Biotech Stocks Rally as Amgen Prevails in Patent Case

Amgen (AMGN Quote - Cramer on AMGN - Stock Picks) shares flew off the shelves Monday, lighting a fire under the biotech sector, as investors bet that Amgen's legal victory late Friday against Transkaryotic Therapies (TKTX Quote - Cramer on TKTX - Stock Picks) will make patent challenges more difficult in the biotech industry.

Amgen shares surged $6.93, or 12%, to $66.93, while Transkaryotic dropped 40%, slumping $13.62 to $20.37. The latter said it planned to appeal its case against Amgen, the biggest biotech company.

In a long-awaited decision, U.S. District Court Judge William Young ruled Friday that Transkaryotic had infringed on three of Amgen's patents for the manufacturing the anemia drug Epogen, Amgen's biggest seller, with $1.7 billion in 1999 sales. Transkaryotic was developing a similar version of the protein-based drug with Aventis (AVE Quote - Cramer on AVE - Stock Picks), the Franco-German drugmaker.

Analysts and investors said the Amgen victory lifts a major weight off Amgen's shares. If Transkaryotic had prevailed, it would have challenged Amgen's virtual monopoly on the use of the genetically modified protein for cancer and kidney failure treatment. That Judge Young's decision would be overturned on appeal is considered unlikely.

"This lifts a psychological cloud hanging over the market," says Jay Silverman, analyst with Robertson Stephens, which has a buy rating on Amgen and does no advising for it. "The concentrated risk for Amgen was very high."

The ruling, which came in a 235-page decision that had been anticipated for months, was credited with boosting the 200-stock Nasdaq Biotech Index nearly 6% in morning trading. Genzyme in particular benefited, up $5.25 at $87.50, as Transkaryotic is also challenging Genzyme's (GENZ Quote - Cramer on GENZ - Stock Picks) patents for Fabrazyme, which treats Fabry's disease, a rare genetic disorder.

But some investors said it is simplistic to suggest that all biotech patents are strengthened by the ruling, since patents can be challenged in myriad ways and a vast number of technologies make up the biotechnology industry.

"This doesn't mean that all patents are defensible," says Laurence Blumberg, head of Blumberg Capital Management, a New York biotech fund that doesn't hold either stock. "You have to look at it on a product-by-product basis."

Nonetheless, Blumberg called the court decision "a watershed event for the industry," since it may cause potential litigants to think twice before mounting court challenges: "You have taken a little risk out of the sector, where investors have been nervous about the defensibility of patents."