Biochip Packaging: Some Settling May Occur

Looks like my guess about Affymetrix's (Nasdaq: AFFX  ) reason for adding foreign lawsuits recently was right. The posturing seems to have brought fellow biochip maker Illumina (Nasdaq: ILMN  ) to the bargaining table.

In exchange for dropping patent lawsuits and countersuits on both sides of the Atlantic, Illumina will pay Affymetrix $90 million. As part of the settlement, Affymetrix agreed that for four years, it won't bring any new lawsuits on future products developed by Illumina.

That $90 million is certainly better than the $16.7 million that a Delaware jury awarded to Affymetrix last year, but the old-school biochip maker isn't getting any royalties, which could have been worth hundreds of millions of dollars, in the settlement.

Still, I'm a little surprised that Affymetrix dropped so much on the news. The lawsuits could have dragged out for years, and the company wasn't guaranteed to win on Illumina's appeals. Just like most patients will probably accept Merck's (NYSE: MRK  ) Vioxx settlement, sometimes it's better to take the money and run.

As for Illumina, it's not surprising that its stock has risen more than 17% on the news; the lawsuits have been hanging over its head like a turkey vulture waiting to jump on a half-dead carcass. With more than $350 million in cash and short-term investments on the books at the end of the third quarter, Illumina should have no problem paying out the ransom to free its products from patent purgatory.

This settlement is just another example of why Fools shouldn't count on revenues from unsettled lawsuits. Sure, read the 10-Ks so you can better understand the company's risks, but factoring them into a valuation can be difficult at best.

A little more Foolishness about the tiny chip makers:

• Affymetrix's Big Mistake?
• Affymetrix Expands
• Illumina Tests New Waters