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Stratagene Seeks Settlements with ABI, Third Wave; Bets QPCR Sales Will Offset Weakening Legacy Sales

Stratagene is looking to settle out of court its ongoing legal disputes with Applera and Third Wave Technologies, President and CEO Joe Sorge said during a conference call last week.

Settling the two cases could significantly decrease the firm's quarterly legal expenses and erase concerns among potential partners that Stratagene products may infringe other technologies. Although Stratagene officials last week would not say whether the company has begun settlement talks with ABI or Third Wave, Sorge's language during the call suggested that that may be the case.

Separately last week, Stratagene said that weakening sales of its legacy products would hurt revenue for the rest of 2006, but it hopes a strong performance from its quantitative PCR line, and especially a recent deal with Bayer, will offset the decline.

Looking for a Quick Resolution

Asked whether a settlement with Applera was in the works, Sorge said, "We are attempting some kind of resolution prior to that trial, and both sides are hopeful that can be reached. I'm hopeful. We're putting a lot of effort into it, but we're not at that stage yet."

"We are attempting some kind of resolution prior to that trial, and both sides are hopeful that can be reached. I'm hopeful. We're putting a lot of effort into it, but we're not at that stage yet."

ABI parent Applera and Roche Molecular Systems settled a long-standing patent-infringement suit against Bio-Rad Laboratories unit MJ Research in February, enabling MJ to resume selling its thermal cycler products in the US (see BioCommerce Week 2/15/2006). The settlement left Stratagene as the sole defendant in the suit, which was brought by Applera and Roche in November 2004 (see BioCommerce Week 11/18/2004), and is scheduled to go to court later this year.

Sorge has since said that he hoped to settle with Applera and avoid a trial. "We believe that Applera was focused on the larger competitor and getting that settlement nailed down first so there would be a precedent for settlement," he said in a conference call in March (see BioCommerce Week 3/8/2006). "We intend very sincerely to pursue that so that we can avoid the need for trial in the fall."

In the case with Third Wave, Stratagene has appealed a judgment and damages of $15.9 million it was ordered to pay Third Wave for infringement of Third Wave's Invader QPCR products (see BioCommerce Week 12/22/2005). Stratagene officials declined to say whether the firm is currently engaged in settlement talks with Third Wave Technologies, but during the call last week Sorge expressed the desire for a quick resolution.

He said Stratagene had filed a 'compelling' appeal, and Third Wave's patents may be invalidated by the court. Stratagene has a countersuit pending against Third Wave, and Sorge said it would make more sense for the parties to have a "positive relationship." These are factors that "should lead both parties to a win-win resolution," he said.

In the meantime, he reiterated that Stratagene's potential partners in diagnostics have evaluated the firm's alternative QPCR technology and "have seen that it can perform as well as the original technology. So, we're moving rapidly forward with them using this new alternative technology."

Sorge added, "We are contemplating re-launching the alternative technology into the research marketplace, but we want to be very careful before launching it … not to have any potential of aggravating Third Wave. In fact, we've tried to weave this into a plan where going forward there is some kind of recognition on the part of both parties as to what might be infringing and what might not, so that there's no doubt in the marketplace going forward."

Resolving the lawsuits would remove an ongoing burden to Stratagene's finances. CFO Steve Martin told BioCommerce Week via e-mail this week that legal activities "resulted in $5.3 million in spending level [in 2005] above a more normal 2004. The first quarter of 2006 was affected by continuing activity on the Third Wave and Applera matters; the before-tax impact of the additional legal costs related to these matters was approximately $1.1 million."

However, he said that the firm expects the impact on earnings from legal fees to be less in 2006 than it was in 2005.

Hoping QPCR Revenues Will Offset
Sales Declines for Legacy Products

Stratagene's first-quarter revenues fell 1.2 percent to $24.3 million from $24.6 million in the comparable quarter last year. The firm said that excluding the negative effects of currency translation, its revenues rose 1.6 percent year over year.

Stratagene also reduced its full-year revenue guidance by $2 million to a range of $98 million to $102 million.

The company said its first-quarter revenue decline was due to the impact of the strengthening dollar on foreign sales, a decline in sales of older products focused on gene discovery and cloning systems, and an increase in product backlog.

"Based upon our first-quarter results and our current outlook for the remainder of 2006, we now believe that the faster-than-expected decline in some of our legacy life science product sales will have a meaningful impact on revenue and earnings this year," said Martin in a company statement.

However, the firm expects sales of its quantitative PCR instruments and reagents to increase throughout 2006. This expectation is partly based on its partnership with Bayer Healthcare, which is purchasing customized Mx3005p QPCR systems from Stratagene for sale in the molecular diagnostics market worldwide.

Martin told BioCommerce Week that contract revenue related to the Bayer alliance could represent as much as 2 percent of the firm's total revenue in 2006. "We hope to be able to report measurable product sales from this effort in 2008 and believe ultimately this revenue will be significant for Stratagene," he said.

Sales growth in the first quarter was roughly 1 percent for Mx3005p instruments and reagents, said Sorge.

"We're seeing discounting in the marketplace from the competitors, and we've had to react to that," he said during the call. "Our unit number was actually up in the first quarter, close to 10 percent, but because of some competitive pricing, we've remained competitive but that's hit the [average sale price]."

Sorge also said that the firm is "redirecting our field sales force and refocusing our marketing resources to best reach our end customers. We think that these efforts can have a positive impact to sales of our more mature products."

Company officials declined to comment on this effort.

"One of our strategies [is] to have a next-generation instrument launched sometime in Q1 of '07 that would be less costly to make and hopefully give us additional pricing flexibility," Sorge said. Martin confirmed that this would be a new QPCR instrument, but not the one Bayer is customizing.

Stratagene posted a 62 percent decline in its first-quarter net profit to $1.1 million, or $.05 per share, from $2.9 million, or $.13 per share, in the first quarter last year.

The firm's results this year include $1.1 million, or $.03 per share, in charges related to patent litigation matters. In addition, last year's Q1 results included $530,000, or $.02 per share, in income related to a litigation settlement.

Stratagene's first-quarter R&D expenses increased 17.3 percent year over year to $3.4 million from $2.9 million.

As of March 31, 2006, Stratagene had cash and cash equivalents of $30.6 million. Included in that amount is $21 million that was set aside in January as collateral for a bond as the firm appeals a judgment and damages in the dispute with Third Wave.

— Edward Winnick ([email protected])

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