FOOL PLATE SPECIAL
Two biotechnology equipment companies are fighting over patents key to gene-sequencing technology for big-money, high-profile products. The federal judge overseeing the case recently ruled primarily in favor of Nycomed Amersham's APBiotech unit against Applera Corp.'s Applied Biosystems division on some pre-trial issues. Investors can assume that neither party will lose its core business over this case, because the companies will almost certainly reach favorable cross-licensing agreements.
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A federal judge has ruled that Applera Corp.'s biotechnology equipment unit Applied Biosystems (NYSE: ABI) infringed a patent licensed exclusively to Nycomed Amersham's (NYSE: NYE) APBiotech life sciences arm. The patent concerns technology for colored dyes used in sequencing genetic code -- key to both companies' top-selling products and to decoding the human genome. The case faces a jury trial at the end of the month on the dye patent and other patents covering hardware technologies fundamental to gene-sequencing products. By any other name Number 2 wants its share The case is filled with claims ("You stole our intellectual property!") and counter-claims ("No, you stole ours first!") of infringement. While the judge ruled that Applied Biosystems had infringed on an APBiotech patent, for example, he reduced the scope of potential money damages for Applied Biosystems when he rejected the claim that Applied Biosystems also encouraged customers to infringe the patent by selling its dye products to them. But the judge gave more good news to APBiotech, ruling against Applied when finding that the MegaBACE system doesn't literally infringe Applied Biosystems patents. (Would-be lawyers, beware: The "literal" in that sentence leaves open the possibility the judge could find another kind of infringement.) Why can't everyone just get along? Of course, sometimes a patent battle can hurt. A win for Amgen (Nasdaq: AMGN) in its patent infringement case against Transkaryotic Therapies (Nasdaq: TKTX), for example, would be major -- and likely sink a huge part of Transkaryotic's business plan to use novel technology to produce other companies' patented drugs by other methods. But it's fair to say that most patent battles between profitable companies with diversified product bases lead to licensing agreements that let both parties go forward and prosper. Why? Because such companies almost certainly need to license different patented technology from each other, and these are rolled into larger settlement agreement. Investors looking for profitable companies providing biotechnology equipment can probably do their research on Applied Biosystems and Nycomed Amersham's APBiotech (still private but with an initial public offering almost certainly up for this year) without fear that this patent case will push either one out of the heavy-duty DNA sequencing business. It's a cinch that the parties will settle before trial or during the almost-certain appeal of any jury verdict.
Applera Corp., named PE Corp. until the end of the last year, trades publicly in the form of two tracking stocks, Applied Biosystems and Celera Genomics (NYSE: CRA) -- shares of which I own.. Applied Biosystems tracks Applera's very profitable biotechnology equipment businesses, with $1.4 billion in year 2000 revenue from DNA sequencers, protein sequencers, molecular diagnostics, and software. Motley Fool Research Analyst Zeke Ashton estimates that customers have purchased more than 1,100 Applied Biosystems' 3700 Prism DNA Analyzers -- at $130,000 each and requiring $100,000 a year in supplies. The Prism relies on the dying (color-coding) of the individual genetic oligonucleotides or "letters" A, C, T, and G to sequence genetic code at high volume. (Shameless plug: I analyze Applied Biosystems along with other Genomics Tool Makers in The Motley Fool's Industry Focus 2001).
Nycomed's APBiotech makes the Prism's main competition, the MegaBACE sequencing system, and both products are key to Celera's and the Human Genome Project's work to sequence the human and other genomes. The company alleges that all of Applied's BigDye products infringe a patent licensed exclusively from the University of California, Berkeley, to APBiotech. It matters: The Prism beat the MegaBACE to market and reportedly owns 85% of the high-throughput gene-sequencing market, so APBiotech stands to gain from any favorable decision.
As more and more drug makers and other companies use biotechnology, the demand for DNA sequencing and testing equipment has increased. Now that there's more money to be made, the patent battles heat up -- such as the fight over Affymetrix's GeneChip DNA testing technology. Yet investors are not pricing any of these companies as if a loss would mean shutting down profitable businesses. Rather, the rational expectation is that companies will share the wealth through licensing agreements requiring royalty payments.
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