FOOL PLATE SPECIAL: An Investment Opinion
Glaxo Heats Up Genentech Lawsuit

Giant drug maker Glaxo Wellcome last week added an additional patent claim to its case that Genentech's monoclonal antibody production process infringes on Glaxo intellectual property. The lawsuit threatens Genentech's blockbusters Rituxan and Herceptin, and products in development. This gives Glaxo the upper hand in negotiations. Genentech may have no choice but to fight.

By Tom Jacobs (TMF Tom9)
September 18, 2000

Drug giant Glaxo Wellcome (NYSE: GLX) applied more pressure last week in its patent infringement case against biopharmaceutical pioneer Genentech (NYSE: DNA). Glaxo now claims that Genentech infringes on a 1997 patented method to make monoclonal antibody drugs. This is the latest injection to Glaxo's May 1999 frontal attack on Genentech's core business and blockbuster cancer drugs, Rituxan and Herceptin.

Monoclonal antibodies and Glaxo's claim
Until Rituxan's 1997 approval, monoclonal antibodies were promises unkept. The idea seemed great: Produce specific antibodies that would bind to an offending target -- such as a cancer tumor cell -- and whistle to the immune system to come and eliminate it.

A monoclonal antibody recognizes only one target. If you could develop lots of it, it could be a potent weapon against cancer and other afflictions. But the theory ran into real-world problems with production methods, cost, drug delivery, and maintaining concentration in the body.

Meeting the challenge, IDEC Pharmaceuticals (Nasdaq: IDPH) through its alliance with Genentech found a way to eliminate the obstacles. One key was to use Chinese hamster ovary cells to turn out perfect antibodies cheaply.

Glaxo apparently believes that Genentech uses Glaxo's patented culture medium in that process for Rituxan and other monoclonal antibody products and drug candidates. If Glaxo's patents apply, Glaxo can choose whether to license its patented technology to Genentech or not, and on what terms.

Genentech has more to lose
Glaxo has not been rewarding investors. Though it had an excellent last quarter, its stock has been flat since February 1998. It hopes to jump start its business with new drugs currently in trials. Through its proposed merger with SmithKline Beecham (NYSE: SBH), it would become the third-largest drug maker in worldwide sales, behind Merck (NYSE: MRK) and Pfizer (NYSE: PFE).

A loss would leave Glaxo's investors no worse off than they are now: The company has its own drug candidates as well as 13 in human trials under alliances with its biotech partners. Not shabby.

There is less room for error with Genentech and its investors, who would lose partial revenues from the company's biggest drugs and other monoclonal antibody products. The stock has risen over 2.5 times from its July 1999 IPO close, and is richly valued based on those drugs and more in human trials.

Investors rewarded Genentech's $1.5 billion in TTM sales with a market cap of $42 billion. They are more stingy with Glaxo, giving its $8.5 billion in sales -- five and two-thirds more than Genentech's -- a market cap of only $98 billion.

This could be due to the perceived value of Genentech's drug pipeline of 12 candidates in human trials. Or maybe it's the hot biotech market of the last year. No matter. A cloud over Genentech's monoclonal antibody revenues simply makes it harder to value its future business and invites a pullback in the stock.

Get used to patent fights
Patent litigation is part of the landscape for investors in biotech and pharmaceuticals. Most lawsuits are bargaining chips and rarely go to trial, but not always: Amgen's (Nasdaq: AMGN) current patent case again Transkaryotic Therapies (Nasdaq: TKTX) illustrates that if it's a make or break for the companies' businesses, the parties may not settle.

Glaxo may have the upper hand in this chess match, attacking Genentech's core drug development process and revenues from blockbuster drugs Rituxan and Herceptin. Unless Glaxo really wants just a few drops of the revenue stream, Genentech might have no choice but to fight on through trial.

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Your Turn:
How much do these drug makers have at risk in the lawsuit? Share your views on the Genentech and Glaxo Wellcome discussion boards!

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