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Uncertainty Over Applera-MJ Patent Lawsuit Tempers Bio-Rad s Fourth-Quarter Outlook

If a September court order barring Bio-Rad Laboratories unit MJ Research from selling certain products remains in place, it could reduce the firm's fourth-quarter revenue by as much as $15 million, Bio-Rad executives said during its third-quarter conference call last week.

While Bio-Rad officials said they hope to resolve the issue or have the injunction lifted before the end of the year, they also cautioned that their goal of lower SG&A costs for fiscal 2005 year over year would be difficult to achieve if the court order remains in place. Also, Bio-Rad continues to assert that it had settled the case with Applera before the injunction was issued.

"The uncertainty surrounding the timing and resolution of the Applera litigation leads us to make some caveats regarding financial performance in the fourth quarter," Bio-Rad CFO Christine Tsingos said during the call. "While we continue to aggressively pursue a resolution of this matter, we are fully complying with the August 30 injunction order. If the injunction remains in place through the remainder of the fourth quarter, our life science business could be negatively impacted with sales being reduced as much as $10 million to $15 million and pre-tax operating profits reduced as much as $8 million to $10 million versus our prior expectations."

She also said that legal fees associated with the litigation are "substantial," which would make the firm's SG&A goal difficult to achieve. The company reported fiscal 2004 SG&A costs of $378.3 million, or roughly 34.4 percent of total revenue of $1.1 billion. Tsingos said early this year that Bio-Rad's long-term goal was to reduce its SG&A spending to 30 percent of revenue, though it did not expect to reach that goal in 2005 (see BioCommerce Week 2/24/2005).

"It's always hard to predict exactly how the courts are going to proceed on these types of things. We certainly are looking for this to be resolved before the end of this year."

The injunction, issued in early September by the US District Court for the District of Connecticut in New Haven, prohibits MJ Research from making, using, offering, or selling thermal cyclers in the US that infringe US patents 5,333,675 and 5,475,610, held by Applied Biosystems' parent Applera (see BioCommerce Week 9/8/2005). Bio-Rad holds a license from Applera to sell products covered by those patents, but MJ, which Bio-Rad purchased in August 2004 for $32 million in cash, does not.

Bio-Rad continues to assert that a settlement had been reached with Applera before the injunction was issued, which would have allowed MJ to continue selling the thermal cyclers. The firm has asked the court to enforce the settlement agreement and has requested the injunction be lifted during an appeal.

However, Norman Schwartz, president and CEO of Bio-Rad, said during the call, "It's always hard to predict exactly how the courts are going to proceed on these types of things. We certainly are looking for this to be resolved before the end of this year."

Asked during the conference call if Bio-Rad had done an appropriate amount of due diligence on MJ and potential liability related to the Applera patent issue, Schwartz said, "We did a fair amount of due diligence with the MJ acquisition, [and] going forward, I still think it will be a good acquisition for us."

He added, "Our surprise, and certainly our dismay, has been more on the side of reaching an agreement with Applera. Given that Bio-Rad is a licensed vendor under thermal cycling products, this has been a little bit of a struggle."

Q3 Sales Rise 9.4 Percent

Bio-Rad reported a 9.4-percent increase in net sales for the third quarter, which it attributed to strong sales in protein-expression analysis, process chromatography, diabetes monitoring, blood virus screening, and quality control products. "This growth was tempered somewhat by the August 30 injunction against selling certain MJ Research thermocycling products in the United States," Tsingos said.

Net sales for the quarter ended Sept. 30 increased to $283.2 million from $258.8 million for the third quarter last year. Tsingos said that Bio-Rad's life science sales — which totaled $132.1 million for the quarter, a 9.5-percent gain year over year — were led by "strong sales in the US and Asia-Pacific region," with robust sales of protein expression instruments, reagents, and the firm's Experion electrophoresis system, which was launched about a year ago.

"We continue to have strong year-over-year growth in our multiplex array and process chromatography product lines, as well as strong demand for Experion," Tsingos said, echoing statements she made during the firm's second-quarter conference call (see BioCommerce Week 8/11/2005).

Sales for Bio-Rad's clinical diagnostics segment grew 8.7 percent year over year to $148.3 million. The firm said sales in that group were led by blood-virus screening products in the US, blood-typing sales in Europe, and worldwide demand for quality-control products.

According to Tsingos, the effect of the injunction, as well as an expected decline in pricing for its BSE testing products, lowered Bio-Rad's overall sales by between $3 million and $4 million in the third quarter.

R&D spending in the quarter increased 8 percent to $28.7 million from $26.6 million during the same period last year, and officials said during the call that the firm intended to continue to invest heavily in R&D for both the life science and diagnostics segments.

Bio-Rad posted third-quarter net income of $16.2 million, or $.62 cents per share, up 158 percent from $6.2 million, or $.24 per share, during the comparable period last year.

As of Sept. 30, the firm had $244 million in cash and cash equivalents.

Tsingos said expectations for the fourth quarter are unchanged, with the company predicting sales growth of mid-to-high single digits. Company officials cautioned that they still see signs of weakness in the European market, particularly in Germany and France.

Though Bio-Rad's fourth-quarter results could be negatively affected by the injunction and ongoing litigation with Applera, the quarter will include a gain of $10 million to $11 million on the sale of the firm's shares in BioSource and Instrumentation Laboratory.

Earlier this year, Bio-Rad lost a bidding war to acquire BioSource International, a provider of assays, antibodies, bioactive proteins and peptides, oligonucleotides, and other products. Bio-Rad's April bid of $8.50 per share was rebuffed by BioSource, and subsequently the firm agreed to be acquired by Bio-Rad rival Invitrogen for $130 million in cash, which was equivalent to roughly $12.50 per BioSource share (see BioCommerce Week 7/28/2005).

At the time of Invitrogen's acquisition, Bio-Rad had held a roughly 6.8 percent stake in BioSource.

Schwartz suggested during the conference call that Bio-Rad is still mulling M&A opportunities. "We have a number of opportunities in the hopper, things that we're looking at [and] evaluating, and one or two that look interesting at the moment. But we've got to continue that evaluation process," he said.

Industry insiders have long considered Bio-Rad to be a value buyer that is unwilling to pay significant premiums to add businesses or products to its portfolio, and company officials have recently suggested that this strategy would not change.

— Edward Winnick ([email protected])

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