Biotechnology patent lawsuits are costly, time-consuming and management-distracting. But that hasn't stopped

Aclara Biosciences

(ACLA)

and

Caliper

(CALP)

from slugging it out in protracted court battles.

The California biotechs are working to develop new miniaturization technologies they say could revolutionize the way drugs are developed. But much of their time is spent in court fighting patent battles with unpredictable results. That has some investors shying away from their retreating stocks, just as the technology sector cries out for support.

Soap on a Rope

Aclara and Caliper are both leaders in so-called lab-on-a-chip technology, a new field that aims to shrink standard laboratory testing processes to make them easier, faster and cheaper to conduct. Analysts say if the new "microfluidics" technology is widely adopted, it could grab a significant chunk of a $1.8 billion market for lab instruments and chemicals that's growing 25% a year.

Fight to the Death?
Aclara, Caliper head to court as stocks slide

Both Caliper and Aclara went public in the last year, joining a wave of biotechnology companies that raised billions of dollars in the public markets on prospects for such novel new technologies. But at the same time, the companies were joined in a pitched battle of litigation, worrying investors and clouding financial projections.

"Both companies and their technologies are going to be very important," says Matthew Buten, managing director of the

Galleon Group

, a New York fund that invests in biotechnology. "But the litigation is messy and causes confusion."

The litigation has helped push down both companies' share prices, analysts say, compounded by falling share prices throughout the sector. Shares in Aclara, for instance, fell from a recent high of $66 in July to around $21 Wednesday, while Caliper's fell from a high of $202 earlier this year to around $48.

"These are huge warning signs for investors in newly public companies," says John McCamant, editor of

TheStreet Recommends

Medical Technology Stock Letter

, a California newsletter that follows both companies. "Rather than waiting to see what happens in court, they should be building their business models."

Bearing Crosses

Patent-infringement lawsuits are common in the fast-growing biotechnology industry and many companies have dozens, if not hundreds, of patents covering genes and molecules, their use, methods of manufacture and myriad other arcane subjects. Caliper, for instance, claims 61 issued patents in microfluidics technology, while Aclara says it has 130 patents issued or pending.

Since patents invariably overlap, many companies cross-license technologies to each other and devise a system of royalty payments based on future product sales. So far, however, Aclara and Caliper seem as far apart as Israel and the Palestinians.

"I think where we overlap most is in the courtroom," jokes Aclara CEO Joseph Limber when asked how the companies' technologies compare. "They are alleging we are infringing

on Caliper patents, but we are sure they are infringing on ours."

'Extremely Valuable'

Aclara's CEO acknowledges that the lawsuits have "unsettled investors and employees," and says he would consider settling with Caliper. But he gave few indications that a settlement is pending.

"We just want to stop Caliper from using what we think is our technology," Limber told investors at a recent conference.

Caliper CEO Daniel Kisner is more philosophical. "This is an area that will involve intellectual property disputes for a while. It's an extremely valuable area," he says.

The latest litigation started in March 1999, when Caliper sued Aclara and its own former patent attorneys over claims that they used Caliper trade secrets to benefit Aclara, since the firm represented both companies for a period.

A month later, Aclara sued Caliper for patent infringement. That action was followed by countersuits from both companies over various patents. Last month, Caliper settled the suit against lawyers

Flehr, Hohback, Test, Albritton & Herbert

. Admitting no liability, the firm paid $12 million to Caliper, a Caliper spokeswoman said.

Still, the litigation clouds prospects for a technology that shrinks chemical analysis to microscopic levels. Each company produces chips with tiny wells containing minute quantities of dozens of chemicals. The chemical fragments to be analyzed are pumped through tiny channels to the wells by electrical or pneumatic means to assess chemical reactions with the help of computers.

Both companies acknowledge that the lawsuits are a burden and distraction as they seek to roll out their products to the drug industry. But they also claim it's the cost of doing business.

"We know investors don't like litigation and we don't either," says Jane Green, a Caliper spokeswoman, who estimates the company will spend $7 million on the litigation this year alone. "But we believe it is worth some effort to clarify who owns what. The goal is not to put each other out of business."