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Stratagene Unveils Bayer as Key Molecular Dx Partner; Hopes to Settle With ABI Out of Court

After a year of negotiations, Stratagene announced this week that Bayer Healthcare will sell customized versions of Stratagene's Mx3005P instruments to clinical labs for molecular diagnostic testing worldwide.

Stratagene officials had mentioned on several occasions over the past year that the firm was hammering out the details of the pact — which is a lynchpin of Stratagene's plans to expand in the molecular diagnostics market — with a major diagnostics player. Stratagene's goal is to eventually develop a full suite of products for the molecular diagnostics market.

The collaboration, along with the company's earlier pact with Focus Diagnostics, "represent a significant beginning for our partnering efforts within molecular diagnostics," said Joe Sorge, president and CEO of Stratagene, during the firm's fourth-quarter conference call this week.

Stratagene had hoped to seal the deal with Bayer by the end of 2005. Initially, Stratagene said that the partner would develop a bigger, customized version of the firm's QPCR-based instrument. But last July, Sorge told BioCommerce Week that the as-yet undisclosed partner "realized it was going to take them too long to get to market by customizing our instrument into a bigger system, so I believe they're going to go with our off-the-shelf instruments." (see BioCommerce Week 7/21/2005).

"It's our hope that we can settle this. 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."

That is exactly what Bayer is doing, but with some minor tweaks. "We do not have to do any significant hardware development," Sorge said during the call. "It's mainly just branding and packaging changes. But we are going to be helping to write software for the clinical market with Bayer, and there are milestones associated with that software, with payments from Bayer."

Sorge said Stratagene expects to realize modest revenue from the collaboration in 2006 and 2007, though he also said the partnership could mean opportunities for sales of the firm's reagent technology in the future. "Bayer will then be taking the instrument along with Bayer's diagnostic kits and going through FDA approval," he said.

Stratagene's goal is to develop a full suite of products for the molecular diagnostics market. "We believe that Bayer chose to partner with us because the Mx3005P offers an easy-to-use, full-feature set at a very economical price point," said Sorge. "We continue to believe that these characteristics distinguish our product offering from our competitors."

ABI Settlement on the Horizon?

Sorge also said during the call that "there's a chance" the firm will settle its ongoing thermal cycler litigation with Applera, parent of rival Applied Biosystems, before the case goes to trial, which is expected in late 2006.

Applera and Roche Molecular Systems recently settled a long-standing patent-infringement suit against Bio-Rad Laboratories unit MJ Research, 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).

"It's our hope that we can settle this," he said. "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. We intend to very sincerely pursue that so that we can avoid the need for trial in the fall."

Meanwhile, Stratagene is hoping an appeals court in Washington, DC, will overturn a decision by a US District Court in Wisconsin to award rival Third Wave Technologies $20.6 million in damages and attorney fees (see BioCommerce Week 12/22/2005). Sorge said during the call that the firm has filed an appeal in the case.

In addition to the appeal, Stratagene countersued Third Wave last May 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. The firm is seeking monetary damages as well as a permanent injunction against further infringement by Third Wave.

Stratagene recently posted a $21-million bond to secure damages in the case (see BioCommerce Week 2/1/2006), and as a result took a $20.6-million non-cash litigation charge to its fourth-quarter earnings.

"The charge is something that we are obviously disputing and appealing and hopefully we can see quite a bit of that reversed," Sorge said during the call. "That's subject to the decision of the courts."

He added, "We are continuing to move forward with our strategy of selling non-infringing FullVelocity products to clinical, reference, and university laboratories, while we establish marketing partnerships, such as the Focus Diagnostics relationship, to enter the hospital laboratory channel."

Q4 Revenue Benefits from Royalty Payment

This week Stratagene also reported fourth-quarter revenue of $57.1 million, a 153-percent increase over revenue of $22.6 million in the fourth quarter of 2004. The results benefited from a $34.1 million royalty payment during the quarter from Cambridge Antibody Technology to satisfy certain patent owners' interests in CAT's collaboration with Abbott Laboratories to develop rheumatoid arthritis drug Humira.

"The cash received from Cambridge Antibody is cash in the bank," said Sorge. "There [are] no contingencies on that."

Excluding this one-time item, Stratagene's revenue grew 2.1 percent year over year to $23 million. Excluding the impact of foreign currency, the firm's revenue was up 5 percent for the quarter.

According to Sorge, sales of QPCR instruments and reagents grew 21.6 percent in the quarter. He said roughly one quarter of QPCR sales come from reagents, while sales of the Mx3005P system accounted for 45 percent of units sold during the quarter.

The firm posted fourth-quarter net income of $2 million, or $.09 per share, a 17.6-percent increase over net income of $1.7 million, or $.08 per share, in the fourth quarter of 2004.

Stratagene's profit for the quarter and full year were positively affected $23.4 million, or $.65 per share, by the settlement and payment from CAT. The results, however, were negatively impacted $20.6 million, or $.57 per share, due to the non-cash litigation charge related to the Third Wave damages. In addition, the firm said its net income was negatively impacted $800,000, or $.02 per share, by legal expenses.

Stratagene's R&D spending increased 43.2 percent during the quarter to $3.9 million.

For full-year 2005, the firm reported revenue of $130.3 million, a 53.7-percent increase over revenue of $84 million in 2004. The 2005 results include $35.4 million in royalty payments, including the $34.1 million from CAT.

Stratagene posted 2005 profits of $7.8 million, or $.35 per share, a 4.7-percent increase over a profit of $7.4 million, or $.39 per share, in 2004.

The firm's R&D spending for the year was $45.2 million, a 54-percent increase over R&D spending of $29.3 million in 2004. Company officials said during the call that they expect R&D expenses to be between 12 percent and 14 percent of revenue in 2006.

Stratagene is predicting 2006 revenue between $100 million and $104 million, a 4 percent to 8 percent growth rate over 2005, and EPS in the range of $.37 to $.41.

Stratagene finished 2005 with $35.2 million in cash and cash equivalents.

— Edward Winnick ([email protected])

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