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Stratagene Faces $5.3M Verdict in Third Wave Suit; Future of FullVelocity, Dx Play Unclear

After determining last week that Stratagene's quantitative PCR and RT-PCR reagents infringe two patents held by Third Wave Technologies, a US District Court jury in Wisconsin has awarded Third Wave $5.29 million in damages.

The verdict, which comes almost one year after Third Wave filed its suit, will likely increase pressure on Stratagene to seek a settlement in this case and in its recently filed countersuit. "Hopefully, the companies can move quickly to reach some kind of conclusion," said Adam Chazan, an analyst with Pacific Growth Equities who covers both companies. "I think that's in the best interest of both companies and shareholders."

Stratagene officials declined to comment on the jury's decision or on its ongoing litigation with Third Wave. The firm, however, released a statement over the weekend saying that it would appeal the verdict once a final judgment has been entered by the District Court. In addition to seeking the reversal of the jury's decision, Stratagene said that it would seek to have damages reduced or eliminated.

Third Wave said that given the jury's verdict of willful patent infringement, it would seek additional damages.

"Hopefully, the companies can move quickly to reach some kind of conclusion. I think that's in the best interest of both companies and shareholders."

According to Stratagene, other details of the decision, which include the possibility of an injunction on sales of certain of its FullVelocity products, are currently being considered by the presiding judge. The timing of a final judgment has not been set.

In a statement, Stratagene pointed out that the technology that infringes Third Wave's patents brought in total sales of less than $400,000 since the FullVelocity products were introduced last year, and represent less than .4 percent of the firm's total revenue in the current fiscal year. But the bigger question facing Stratagene is what the jury's decision could mean for future sales of the FullVelocity products, which are a major part of the firm's strategy for playing in the emerging molecular diagnostics market.

Stratagene and Third Wave are two reagent makers seeking a piece of the potentially lucrative molecular diagnostics space — a market valued at anywhere from $1.2 billion to $2.5 billion annually. Their ability to compete in that market was greatly enhanced by the expiration of certain PCR patents held by Applied Biosystems and Roche. Both have claimed that their technologies will offer advantages over the industry standard TaqMan reagents offered by Roche and ABI.

La Jolla, Calif.-based Stratagene has been in negotiations for several months with an unnamed partner to further develop the firm's MX3005 QPCR instrument for molecular diagnostic applications (see BioCommerce Week 7/21/2005). That alliance, which is expected to be signed before the end of this year, would provide the partner — expected to be a large diagnostics player — with access to the FullVelocity technology.

It remains to be seen whether the jury's decision or ongoing litigation will affect the partnership.

Chazan noted that although most of Stratagene's revenue comes from selling real-time PCR instrumentation and assorted reagents, and not from tools that infringe Third Wave's patents, "having a proprietary chemistry is really something special. So, the possibility of being able to sell that to a potential big partner is quite interesting."

Suit and Countersuit

The dispute between the firms dates back one year, when Third Wave sued Stratagene, claiming that its FullVelocity technology infringed upon US patents 6,348,314, "Invasive cleavage of nucleic acids," and 6,090,543, "Cleavage of nucleic acids" (see BioCommerce Week 9/23/2004). Patent '314 was issued to Third Wave on Feb. 19, 2002, while the '543 patent was issued on July 18, 2000.

Third Wave's Invader technology "uses a flap endonuclease for allele discrimination and a universal fluorescence resonance energy transfer (FRET) reporter system," according to an article in the March 2000 issue of the journal Genome Research co-authored by a company scientist.

But Stratagene Chairman and CEO Joe Sorge disputes claims that FullVelocity infringes Third Wave's Invader patents. "Stratagene does not include overlapping DNA molecules in its kits," Sorge said in July (see BioCommerce Week 7/21/2005). "Stratagene's FullVelocity technology benefits from the sensitivity advantages of PCR amplification, something not found in Third Wave's Invader methods."

In May, Stratagene filed a countersuit in the US District Court for the District of Delaware claiming that some of Third Wave's Invader products infringe its 6,528,254 and 5,548,250 patents. Both patents are titled "Methods for Detection of a Target Nucleic Acid Sequence," with the '250 patent being a continuation in part of the '254 patent.

Stratagene is seeking monetary damages as well as a permanent injunction against further infringement by Third Wave.

Stratagene served Third Wave with that countersuit last Friday, the same day the jury awarded damages. The firm noted that it expects to incur additional legal costs that will impact its earnings as a result of the countersuit — a prospect it warned investors of during its second-quarter earnings conference call last month.

The urgency to reach a settlement is greater for Stratagene, which in addition to facing damages awarded by the jury, also held cash of roughly $5.7 million as of the end of its second quarter on June 30. Third Wave held cash of approximately $61.5 million as of the same date.

A total of five US patents cover Stratagene's FullVelocity, with additional patents pending. Third Wave's Invader technology is covered by more than 30 patents, with more than 60 patents pending, according to the firm.

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Stratagene's shares took a beating on news of the jury's verdict, falling $.96, or 10.8 percent, on Friday to close at $7.95. On Tuesday, its shares dropped an additional 6.8 percent to close at $7.41. Over the past month, Stratagene's shares have lost about 26 percent of their value (see graph).

Meanwhile, shares of Third Wave, which closed at $5.14 the day before the jury's verdict was announced, rose as high as $5.80 on Friday. The shares closed at $5.59 on Tuesday, up 8.8 percent from before the jury's verdict but down 1.6 percent for the day.

— Edward Winnick ([email protected])

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