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Stratagene's Pact with Bayer Remains on Track, But Focus Alliance Hits a Snag After Quest Buy

Stratagene officials said this week that the firm’s collaboration with Bayer is on track, but its partnership with Focus Diagnostics has been disrupted by that firm being acquired by Quest Diagnostics earlier this year.
Stratagene still expects Quest to move forward with the products outlined in an agreement with Focus signed late last year, but company officials have been meeting with Quest to hammer out the details. Meanwhile, the firm anticipates Bayer will begin purchasing instruments from Stratagene by the end of this year.
The deals are part of Stratagene’s goal of becoming a molecular diagnostics player with the help of larger and more established partners.
Stratagene officials gave the update on the two molecular diagnostic alliances during the firm’s third-quarter conference call this week. The company’s revenues dropped 2.1 percent year over year, and its quarterly profit slumped to a $6.3 million loss on litigation charges.
As has been the case over the past year, Stratagene’s conference call focused on its growing molecular diagnostics business. Stratagene President and CEO Joe Sorge said the firm is pursuing a three-pronged strategy for that market.
“First, we are establishing the Stratagene brand in bulk reagents and instrumentation,” he said. “Our second step is to establish collaborations with large clinical centers to validate assays that can then be taken through the FDA either with a partner or alone. And our final step is to in-license and develop cancer prognostic tests and intellectual property that we can develop into our own diagnostic test kits.”
The firm signed several pacts over the past year aimed at transitioning from sales of its core gene analysis and cloning products to molecular diagnostics, with the help of larger and more established partners.
Among these pacts is a collaboration with Bayer signed in March, under which the German diagnostics giant will sell customized versions of Stratagene’s Mx3005p instruments to clinical labs for molecular diagnostics testing worldwide (see BioCommerce Week 3/8/2006).
“We are continuing to customize Mx3005 software for their new molecular diagnostics testing platform based on our instrument,” Sorge said during the call. “We have made outstanding progress with this effort and continue to meet the project’s timelines.”
He said Bayer would begin to purchase development instruments in late 2006 and early 2007. “After completion of regulatory approvals, Bayer will begin to purchase production units for use in their diagnostic instrument systems,” he said.
Another partnership important to Stratagene’s plans for the molecular diagnostics market is its alliance inked late last year with Focus Diagnostics, which is developing diagnostic assays based on Stratagene’s FullVelocity technology (see BioCommerce Week 12/8/2005). Herndon, Va.-based Focus, which operates a national reference lab that offers more than 1,200 infectious disease tests, received a non-exclusive license to the FullVelocity technology, and Stratagene intends to help the company develop molecular diagnostic kits and products.
Under the alliance, Stratagene will manufacture any diagnostic products that arise from the collaboration, and Focus will commercialize them globally.
Sorge said during the firm’s second-quarter conference call in August that the firm hoped to begin regulatory testing of assays developed in collaboration with Focus early next year, with the launch of some of the products in 2007 (see BioCommerce Week 8/9/2006).
But that timeline has been disrupted by Focus’ acquisition by Quest Diagnostics earlier this year (see BioCommerce Week 5/24/2006). “The relationship with Focus is still a good one,” said Sorge this week. “However, the integration of Focus into Quest has caused there to be some changes in that program, and we are currently now meeting with people from Quest to look at other opportunities for Stratagene to participate with Quest as well as rechart the program with respect to the infectious disease agents.
“Quest still intends to move forward with those products, but it’s a matter of the degree to which Stratagene will be participating in the supply of reagents and manufacturing of products that is currently being reevaluated by Quest,” said Sorge.
Litigation Charges Take a Toll on Q3
Stratagene reported revenue of $23.2 million for the quarter, down from $23.7 million for the third quarter last year. The company blamed part of the slide on declining sales in its gene-discovery and cloning systems products.
The firm posted a net loss of $6.3 million, or $.28 per share, from a profit of $688,000, or $.03 per share, a year ago. The loss was primarily the result of a $12.5 million pre-tax litigation charge related to a patent-infringement suit filed by Invitrogen against the firm. Without the litigation charge, net earnings would have been $1.6 million, or $.07 per share, for the quarter.
Three weeks ago, a US District Court for the Western District of Texas awarded Invitrogen $16.2 million in damages in the case, tripling an earlier award from a jury (see BioCommerce Week 11/1/2006). “We intend to appeal the court’s decision to the US Circuit Appeals Court in Washington, DC,” said Sorge.

“The integration of Focus into Quest has caused there to be some changes in that program, and we are currently now meeting with people from Quest to look at other opportunities for Stratagene to participate with Quest as well as rechart the program with respect to the infectious disease agents.”

In total, Stratagene has recorded $20.4 million in legal charges, which includes legal fees, court costs, and prejudgment interest, in the case with Invitrogen this year. The charges equaled $.35 per share for Q3 2006, Martin said.
Stratagene’s R&D spending for the quarter remained flat at around $2.8 million.
Stratagene finished the quarter with $16.6 million in unrestricted cash and cash equivalents. It holds $21.5 million in restricted cash.
Company officials said the firm will use available cash resources for the posting of an appeal bond in the Invitrogen case in Texas.
Stratagene expects to post 2006 revenue of $94 million to $98 million, and a loss of $.34 to $.37 per share. The firm anticipates taking a $.57 per share after-tax litigation expense related to the Invitrogen case.
Remaining Legal Issues
While Stratagene will appeal the judgment in the Invitrogen case, the firm has already appealed a judgment handed down late last year by a US District Court in Wisconsin that ordered the firm to pay roughly $21 million in damages to Third Wave Technologies (see BioCommerce Week 12/22/2005).
Stratagene filed that appeal with the US Court of Appeals in Washington, DC. Oral arguments are expected to be heard in December 2006, with the court expected to rule three to six months after those oral arguments, Martin said during the call.
Stratagene also has patent suits ongoing that it filed against both Third Wave and Invitrogen.
“We are going to the courts for an injunction against Third Wave to prevent them from pursuing an amplification strategy coupled with a cleavage strategy” that Stratagene believes infringes its patents, said Sorge. “We are still talking with Third Wave about some type of cross-license agreement that would involve a resolution of the Wisconsin case that they had against us, and hopefully there will be a logical outcome from those discussions.
“It’s a complex situation, though,” he added. “They’re holding onto a $21-million judgment, [and] we’re appealing the judgment. The outcome of the appeal could go anywhere from completely eliminating the judgment and invalidating their patents all the way to upholding the judgment and causing Stratagene to pay $21 million.”
Stratagene has a suit pending against Invitrogen for allegedly infringing the firm’s patents covering polymerase blends. “We have been notified by the [US] 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 blend sales as well as the enzyme blend sales of several other competitors,” said Martin.
“We hope that we will be in a position to negotiate with Invitrogen some type of logical business resolution,” said Sorge. “But it’s a high-stakes game … and we believe that in order to play in that high-stakes game we have to have the kinds of chips that our patents bring to the table for us, and therefore we need to show that we are committed to enforcing our patents as well.”
Stratagene also has been negotiating for months to settle with Applera, which sued the firm for alleged infringement of its thermal cycler patents (see BioCommerce Week 7/12/2006).
“It’s likely we are going to settle with Applera,” said Sorge. “It’s their intent to settle with us, and it’s our intent to settle with them. It’s a complex negotiation because there’s more than just an instrument license involved. We have weekly calls with Applera and are making progress on each call.”
He said the negotiations would likely result in a research-market license similar to ones signed by other firms that have settled similar litigation with Applera.

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