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Stratagene Asks Texas Judge to Reduce Damages In Invitrogen Case as Jury Award Eats Q2 Earnings

Stratagene is hoping that a US District Court judge in Texas will decrease the $7.8 million in damages a jury awarded to Invitrogen in a patent-infringement case, President and CEO Joe Sorge said during a conference call this week.
The Invitrogen case is one of several legal disputes in which Stratagene is embroiled and hopes to wrap up this year, either through final court rulings or settlements, according to Sorge.
The firm also reported a slight drop in second-quarter earnings with a litigation-related charge causing its net income to swing to a loss, but said its molecular diagnostic partnerships remain on track.
Last month, a Texas jury determined that Invitrogen's US Patent 4,981,797 involving a process for developing competent cell products is valid and that Stratagene infringed that patent by making and selling its competent E. coli cell products (see BioCommerce Week 7/26/2006).
The jury awarded Invitrogen a 15-percent royalty rate on sales between 1997 and 2004 for a total of $7.8 million in damages, Stratagene said. Invitrogen had sought $32 million in damages based on a lost-profits argument, Stratagene said at the time.
“There is certainly the possibility for an appeal” in the Invitrogen case, said Sorge during the firm’s second-quarter conference call. “The judge made several decisions prior to sending the jury out to deliberate, and those decisions are potentially appealable.
“We’re waiting to see what happens with the ultimate damage award,” said Sorge. “The jury based the damage on a 15-percent royalty rate, yet the evidence introduced at trial was either lost profits, which would have been very large damages, or a 5-percent royalty rate. So, there’s really no support for the 15-percent royalty rate on the record or in the evidence. We are going to ask the judge to adjust the award to 5 percent,” he said.
However, Sorge noted, “The judge has a lot of latitude in Texas to do what he feels is right, so there’s no guarantee that he’ll lower the amount. There’s also a possibility that he can increase it.”
He said Stratagene recently submitted briefs to the judge. The firms have not been given a date on when the judge will give a ruling, but Sorge said he expects it will happen in a month or two.
The Invitrogen case is one of several disputes in which Stragene remains either a defendant or plaintiff. As recently reported by BioCommerce Week, the firm is involved in settlement talks with both Applera and Third Wave Technologies (see BioCommerce Week 7/12/2006). In addition, Stratagene continues to press forward with its patent-infringement suits against Invitrogen and Third Wave.
“The goal remains to reduce legal expenditures through final resolution of these matters,” said Sorge. “We continue to believe that a reasonable business solution is available to the parties” in the case with Third Wave, he said.
Q2 Revenues Drop; Litigation Charge Hurts Earnings
Total receipts for the three months ended June 30 were up 6 percent to $23.4 million from $24.9 million year over year. The company attributed the decline to poor sales of its gene-discovery and cloning systems products.
“Competition for sales in this slow-growth market has made the achievement of annual revenue growth more challenging,” said Sorge during the call.
Stratagene noted that sales of its QPCR instruments and its allergy diagnostic products were up 3.5 percent and 2.5 percent, respectively, year over year.
Stratagene posted a net loss of $3.7 million, or $.17 per share, for the quarter compared to net income of $2.1 million, or $.10 per share, in Q2 2005. The company said the loss reflected the litigation charge, which equaled $.22 per share, from the Invitrogen case. Without the litigation charge, the firm’s earnings per share would have been $.05, company officials noted.

“The judge made several decisions prior to sending the jury out to deliberate, and those decisions are potentially appealable. We’re waiting to see what happens with the ultimate damage award.”

Stratagene’s R&D spending grew 8.6 percent to $3.1 million for the quarter from $2.9 million in the prior-year period. The company said the increase was due to instrument and pathway analysis software development costs.
As of June 30, Stratagene had $33.6 million in cash and cash equivalents.
“We are in the process of transitioning our revenue base from basic research products that are substantially dependent on NIH funding to products targeted to applied markets,” Sorge said.
He reiterated that the firm hopes to launch a new QPCR instrument that will be faster and cheaper than its, and competitors’, current offerings in early 2007.
Stratagene also is moving forward with its molecular diagnostics collaborations with both Bayer Diagnostics and Focus Diagnostics, said Sorge, assuaging investor concerns that those partnerships could have been derailed by those firms’ acquisitions. Focus was recently acquired by Quest in a $185-million deal, and Siemens recently announced that it would acquire Bayer Diagnostics for $5.26 billion (see BioCommerce Week 5/24/2006 and 7/5/2006).
Bayer is currently funding software development, according to Sorge, and will begin developing instruments based on Stratagene’s technology in the latter part of 2006.
The firm also hopes to begin regulatory testing of assays developed in collaboration with Focus early next year, with the launch of some of the products in 2007, Sorge said. “Quest is very much interested in continuing that program,” he said.
In addition, Stratagene said that later this week it will announce a joint development and licensing agreement with a “major pharmaceutical company.” “This company and Stratagene are jointly creating a fully automated solution for the isolation of nucleic acids from a variety of clinical samples,” Sorge said during the call. “These nucleic acids will be used to detect and track biomarkers during pharmaceutical development studies.
“While we anticipate healthy revenue from the sales of this automated solution in 2007, we foresee substantial long-term revenue potential as the adoption of nucleic acid biomarkers in standard medical practice begins to take place toward the end of the decade.”

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