Innate Immunotherapeutics co-founder sues for royalties from sales of patented products

The case being heard in the High Court at Auckland centres on a royalty agreement.

The co-founder of ASX-listed Innate Immunotherapeutics is suing the New Zealand and Australian-based medical biotech company for royalties he claims are owed to him through the sale of patented products.

The case being heard in the High Court at Auckland centres on a royalty agreement which Frank Gelder claims was triggered when a quantity of anti-bodies were transferred to former product development manager, Chris O'Loughlin, in 2009 in apparent settlement of an employment dispute.

The company has designed and manufactured a technology used to induce the human immune system to fight certain cancers and infections or modulate immune mechanisms in autoimmune diseases such as multiple sclerosis. The first drug candidate developed using the technology, MIS416, is undergoing Phase 2 clinical trials on Australian patients with secondary progressive multiple sclerosis.

In a recent earnings update to shareholders, Innate Immunotherapeutics said it had informed Mr Gelder that in the company's view there had been no commercialisation of products that are subject to the royalty agreement between the parties, and accordingly, no royalties are due to him.

The update says when acquiring the intellectual property in 2000, the company granted the sellers – a number of its original shareholders including the technology's inventor, Mr Gelder – royalties totalling 6% from the future net revenues that may result from the IP's use. Mr Gelder's share under the royalty agreement is the largest at 3.25 percent.

Formerly known as Virionyx Corporation, the company was set up in New Zealand by Mr Gelder and the late Wayne Watkins, initially focusing on developing an anti-HIV therapy. Its lead drug HRG214 was a treatment for AIDS patients for whom then existing therapies were failing.

But the company nearly folded due to a shortage of funds, shareholder disagreement over fundraising, and internal in-fighting, which led to Gelder leaving.

In 2009 the company changed its name, secured more funding, halted the programme relating to the anti-HIV treatment, and focused instead on developing MIS416.

In court today, expert witness accountant Kevin Gillespie amended his estimate of what the total royalties owed to Mr Gelder would be to date, a figure of just under $8 million when daily compounded interest is added. Innate argues the royalty agreement doesn't state the daily interest should be compounded.

Mr Gillespie said it was difficult to assess the value of the materials transferred to Mr O'Loughlin which the company's chief executive Simon Wilkinson had said in earlier testimony had no real value.

He based his royalty assumptions on information provided by Messrs Gelder and O'Loughlin, cross-checked against invoices of sales of the stock, which varied in type and purity. It also included what he called a "savage" discount for the limited market for the products which he thought could take up to five years to sell and sell for less when marketed in volume.

He has business experience rather than expertise in medical biotechnology and the court was told he has given expert testimony before in cases associated with Gelder's lawyer Brian Henry and is a former client of his.

Mr Gillespie's calculations were attacked by Innate's lawyer Edward Grove, including because Mr Gillespie's original assumptions amended today in a new calculation presented to the court, "were riddled with arithmetical mistakes" and contained no independent, third-party verification of the fair value of the stock.

The case will continue on Monday when Innate's lawyers will open their defence.


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