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Stratagene Hopes Instrument Launches, Patent Reinstatement Will Aid Revenue Growth in 2007

This story originally appeared in Biocommerce Week, a newsletter that has been discontinued.
 
Stratagene expects its partnerships for molecular diagnostics and pharmacogenomics will result in new instrument launches in 2007 and 2008, and hopes that the reinstatement of a key patent will provide it with leverage in negotiations with rivals.
 
Company officials said this week that the firm is making progress in its collaborations with Bayer Diagnostics and Merck’s Rosetta Inpharmatics subsidiary, and although they expect instruments from those collaborations to launch this year and in 2008, they see a greater payoff down the line as molecular diagnostic technologies are widely adapted.
 
In addition, Stratagene believes that the reinstatement of a patent covering polymerase blends will provide the firm with a bargaining chip in dealing with competitors, and Invitrogen in particular.
 
“Within molecular diagnostics, we are executing on our strategy, and 2006 has been a pivotal year,” said CEO Joe Sorge during the firm’s fourth-quarter conference call. “We have entered into significant partnerships, resolved related litigation, obtained clear freedom to operate, and acquired important intellectual property that will allow us to produce differentiated products.”
 
The call came after Stratagene reported that its fourth-quarter revenue increased 7.2 percent on an adjusted basis to $24.7 million.
 
Instrument Development Progress
 
Sorge said that Stratagene is “making good progress” in its collaboration with Bayer Diagnostics, which will begin purchasing development instruments from the firm this year. Stratagene announced a year ago that Bayer would sell customized versions of Stratagene's Mx3005P instruments to clinical labs for molecular diagnostic testing worldwide (see BioCommerce Week 3/8/2006).
 
According to Sorge, contrary to the perception that Siemens’ acquisition of Bayer Diagnostics could be slowing progress in the partnership, “there really hasn’t been much of a delay.” He said the firm continues to meet timelines and Bayer will begin purchasing the instruments after regulatory approval. During the firm’s last quarterly conference call in November, Sorge said he expected Bayer to begin purchasing development instruments in late 2006 and early 2007 (see BioCommerce Week 11/15/2006).
 
In August, Stratagene signed an alliance with Merck unit Rosetta to develop a new automated RNA purification instrument (see BioCommerce Week 8/16/2006), and Sorge said during the call that he expects this instrument will pay dividends as more pharmaceutical firms look to employ molecular technologies in early toxicity and side-effect drug studies.
 
“We are creating a fully automated solution for sample preparation from a variety of clinical samples,” said Sorge. “These purified samples will be used to detect and track biomarkers during pharmaceutical development studies. Specific to this collaboration, we will be creating an instrument and a single-use disposable that will allow users to extract RNA at the phlebotomist’s workbench.”
 
Stratagene has the exclusive right to commercialize the technology for all markets. The firm expects to realize revenue from the new instrument in 2008, but “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,” said Sorge. “This field is in its infancy today but has large growth potential.
 
“We believe that there will be a growing need to monitor nucleic acids coming from the blood of individuals [who] are part of pharmaceutical trials or [who] are undergoing drug therapy or [who] have a disease state that can be monitored through the peripheral blood,” he said. “We have been working for the last year and a half on a small, relatively portable, relatively inexpensive instrument that can be used by a phlebotomist … such that a test tube of blood, once it’s been drawn, within seconds can be put into this instrument, one button pushed, and then within a couple of minutes the RNA or DNA purified within the instrument.”
 
Sorge said pharma firms would primarily be interested in using the instruments in early drug toxicity studies. The instrument will be closed architecture and will use proprietary disposable cartridges, which will help drive sales of consumables.
 
He also noted that Strategene is working on developing next-generation QPCR instruments, and is hoping to launch one instrument this year and the other in early 2008. He did not provide further details on those products.
 
Awaiting Patent Reinstatement
 
Sorge said during the call that Stratagene is awaiting reinstatement of a key patent covering polymerase blends that is at the center of a suit it has filed against Invitrogen. “We have been notified by the patent office that our previous patent in this area will be reinstated with retroactive effect, and this patent should encompass a substantial amount of Invitrogen’s historical enzyme blends sales as well as the enzyme blends sales of several other competitors,” said Stratagene CFO Steve Martin during the call.
 
Invitrogen has repeatedly challenged Stratagene’s ownership of the polymerase blends patent, according to Sorge. “Subsequently to that, we had another patent dispute with another company over the same patent, Takara, and we actually got into settlement discussions with them,” he said. “They examined our notebooks and conceded that … we made the invention before their inventor did, and that was the question that Invitrogen kept raising in the patent offices.”
 
He said Stratagene is now waiting for the patent office to go through its administrative procedures and reissue the patent. “We have received verbal notice from the patent office that that will be happening,” said Sorge.
 
“Once the document is issued … it reinstates the patent retroactively. Then should there be any products that any company has sold in the United States historically since the date of original issuance of the patent, those products would be subject to some type of a damage award to us,” he said.
 
Once Stratagene does receive formal notice from the patent office, Sorge said the firm would “proceed forward with whatever legal resolution or business resolution that might be possible.”
 

“We believe that this will either act as a revenue generator for the company or a catalyst to resolve other suits where other companies have sued us.”

He said Stratagene believes there are several companies that sell products covered by the patent, and some of the revenues from those products have been substantial. “We believe that this will either act as a revenue generator for the company or a catalyst to resolve other suits where other companies have sued us,” he said. “It puts us in a fairly good negotiating position with respect to some other litigation, and it also potentially could bring in some revenue.”
 
The reinstated patent could give Stratagene some leverage in negotiations with Invitrogen, which won a $16.2 million judgment against Stratagene in a separate patent infringement case (see BioCommerce Week 11/1/2006). Stratagene has since appealed that judgment and has posted a $12.2 million bond to secure the damages (see BioCommerce Week 1/17/2007).
 
Q4 Profit Aided by Litigation Benefit
 
Stratagene posted fourth-quarter revenues of $24.7 million compared with revenue of $57.1 million in the comparable quarter a year earlier. However, the 2005 fourth-quarter results included a royalty payment of $34.1 million from Cambridge Antibody Technology to satisfy certain patent owners' interests in CAT's collaboration with Abbott Laboratories to develop rheumatoid arthritis drug Humira.
 
Excluding that one-time royalty payment, Stratagene’s revenues were up 7.2 percent for the quarter.
 
The firm’s net income of $9 million, or $.40 per share, was aided by a $10.7 million litigation benefit, due to the firm’s recent settlement of patent litigation with Third Wave Technologies (see BioCommerce Week 1/31/2007). Stratagene posted a profit of $2 million, or $.09 per share, for the fourth quarter of 2005.
 
Stratagene’s R&D expenses for the quarter dropped to $3.1 million from $3.9 million, year over year.
 
For full-year 2006, Stratagene brought in revenue of $95.6 million, compared with revenue of $130.3 million in 2005. Excluding the CAT royalty payment, Stratagene would have posted revenue of $96.2 million in 2005.
 
The firm’s net income for 2006 was $59,000, or $.00 per share, compared with a profit of $7.8 million, or $.35 per share, in 2005.
 
“We expect that the legal costs associated with active legal matters will continue to impact our financial results going forward,” said Martin during the call. “Legal fees associated with patent and other legal matters were $5.2 million for full-year 2006 versus $6.7 million for the full-year 2005.”
 
Stratagene finished the year with $9.7 million in unrestricted cash, and an additional $33.1 million of restricted cash.
 
The firm is predicting 2007 revenue growth in the low single digits.

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