Stratagene CEO Joe Sorge circled the date March 28, 2005 in the company's fourth-quarter conference call last week.
"This will mark the beginning of an opportunity for us to move into the molecular diagnostics market," Sorge said.
Why March 28? On that date, Roche's core PCR patents will expire, and Sorge, like others in the molecular biology tools market, is preparing to be freed from the patent barriers that kept his company from using the technology more broadly.
Will it be a gold rush? Or, will it just be like entering a suburban gated housing development, with all the good lots already sold? Time will tell.
For Stratagene, the expiration of the patents will initially mean it will no longer have to pay some $400,000 a quarter in royalties. This savings, which will appear in the company's second-quarter earnings this summer, equates to roughly 2 percent of the $22.8 million in revenues Stratagene generated in the fourth quarter 2004.
Stratagene is also set to save an additional $150,000 in royalties beginning in the second quarter of 2006, Sorge said. European core PCR patents begin expiring next year.
Stratagene is one of the smaller companies in the BioCommerce Week index. It has a diversified product portfolio addressing life-sciences research and the clinical market with instruments, reagents, and software, which together are regarded as a key to competing in the emerging integrated molecular biology tools market. PCR will continue to play a significant role in this sector as it continues towards a convergence of the research and clinical markets and, long-term, into a systems-biology context to research and technology development.
In the short-term, the expiration of the PCR patents means a yearly savings of nearly $2 million to Stratagene just on royalties no longer being paid. To be sure, that savings is not going directly to fatten up the company's bottom line.
"We will reinvest a moderate amount as we leverage our technology in 2005 to enter the rapidly growing molecular diagnostics marketplace," Sorge said.
The company will increase spending on R&D, manufacturing, and marketing by directing new revenue into this area while redistributing funds from elsewhere within the company, Sorge said. At the same time, despite this impending investment, the company is projecting revenues to grow between 12 percent and 15 percent in 2005.
"Certainly, we could achieve a higher level of profitability if we focused only on the short term, but we do not believe this will generate the greatest amount of value in the long term," Sorge told analysts. He said the investments would cost approximately $0.10 a share in 2005. The company had earnings of $0.39 a share in 2004.
"The molecular diagnostics opportunity is large and it is upon us," he said. "We must build the infrastructure needed to take advantage of the opportunity in molecular diagnostics this year."
It is unclear, however, to what extent the expired PCR patents will help Stratagene play in the molecular diagnostics market.
Does a Big Pie Mean a Big Slice?
Robert Bauer, senior consultant and general partner of CaseBauer, an Irving, Texas, business development consultancy for in vitro diagnostics, medical devices, and clinical laboratories, told BioCommerce Week that the molecular diagnostics market is approximately $2.5 billion a year.
On the PCR front, there are some 100 companies that are licensed to offer PCR-based products, primarily in research and human diagnostics internationally, according to Roche. Another 600 laboratories are licensed to perform clinical human and/or veterinary PCR-based testing around the world.
But Bauer said that because many entities are licensed to use the patents, the lifting of patent protections would likely have little initial impact.
"I think labs are cautious to make changes," he said. Labs would also likely be less motivated to deal with a home-brew test as opposed to a commercial product, he said.
Stratagene is aiming to go the home-brew reagent route initially.
Sorge said the company has prospective partners in this area high-volume testing laboratories who would determine the content provided in the initial assays, which would first be then sold as reagents, then moved to kit form for FDA approval.
With its 2003 acquisition of Hycor, Stratagene has experience in gaining FDA approval as the wholly owned subsidiary has some 30 approved assays.
Additionally, Sorge said Stratagene's combination of instruments, consumables, and software, as well as its expertise in developing and marketing various assays, position the company for entry into the molecular diagnostics market.
At the center of the strategy is the company's FullVelocity suite of QPCR and QRT-PCR probe-based reagents; the MX3500 set of real-time PCR technology and software; and a project to develop eight assays for application in infectious disease, genetics, cancer prototypes, and polymorphism tests, said Sorge.
The company does not have specific content targets for the assays, which will be developed in partnerships, said Sorge.
"We are making some very significant progress with potential partners on the reagents side," he said, but did not disclose who the partners would be.
Additionally, the company has closed a deal with an undisclosed European company to resell its MX3000 QPCR instruments and is in negotiations with another undisclosed diagnostics firm for another OEM deal, said Sorge. The first deal involves dozens of instruments, while the second, unsigned deal, over time might mean sales of over a thousand instruments, which list at $25,000 each, said Sorge.
The company, which introduced the MX3000P QPCR instrument at the end of the second quarter in 2003, encountered a parts shortage, which resulted in the buildup of a back order of instruments in the fourth quarter of 2003, and the first quarter of 2004, distorting comparisons to this year's fourth quarter, Sorge said.
"While it may appear that have we had a decline in the sales of our life-sciences research products, the back order inflated sales revenues for those quarters," he said. "It is important to note that current-order demand for our instrument-coupled QPCR reagents continues to grow in excess of 25 percent annually," he said.
The expiration of the PCR patents affects every company on the BioCommerce Week index, but will most dramatically affect Applied Biosystems. Hoffmann-La Roche which owns the basic PCR process and reagent patents has granted ABI an exclusive license to the patents for the field of research and development, and applied fields such as quality assurance and control, environmental testing, food testing, agricultural testing, forensics and non-paternity identity testing in humans, and animal-identity testing.
In filings with the SEC, ABI has said that it expects a possible reduction in its PCR royalties beyond 2005 but that drop will be offset to a "substantial degree" by income from real-time PCR and other related technologies that should mitigate the effects of the patent expirations.
Mo Krochmal ([email protected])
Roche's US Patents on PCR That Go Away March 28
Following is a list of the Roche US patents on PCR that expire on March 28:
- 4,683,195 Process for amplifying, detecting, and / or cloning nucleic acid sequences
- 4,683,202 Process for amplifying nucleic acid sequences
- 4,965,188 Process for amplifying, detecting, and / or cloning nucleic acid sequences using a thermostable enzyme
- 6,040,166 Kits for amplifying and detecting nucleic acid sequences including a probe
- 6,197,563 Kits for amplifying and detecting nucleic acid sequences
- 4,800,159 Process for amplifying, detecting, and / or cloning nucleic acid sequences
- 5,008 182 Detection of AIDS-associated virus by PCR
- 5,176,995 Detection of viruses by amplification and hybridization
Source: Roche Diagnostics