By Randall Osborne


It's complex. It's high stakes. It's boring.

It's your typical biotech patent lawsuit.

Few spectacles in life are quite the same that is, few are so stupefyingly tangled and bogged in detail that glazed-eyed onlookers often forget the big money on the line.

Perry Mason it's not.

But the courtroom clash, under way in Boston between Amgen Inc. and Transkaryotic Therapies Inc. (TKT), is different.

The David vs. Goliath case pits TKT against heavyweight Amgen over rights to erythropoietin (EPO), a glycoprotein hormone that regulates the level of red blood cells in circulation by stimulating their production in the bone marrow, marketed by Amgen as Epogen.

Sales of Epogen last year totaled $1.76 billion, an increase of 27 percent from 1998 sales, which were $1.38 billion. For the fourth quarter, sales were up 25 percent to $488 million, from $391 million in the fourth quarter 1998.

EPO was introduced for patients with anemia who are on kidney dialysis. Amgen, which filed suit against TKT in 1997, claims the latter's gene-activated EPO (GA-EPO) infringes on Amgen's patents.

TKT may file for FDA approval this year of GA-EPO, which has completed Phase III trials in renal failure in dialysis patients and in pre-dialysis patients. It also is being tested in a Phase III trial in oncology.

Also named in the litigation was Hoechst Marion Roussel AG (now Aventis Pharma AG). Amgen wanted to stop both defendants from making, importing, using or selling EPO in the U.S., but the case was stayed until the two firms lost the protection of a clinical trial exemption, as provided in the Waxman-Hatch Act, in June 1999. Either party had the option of reopening the case, and TKT did so.

TKT says Amgen's patents don't apply because TKT technology uses a normal human cell with a normal EPO gene present, and then turns the gene on.

The method, unlike Amgen's, is natural, says TKT.

But, in April, a federal judge granted Amgen a motion for summary judgment of infringement for a single claim on a pharmaceutical composition patent for EPO. This ruling hardly ended the fight, but may have raised the bar for TKT, which is making a three-part claim: that Amgen's patent is not valid; that it does not enable TKT's method of making EPO; and that it was gained by inequitable conduct.

Whoever loses is sure to appeal. Meanwhile, though, analysts are following the trial like sports reporters at a major-league game. Investors are trying to figure out what to do next.

Proceedings hit a speed bump last week, when Amgen's lawyer in charge of patent prosecution had health problems, and was not immediately available as a witness to be called by TKT.

The slowing of testimony, which could extend beyond September, gave trial-watchers a chance to sit back, assess what's happened so far, and mull the likely outcomes.

Evidence was complicated, of course, revolving around such scientific matters as glycosylation patterns and isoelectric focusing profiles. But, for investors and would-be investors, the questions are simple. Just how steep is the risk for Amgen? For TKT? Whichever side wins, what does the battle mean for others in the industry that are doing similar work?

"A lot of people have tried to bring this to a level where it was impacting the entire biotechnology industry," said Thomas Dietz, managing director of research at Pacific Growth Equities Inc. in San Francisco. "It's not."

Dietz said that, although attorneys may follow the case for tips on how such cases are litigated, the rest of biotech is ignoring it except as a skirmish between one figurative big boy and a smaller one which is as it should be, he added.

Even Amgen and TKT, Dietz said, are more interested ultimately in an appeals court decision than in the result of the district face-off, which only will narrow the field of focus.

"If either party wins, it's important for the short term, stock price-wise, but in terms of the marketplace, [the case] will be finalized at the appellate level," he said.

Amgen vs. TKT likely will reach the appellate court next year, and a decision will be handed down "fairly rapidly, probably in a year," Dietz said.

His advice is simple: Buy and hold TKT, which Dietz believes will prevail in court.

"The stock is likely to be volatile through the remainder of the case, and you [must] have the appetite for that," he conceded.

This proved true Friday, when a decision by the judge in the case, eliminating two of five possible TKT defenses, sent the company's stock (NASDAQ:TKTX) down by 4 percent to close at $31.875.

But TKT is "starting from zero sales, and could build to a billion dollar-plus sales," Dietz said. "Your downside is limited, and your upside is huge. The stock has been undervalued for a loss [in court]. If they do win, it'll be hard to touch the stock, even at double the price."

TKT's possible gain is "a much greater impact than Amgen losing some percentage of the marketplace," Dietz said, adding that Amgen needs to start building its pipeline to keep its value.

The company has filed for regulatory approval of two products, novel erythropoiesis stimulating protein (NESP) and Kineret. NESP has shown it can manage hemoglobin levels in people with chronic renal failure at the same level as when patients take Epogen, but with less frequent dosing.

Kineret is a recombinant form of the cytokine interleukin-1ra, which selectively blocks the effects of IL-1, a cytokine released as part of the disease process in rheumatoid arthritis, which is a central mediator of bone and cartilage destruction and inflammation in rheumatoid arthritis.

By comparison with Amgen, TKT already is so undervalued by Wall Street that Amgen stockholders would be wise to own it as a hedge, Dietz said.

"We look at the stock from a valuation perspective," he said. "It has no value from the GA-EPO program, and we've had [longer-term] investors tell us they don't care what happens with GA-EPO. Wall Street has to look shorter-term, and we understand that."

But, Dietz said, even Wall Street has failed to take account of TKT's potential with Replagal (agalsidase alfa), its drug for Fabry disease. TKT is in a race for approval with Genzyme General, which submitted a biologics license application (BLA) for its Fabry drug, Fabrazyme (agalsidase beta), days after TKT submitted its BLA last month.

Eric Schmidt, vice president at SG Cowen Securities Corp. in New York, said few analysts are jumping the fence this late in the trial, and are sticking to their opinions, which seem to favor TKT although some favor Amgen, such as Meirav Chovav at Salomon Smith Barney, Franklin Berger at J.P. Morgan Securities Inc. and Elise Wang at PaineWebber Inc..

"At the end of the day, it's a coin toss," Schmidt said, although he still puts his money on TKT, agreeing with Dietz that a victory at the district level won't solve everything.

"But it will have an effect on stocks, and that's the basis for our 'buy' recommendation," Schmidt said. "TKT's not getting marketplace credit for [even] a 50 percent chance" of winning, he added, which means an opportunity for investors.

Chovav, managing director and senior biotech analyst at Salomon, said the trial is a numbers game.

"The bottom line is, Amgen has multiple patents and multiple claims," she said. "If Amgen loses the vast majority of its case, it still wins. If TKT wins 90 percent of its case, it still loses. Do I think Amgen is going to win everything? No. Does it have to? No."

She said Amgen's patents "have been tested in the patent court with very similar arguments to TKT's."

Chovav said she has been reading trial transcripts every day, and finds TKT's case "not particularly meaningful," as well as repetitive of court conflicts from the early and mid-1990s.

"TKT keeps talking about the Goldwasser experiments [performed to test EPO before Amgen won its patents] as the smoking gun, saying they would dismantle the patents," Chovav said. "It's more like a water pistol."

She does not accept the idea that TKT is worthwhile aside from the outcome of the EPO battle.

"I don't cover it, but I don't think it's a good buy," she said, adding that she is not convinced by the potential for Replagal.

"We don't know who's going to get [approval] first, TKT or Genzyme," she said. "And how much is that worth?" *

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