[This article was edited and updated on January 30, 2001]
Welcome to another wonderful week of Foolishness. Big news Friday! A federal judge ruled for Rule Breaker Amgen (Nasdaq: AMGN) in its three-and-a-half-year patent infringement case against gene activation hopeful Transkaryotic Therapies (Nasdaq: TKTX) and partner Aventis (NYSE: AVE). Amgen investors have anxiously awaited the decision for more than four months since the trial ended, and they happily greeted the clear victory for Amgen's patents on its flagship anemia drug, Epogen.
Transkaryotic Therapies: 0
Biotech advance falls within Amgen's patent coverage
At issue was Transkaryotic's gene activation method for producing erythropoietin, a protein that boosts red blood cell production to combat anemia -- a particularly serious problem for dialysis patients. Where Amgen inserts a cloned gene into Chinese hamster ovary cells, which then grow the protein, Transkaryotic inserts a "promoter" into human cells that switches on the production of the protein erythropoietin in cells where it had been turned off. Transkaryotic argued that its new manufacturing method fell outside of Amgen's patents. The judge ruled that Amgen's patents were broad enough to cover Transkaryotic's production. (For more details, you can start with the press release that contains a source for the judge's lengthy decision.)
Though appeal is likely, the victory removes a threat to Amgen's key revenues, patent-protected through 2004. Amgen earns $2 billion free and clear annually from Epogen, and charges royalties on another $2 billion sold by Drip Port holding Johnson & Johnson (NYSE: JNJ) under the name Procrit. That's well over half of Amgen's trailing 12-months revenue of $3.6 billion. So, Amgen breathes easier, while the ruling delivers a body blow to Transkaryotic, which hoped to apply its gene activation advances to other proteins and reap its own patent-protected rewards.
But, Friday's decision means that the company either must secure licenses to use its gene activation biotechnology to stimulate production of proteins already patented by others, or wait until those patents run out. Licenses might be harder and harder to come by: Companies such as Rule Breaker holding Human Genome Sciences (Nasdaq: HGSI), Genentech (NYSE: DNA), and privately held ZymoGenetics are rushing to patent therapeutic protein real estate. It's prime lakefront property, too. As ZymoGenetics' CEO Bruce Carter told us in a December interview, "There's only one erythropoietin."
Does Amgen's victory imply that these licenses won't be forthcoming? It depends.
Patent litigation routine for biotech
Investors in companies that employ biotechnology should expect patent litigation. But, companies facing or in lawsuits usually negotiate licensing agreements to allow everyone to move forward because lawyers routinely advise clients that settlements are preferable to rolling the dice -- allowing a judge or jury to decide your dispute. Why didn't this one settle? Perhaps Amgen, needing every Epogen dollar, demanded too high a license fee or refused to license, and Transkaryotic, for which gene activation technology is key to its future, then had no other choice.
For Amgen investors, the short-term stakes were high. The long-term challenge, however, as Jeff Fischer has explained, is this: Does Amgen have the drugs on deck to replace and increase revenues when Epogen loses patent protection and Transkaryotic and others legally produce their own competing versions? Profits will not come from sitting still, and Amgen isn't. Among other things, it recently purchased a late-stage drug candidate for non-Hodgkin's lymphoma.
So, what about Amgen's future? As readers know from Selena Maranjian's Friday column and Jeff Fischer's State of the Rule Breaker, Fools are vigorously debating ways to improve the criteria, including how to quantify whether a Rule Breaker candidate's potential returns justify investment risk. One shorthand is whether a company's business growth could produce a 10-fold increase in the stock price in 5 years -- 10x/5y for short.
When the Rule Breaker purchased Amgen in December 1998, it had a $22 billion market capitalization. Expecting a price today of at least $70 (Amgen's stock traded as high as $73 a share on the news in after-hours trading Friday), it's now at $72 billion. Please vote whether you think Amgen has 10x/5y potential from the initial $22 billion market cap in 1998:
A. Yes, Amgen's drug pipeline can produce earnings justifying a $220 billion market cap by December 2003.
B. No, Amgen can't return 10x/5y -- but in 10 years, it could.
C. Not 10x, not 5y, not 10y -- never, neither, nada, no how.
D. I don't like the 10x/5y valuation criterion. In the spirit of Foolish discussion, I suggest... [Please post what you do think would be a good "How high is the possible return?" criterion in the poll thread!]
Celera's new supercomputer alliance
In other Rule Breaker news, Celera Genomics (NYSE: CRA), Compaq (NYSE: CPQ), and the Department of Energy's Sandia National Laboratories announced a collaboration to create supercomputers with new genomics and proteomics capabilities. Fool Community member Ken Dixon, M.D., took excellent notes on the conference call. Particularly fascinating is Celera President and Chief Scientific Officer Craig Venter's assertion that computing power and speed matter, versus Compugen (Nasdaq: CGEN) Board Chairman Martin Gerstel's opinion -- shared with the Fool in a StockTalk interview -- that in five years the computing power won't matter, and molecular biology software will be everything.
Lastly, are you fascinated by stem cells? I'm trying to learn more about this Rule Breaking biotechnology. Ever since I called Geron's (Nasdaq: GERN) stem cell technology "sci fi," I've regretted it. Fool community member Arlo Miller (mille1j) is helping out with his Soapbox.com report, Investment Opportunities in Stem Cell Research. It's definitely worth a read.
Tom Jacobs -- TMF Tom9 when enjoying Chinese hamster ovary cells, a known delicacy
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