By Lisa Seachrist

Washington Editor

WASHINGTON — A U.S. Court of Appeals upheld the ruling against CellPro Inc. in its long-standing patent dispute with Johns Hopkins University, Becton Dickinson and Co., and Baxter Healthcare Corp.

The appellate court affirmed the district court's July 1997 ruling that CellPro willfully infringed upon patents involving stem cell selection technology. The news sent CellPro's stock (NASDAQ:CPRO) plummeting 52.5 percent to close at $1.188, down $1.312.

As a result of the ruling, CellPro will pay a total of $7 million in damages to the three parties and must cease selling its Ceprate SC Stem Cell Concentration System in the U.S. once an alternative system licensed under the patents wins FDA approval. In the meantime, CellPro will be required to pay royalties on all products sold in the U.S.

The appeals court, however, vacated an order by the district court that would have prevented CellPro from selling the Ceprate System abroad.

"We are disappointed with the ruling," said Mark Handfelt, vice president and general counsel for Bothell, Wash.-based CellPro. "We are going to continue to grow our business outside the U.S. As for the ruling, we take exception to the willful infringement."

The Ceprate SC System selects and purifies cells and is used to replenish cancer patients' bone marrow, which is destroyed by chemotherapy and radiation. Prior to chemotherapy, a patient's bone marrow and/or some peripheral blood is extracted and frozen. The technology removes stem cells from bone marrow and peripheral blood by collecting cells which bear the CD34 cell marker on their surfaces. These cells are returned to the patient's body, where they reconstitute the immune system.

The product was approved in December 1996 for use with bone marrow transplantation and received advisory panel recommendation in March 1998 for an expanded label to include peripheral blood as the source of the stem cells.

To date, it is the only stem cell separation and concentration system to garner FDA approval. However, the agency may be ready to approve a second system by year's end. That system is under development by Nexell Therapeutics Inc., of Irvine, Calif., a jointly owned subsidiary of Vimrx Pharmaceuticals Inc., of Wilmington, Del., and Baxter Healthcare Corp., the principal U.S. operating subsidiary of Baxter International Inc., of Deerfield, Ill.

Nexell owns the license for the disputed technology.

In early July, the FDA submitted a number of questions to Nexell concerning the Isolex 300 and Isolex 300i cell selection systems. At a meeting later that month, the agency informed Nexell that they would review the two devices simultaneously and Nexell committed to answering the questions by the end of August.

"We are prepared to respond to all of the agency's questions in a matter of days now," said William McIntosh, president and CEO of Nexell. "With luck, we expect to receive an approval by the end of this year. Then again, it's not over until it's over."

Although the injunction against CellPro has been stayed while a properly licensed product wends its way through the FDA approval process, Handfelt said that under the current royalty terms, the company will be hard-pressed to continue providing Ceprate services for very long.

"It's a priority for CellPro to ensure that patients have access to the technology," Handfelt said. "But the likelihood of providing it in the long term really is not that high. Right now, we would be handing over more than 25 percent of our revenues as royalty, which I would suggest is way off market."

CellPro will be looking into establishing a licensing agreement with other parties to find a way to continue to provide the Ceprate system, without infringing upon the disputed patents. In addition, the company will ask the court to recalculate and reduce the damages, because the calculations included revenues from non-U.S. business, which the court determined didn't infringe upon the relevant patents.

Nexell, for its part, won't receive any direct benefit from the court's ruling. However, McIntosh noted that the company will gain the indirect benefit of a competition-free market.

"We fully expected to compete with CellPro when we acquired the license for the technology," McIntosh said. "Our device represents an improvement upon the current technology. We firmly believe we are bringing a better mousetrap to the world."

Vimrx's stock closed at $1.125, up $0.156. *