztreonam lysinate for inhalation), the drug Montgomery is working on, can be inhaled much faster than TOBI, fights bacteria strains that Chiron's drug can't, and even tastes better, so says Corus in an SEC filing.

COMMON GOOD? Cayston is currently in Phase III clinical trials, the last stage before it can win U.S. Food and Drug Administration approval.

As a result of the lawsuit, Corus was forced to pull the plug on a planned initial public offering that would have provided funding for the drug's development. A trial date is scheduled for July 10. "It's disappointing," says Robert J. Beall, president of the Cystic Fibrosis Foundation. "We'd rather see drugs developed in the lab than in court." Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau

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