What Does Celgene's May 15 Markman Hearing Mean to You?

NEW YORK (TheStreet) -- Recently, TheStreet.com's editors published this contributor's article entitled Celgene To Rise Like a Phoenix: Opinion.

Afterward, TheStreet co-founder Jim Cramer emailed, questioning my level of concern about the potential fallout from next week's Markman hearing. Cramer's comments got me turning on some additional due diligence. Let's share it together.

But first remember the case involved regards patents on Celgene's franchise product -- Revlimid, a cancer drug. Shares of Celgene -- which closed Tuesday at $146.70 -- have fallen 13%, partly over patent concerns.

In deciding whether Celgene now represents a buying opportunity, investors need to understand the Markman hearing and its possible ramifications.

What Is a Markman Hearing?

A Markman hearing is a pretrial hearing in a U.S. District Court in which a judge examines evidence on the meanings of relevant key words used in a patent claim, after patent infringement is alleged.

Holding a Markman hearing in patent-infringement cases has been common practice since the U.S. Supreme Court ruled in a 1996 case Markman v. Westview Instrument Inc. that the language of a patent is a matter of law for a judge to decide, not a jury.

This court decision was grounded upon the view that juries are typically asked to rule on facts, but judges are to rule upon law.

Patent law is complex and nuanced, much of it built around words. A combination of the inherent ambiguity of the English language and high stakes makes a Markman hearing the first step in a chain of events when parties disagree on what constitutes a valid patent.

What Celgene Patents Were Challenged and by Whom?

Revlimid patents are in play, including exclusivity for composition of matter and associated polymorph patents. The drug is by far the largest product in the Celgene (CELG) stable. Revlimid sales make up two-thirds of Celgene's total revenue.

The drug has multiple patents around it that, among other things, protect composition of matter (the base compound formula) through 2019, and the polymorphism (various substance forms) through 2027. So it's a big deal.

Natco Pharma, an India-based subsidiary of Actavis PLC (ACT), wants to manufacture and sell a generic form of Revlimid.

Although Celgene has a strong pipeline of new compounds and products on tap, losing Revlimid exclusivity would hurt the company's growth.

My view is that Revlimid may still represent half Celgene's 2017 sales, and a third of 2019 sales. The drug is a huge contributor to net earnings.

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