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Affy Will Use $90M Illumina Settlement Bounty on R&D Projects, Acquisitions

Affymetrix will spend the $90 million it won from its settlement with Illumina on R&D projects and acquisitions, according to a company official.
The settlement ends more than three years of litigation between the companies, though patent re-examinations of Affy IP filed by Illumina will proceed and the possibility of future litigation between the array vendors exists. 
Under the terms of the settlement, Illumina will make the one-time payment without admitting liability, and has promised to pay Affy after all pending suits are dismissed from courts in the US, UK, and Germany. Affy in turn will dismiss with prejudice all lawsuits it had filed against Illumina. To this Illumina agreed to dismiss with prejudice its counterclaims against those suits.
In addition, in exchange for the payment, Affymetrix granted Illumina, its affiliates, and its customers a perpetual covenant not to sue them for making, using, or selling any of Illumina's current products, evolutions of those products, and services related to those products. Affymetrix also extended the covenant not to sue for four years for making, using, or selling Illumina products or services that are based on future technology developments.
However, according to Illumina, the covenant does not prevent Illumina from suing Affymetrix for using or selling future products in that same window of time. The covenant “only says that Affy cannot sue Illumina for any future products for the next four years,” Illumina spokesperson Maurissa Bornstein told BioArray News last week. “It does not say that Illumina cannot initiate litigation against Affy.”
Bornstein added that patent re-examinations that were filed with the US Patent and Trademark Office for four Affy patents involved in the litigation are ongoing. Illumina announced last month that the USPTO will begin re-examining the four patents at its request (see BAN 1/2/2008).
Illumina had no further comment on the settlement, though Bornstein said the firm is mulling an additional statement. Illumina had previously told investors that it intended to fight the suits, but CEO Jay Flatley had also said previously that Illumina has been prepared to negotiate a settlement. “If there were such an economic settlement then we’d love to see it, but so far that hasn’t happened,” Flatley said in June (see BAN 6/5/2007).


Illumina shareholders reacted positively to news of the settlement. Shares of the firm’s stock were trading at $70.72 at midday Tuesday, up 24.7 percent from a closing price on Jan. 9, the day before the settlement was announced.

The covenant “only says that Affy cannot sue Illumina for any future products for the next four years. It does not say that Illumina cannot initiate litigation against Affy.”

In comparison, shares of Affymetrix stock, which initially plunged 8 percent on the news, were trading at $22.61 at midday on Tuesday, roughly unchanged from the closing price of $22.60 on Jan. 9.
Meantime, analysts at GARP Research, Lehman Brothers, and UBS upgraded Illumina’s stock on Jan. 11. GARP upgraded Illumina’s stock from Neutral to Buy, Lehman Brothers upgraded the stock to Overweight from Equal Weight, and UBS upgraded it to Buy from Neutral.
In a research note published on Jan. 10, GARP Research analyst Alastair Mackay called the settlement a “striking victory” for Illumina and a “defeat” for Affymetrix.
“We believe that the end of Illumina’s legal woes will improve the long-term outlook for Illumina’s top line,” Mackay wrote. “From this point on, customers need not worry about the disruptive effects of injunctions or punitive damages on their multi-year projects.”
Affy’s View
Affymetrix said it is pleased with the settlement and will use the one-time payment to invest in product development as well as to fund potential acquisitions.
Pratima Rao, senior director of product marketing at Affymetrix, told BioArray News in an e-mail this week that the resolution is “favorable to Affymetrix” and should strengthen the company’s licensing program.
“Affymetrix’ intellectual property is one of our core assets, representing the work product of many scientists and hundreds of millions of dollars of investment,” she said. “The $90 million settlement is financially substantial and, more importantly, recognizes the value of our IP portfolio and our licensing program.”
According to Rao, the payment provides Affymetrix with “additional working capital and greater strategic financial flexibility, better positioning the company to capitalize on long-term growth opportunities – both organically through increased R&D investment and inorganically through acquisitions like the recent announcement with USB Corp,” which Affy agreed to acquire for $75 million last month (see BAN 12/18/2007).


Rao said that by settling with Illumina Affy “avoid[s] costs and risks associated with long-term licensing arrangements.” In recent years, Affy has concluded licensing agreements with other firms that sell arrays, such as NimbleGen, Abbott Molecular Labs, and Applied Biosystems (see BAN 10/10/2006, BAN 5/30/2006).
Affymetrix first sued Illumina in July 2004 for allegedly infringing six of its patents. One patent was later dropped from the suit, and Illumina fired back with counterclaims alleging unfair competition and accusing Affy of violating US anti-trust legislation (see BAN 8/24/2005).


Last March, a jury sided with Affy in the first phase of the litigation, finding that Illumina's products infringed “one or more claims” of Affy’s patents and awarding Illumina damages of more than $16.7 million for the period of 2002-2005 based on a royalty of 15 percent. Affy and Illumina were scheduled to meet next month for the second phase of the trial, which was supposed to focus on the validity of Affy’s IP (see BAN 3/20/2007).


In October, Affy filed more suits against Illumina, alleging its array products as well as its next-generation sequencing technology were in violation of five US patents awarded to Affy, as well as three European Patents. The US suit was filed in the US District Court for the District of Delaware, where both firms are incorporated, while the European suits would have been contested in the UK High Court of Justice and in Germany’s Dusseldorf Regional Court (see BAN 10/30/2007).
Affy has agreed to drop all of these suits as part of the settlement with Illumina.