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Another Pain for Genentech

By Arlene Weintraub Investors barely blinked on June 11, the day after biotech giant Genentech took a blow from a Los Angeles jury. In a retrial of a case that had ended earlier this year in a mistrial, the jury ordered Genentech (DNA) to pay $300 million in unpaid royalties to City of Hope, a Duarte (Calif.) cancer center.

The dispute revolved around a patented method for making protein-based drugs that City of Hope developed and licensed to Genentech in 1976. The jury also ruled that Genentech acted with malice or fraud, which means the company is subject to punitive damages. That phase of the trial begins in mid-June. By the close of business on June 11, Genentech's stock was down 8%, to $34.40.

Certainly $300 million is far from a critical hit to Genentech -- it has $1 billion in cash -- but the punitive damages could be an additional blow to a company that has already had its fair share of challenges this year.

PUNISHING FIGURES. It's difficult to predict what the punitive award will be because of the unprecedented nature of the case. City of Hope says Genentech violated their agreement by licensing the patented technology to other companies, such as Schering-Plough (SGP) and Monsanto (MON), and not giving City of Hope its share of the royalty payments.

"They were purposely cheating us out of our money," says Glenn Krinsky, general counsel for City of Hope. Counters Sean Johnston, Genentech's vice-president for intellectual property: "We believe the evidence we presented showed we had been forthcoming." He declined to comment on whether Genentech would appeal the decision or what the company's strategy would be in the punitive phase of the trial.

"Punitive" means "punish," and that could be bad news for Genentech. Legal experts say the jury can slap it with any sum they choose. City of Hope lawyers will ask the jury to consider Genentech's financial health. "The idea is to make it hurt," says Krinsky, who wouldn't elaborate further on the hospital's strategy except to say it would make a case for punitive damages in the "hundreds of millions of dollars."

DRUG WOES. Punitive damages of more than $200 million would be hard to swallow for Genentech, which earned $150 million on $2.2 billion in sales in 2001. Analysts expect its earnings to grow 18% this year, to $177.3 million, on revenues of $2.4 billion. Of the 22 analysts covering the stock, only six rate it a strong buy, despite the fact that shares have fallen nearly 40% since January, from $55 to around $34.

On top of that, troubles in Genentech's drug pipeline threaten to stall its growth. It's already facing hurdles this year with its much anticipated cancer drug, Avastin, now in late-stage trials. In April, rumors that the drug might cause dangerous bleeding and blood clots pummeled the stock, causing it to drop 15%, to $37. The shares never recovered, even though Genentech disputed the rumors at the American Society of Clinical Oncology conference in May.

Potential approval of two other new drugs, for asthma and psoriasis, has been delayed until 2003, as Genentech scrambles to provide additional study data to the Food & Drug Administration.

For now, analysts are more troubled by Genentech's pipeline delays than they are about potential punitive damages. "I won't say [punitive damages] aren't a concern," says Eric Schmidt, an analyst for SG Cowen Securities. "But I believe the company will have adequate cash flow to handle it." Ultimately, it's up to the jury to decide just how big a hit Genentech should take. But in a difficult year, this is one blow the former biotech luminary could have done without. Weintraub writes for BusinessWeek from the Los Angeles bureau

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