Genentech Gang Fights Back

Lucentis won't be on the market until the end of next year or later, and already Eyetech (EYET) and Pfizer(PFE) have a head start with their own wet AMD treatment called Macugen, which was approved in December. OSI and Eyetech are merging.

Various Outcomes

The most recent issue Genentech has had to confront entailed a patent detailing methods of producing monoclonal antibodies -- molecular-targeted drugs designed to fight specific diseases. Genentech licenses the patent to other companies.

The company's shares sank 3.3% on Sept. 27 as speculation arose that Genentech's Cabilly patent, which isn't set to expire until 2018, in fact might not be untouchable. The company said the U.S. Patent and Trademark Office had rejected the claims of the Cabilly patent, but called the decision "a routine and expected next step" in a re-examination another party had requested.

There are three possible outcomes of the dispute, according to analyst Joel Sendek of Lazard Capital Markets: The patent could be rejected, stopping Genentech's royalty payments at the end of 2006; the patent office may force Genentech to renegotiate license agreements; or the patent may ultimately stand, allowing Genentech to continue collecting Cabilly-related royalty payments through its scheduled expiration.

"We believe that Genentech has a strong case to prevail and achieve an extension to their patent, and therefore we view reducing our royalty estimates at this time would be premature," Sendek wrote in a research report last week. He maintained a buy rating and price target of $103.

Genentech said a final resolution of the case may take from several months to several years. As a result, Adam Walsh of Jeffries & Co. said the threat isn't immediate to the patent's validity. The Cabilly patent remains valid while the re-examination is pending.

However, Walsh says the Cabilly issue is worth watching. An estimated $300 million in annual royalty revenue would be lost without the patent, and according to the analyst's calculations, that could cut earnings by 18 cents a year.

"We would take advantage of the recent pullback to add to positions, as fundamentals remain strong and valuation looks increasingly attractive," Walsh wrote in a research report. He kept his buy rating on the stock and sees a 12- to 18-month price target of $98. Jefferies doesn't have an investment banking relationship with Genentech.

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