Decision Against Genentech Puts a Crimp in Biotech Stocks
Genentech Inc. shares slid 8.3% on Tuesday, one day after a Los Angeles County jury ordered it to pay $300.2 million in damages for withholding royalties from City of Hope National Medical Center.
The bad news about South San Francisco-based Genentech helped drag down biotechnology stocks. The Nasdaq biotechnology index fell 7.1% and the Amex biotechnology index, another closely watched measure, sank 8.1%.
The sector also was hurt by disappointing news from Idec Pharmaceuticals. The San Diego-based company said Monday that Medicare reimbursement for a new cancer drug will come later than expected and that it had halted development of a potential psoriasis drug because of adverse side-effects. Idec skidded $6.34 to $32.03, a decline of 17%, on Nasdaq on Tuesday.
Genentech, meanwhile, closed at $31.55, down $2.85, on the New York Stock Exchange.
Analysts were unshaken by the jury award against Genentech, an industry leader with revenue of $2.2 billion in 2001. They said it did not pose a financial threat to the company, which, as of March 31, had $1 billion in cash and short-term investments on its balance sheet.
A.G. Edwards analyst Alex Hittle said the compensatory damages work out to 56 cents a share. He expects Genentech to earn 91 cents a share in 2002.
Jurors will return to court Monday to hear testimony on punitive damages. City of Hope has not said how much it is seeking, except that the amount will be substantial. Some analysts said they would not be surprised if the hospital sought triple damages--twice the compensatory amount.
J.P. Morgan H&Q; biotechnology analyst David Molowa said it was likely Genentech would appeal the verdict. The company said it would wait until the punitive judgment before making its decision. But in the past, executives said they expected the appeals process to extend the case, filed in 1999, for several more years.
Genentech could decide to settle the case with City of Hope to avoid the cost and delay of an appeals process. The biotech company in 1999 paid UC San Francisco $200 million to settle a patent infringement case. But a settlement in the City of Hope case before the jury reaches its decision on punitive damages is considered unlikely.
S.G. Cowan biotechnology analyst Eric Schmidt said the jury award is a one-time event that won’t affect the company’s ability to develop and market biotechnology drugs, including the cancer drug Herceptin. “From a Wall Street perspective, this will not put Genentech out of business,” Schmidt said.
“If there is one biotechnology company that can write a check for this, it is Genentech,” said A.G. Edwards’ Hittle.
On Monday, jurors found that Genentech owed Duarte-based City of Hope royalties on drugs made by third parties under a 1976 contract. Under the contract, Genentech funded research at City of Hope, which gave the company patents on its discovery in exchange for a 2% royalty on sales of resulting products.
City of Hope scientists Arthur Riggs and Keiichi Itakura discovered a method to produce human proteins from bacteria, an invention that launched the biotechnology industry.
Genentech has paid City of Hope royalties on two biotechnology drugs that resulted from the collaboration, human insulin and human growth hormone. But the jury decided that the biotechnology company hid licenses on other drugs, including interferon and hepatitis B vaccine, to avoid paying the hospital royalties.
City of Hope general counsel Glenn Krinsky confirmed Tuesday that the City of Hope scientists credited with the discovery would share 10% of the award.
