Genentech to Pay Royalties in Patent Dispute

Genentech Inc. has agreed to pay Protein Design Labs Inc. royalties on three drugs that until now have been the subject of a patent dispute, the companies said Monday

Protein Design’s shares rose 23% in Nasdaq trading as a result.

Under the proposed agreement, Genentech will pay royalties, although less than Protein Design originally had desired, on the asthma drug Xolair, the psoriasis drug Raptiva and the promising experimental cancer drug Avastin.

South San Francisco-based Genentech had been contesting Protein Design’s claim that patents it holds on early stages of the technology used to produce the drugs were valid.

“It means Protein Design is definitely going to get something,” said Dennis Harp, an analyst at Deutsche Bank. “Genentech has gone from a position of potentially paying nothing to paying something on three products.”

For Genentech, the agreement means its cost of goods on those three drugs -- one of which, Avastin, has yet to be approved -- will rise, Harp said.

Separately, Genentech said Monday that the Food and Drug Administration accepted its application for Avastin and would give it a faster-than-normal review, with an answer due by the end of March.

Some analysts have said they expect a decision on Avastin might come before the end of the month.

Monday’s settlement allays some concern about future revenue for Fremont, Calif.-based Protein Design, which licenses its patented technology used to make biotech medicines.

With Avastin payments, Protein Design’s total royalty revenue may reach $92 million in 2006, RBC Capital Markets analyst Jennifer Chao said.

“This is very meaningful,” said Chao, who raised her rating on Protein Design shares to “outperform.” “They continue to demonstrate the breadth of their intellectual property and their ability to defend it.”

Chief Executive Mark McDade, who took over as Protein Design’s top executive a year ago, said the agreement erased a “cloud of uncertainty” that has plagued his company for several months.

“We are very pleased to be in a position to resolve an issue that has received a tremendous amount of investor interest and concern,” McDade said on a conference call with analysts.

A Genentech spokesman said the company had no comment on any financial effect the agreement might have.

The companies said the accord was an agreement in principle and they were working toward a final settlement this month. Neither company would disclose the exact structure of the agreement, but James Goff, a spokesman for Protein Design, said it would be in line with most analysts’ expectations of 3% for the next three to five years.

Protein Design provides drug developers with antibodies, or proteins that trigger the body’s immune system.

Protein Design shares surged $3.16 to $17.02 on Nasdaq.

Genentech, which trails only Amgen Inc. by sales in the biotech industry, rose 93 cents to $85.23 on the New York Stock Exchange.

Reuters and Bloomberg News were used in compiling this report.