Waters Looking To Douse $48 Mil. Jury Award; Index Composite Flat In Q1

Waters Corp. has asked the presiding judge in a federal patent infringement trial to review a $47.5 mil. jury award against the firm. A decision is expected by the end of May.

The jury's decision affects triple-quadrupole technology used in Waters' Quattro Ultima mass spectroscopy system, which will no longer be sold in the U.S.

The company also will discontinue U.S. sales of its Q-TOF Ultima series, including the Maldi , API and Global , due to a front-end ion tunnel assembly "that could be construed" to fall under the verdict.

The jury in Wilmington, Delaware federal court determined that Waters subsidiaries Micromass U.K. Ltd. and Micromass Inc. violated patents related to mass spec systems held through a partnership between Applied Biosystems and MDS Sciex Instruments.

The ruling against the company precipitated a 28%, or $10.86, drop in Waters stock during the first quarter to close at $27.89, the issue's inaugural three months on "The Gray Sheet" Index of 30 NYSE/AMEX-traded medical device and diagnostic stocks.

Specifically, the Ultima line, which includes the MassTRANSIT , were found to infringe U.S. Patent No. 4,963,736, which covers triple quadrupole mass spectrometers. The complaint was originally filed in February 2000.

"Our scientific leadership in the area of triple quadrupole mass spectrometry is the result of significant investments in research and development made over the last decade," Applied Biosystems President Michael Hunkapiller commented.

As a result of the trial outcome and an aggressive appeal strategy going forward, Waters has revised its 2001 financial results and will take a $75 mil. pre-tax provision for estimated costs related to the matter.

The pre-tax provision will reduce earnings per share for the year from $1.23 to $0.83. The firm now forecasts sales growth of 2% and 7% for the first quarter and full-year, respectively, in light of the litigation.

While the verdict represents a significant roadblock in the Milford, Massachusetts-based firm's projected top line over the next two years, Waters remains optimistic that the setback is only temporary.

"We see it largely as being a temporary dynamic...this is clearly not something where we see it necessary to do major retorquing of the organization," CEO Douglas Berthiaume said during a March 25 conference call. He commented that "it is unlikely that [the situation] could get worse."

If the jury decision is upheld, Waters will take the case to a three-judge federal appeals court, which could extend the litigation another 12-18 months.

Waters is using a two-pronged strategy to mitigate the impact of the verdict: reengineering products covered under the decision, and aggressively marketing products not addressed by the jury.

The firm is now pushing the Quattro Micro ; a less expensive, lower-volume version of the Quattro Ultima. "We will strongly emphasize [the Micro] in our continuing efforts in the U.S.," Berthiaume said, adding that the Micro "is performing extremely well."

Waters was one of 14 "Gray Sheet" companies to lose ground during the first three months of 2002. A nearly even number of advancing and declining issues was reflected in a relatively flat performance by the Index composite, which was up a modest 1% during the quarter. Among the broader market averages, the S&P 500 remained flat, while the Dow was up 3.8%.

The jury decision only affects products sold in the U.S., and it is unclear whether Applied Biosystems will pursue similar claims and damages in other countries.

Waters will be ready to ship reengineered versions of its Q-TOF line in the back half of the year, while a new triple quadrupole embodiment for the Quattro Ultima will not be ready for the U.S. market until sometime in 2003.

The ruling follows a Jan. 4 announcement that the company would reorganize into three divisions: Waters, Micromass and TA Instruments in order to more effectively address the high-performance liquid chromatography (HPLC), mass spec, and thermal analysis segments in which they compete.

Although Applied Biosystems was able to gain a favorable court decision, the Applera unit was unable to curry much favor on Wall Street, as the stock retreated 43.1%, or $16.92, to end the quarter at $22.35.

For the second quarter of fiscal 2002, which ended Dec. 31, the gene sequencer manufacturer reported a 16% decline in net income to $49 mil. Sales were flat, at $411 mil. "We are transitioning to a new era where the emphasis is changing from generating genomic information in 'big biology' projects such as the mapping of the human genome, to applying that information to specific areas of biomedical research like drug discovery," Applera Chairman Tony White explained Jan. 23.

In preceding quarters, human genome-sequencing efforts were seen as the firm's primary growth driver. During the period, however, six of Applied Biosystems' largest customers for the ABI 3700 high-throughput gene sequencing system discovered a way to dilute their own reagents, drastically reducing revenues paid to the company. Analysts anticipate growth in the firm's other business segments to help the company rebound by the June quarter.

The paradigm switch to drug discovery also could be seen in Applera's other operating unit, Celera Genomics, with the announcement one day earlier that CEO Craig Venter was leaving and the firm would search for a seasoned pharmaceutical executive to take his place. Celera reported second quarter revenue of $35 mil. and booked a net loss of about $19 mil.

Sulzer Medica was able to put earlier legal woes behind it, as the firm's stock price rebounded on news of a preliminary $1 bil. settlement of a class action lawsuit related to a recall of hip and knee implants. Although the price was high, investors may have felt that the Swiss firm is now in a position to move forward. Sulzer stock more than doubled during the quarter, from $4.49 to $9.15.

A federal court in Cleveland, Ohio tentatively approved the proposed settlement on March 14. The opt-out period will run from April 12 through May 14, and a final fairness hearing is scheduled for May 6.

Signaling that the company is ready to move on, Sulzer reached an expanded distribution agreement with tissue products manufacturer Tutogen to develop new products in the biologics segment. The agreement will build on a March 2000 distribution agreement for Tutogen's Tutoplast processed bone implants by combining Sulzer's core orthopedics implant business with Tutogen's expertise in bone and tissue to develop hybrid products.

Investor confusion as to exactly when FDA will approve Guidant's Contak CD resynchronization therapy device for heart failure, coupled with the termination of an internal actinomycin-D drug-eluting stent development program helped send that company's stock price down 13%, or $6.48 during the quarter to $43.32.

On March 7, Guidant announced that it had terminated its actinomycin-D drug-eluting stent program due to "intolerable" data from a subset of 90 patients that were going to be the basis of an IDE submission in the U.S. The European study data suggested that the compound's ability to reduce restenosis was not as robust as had been previously seen in animal studies.

Guidant had originally predicted that the actinomycin-D-coated stent would be available in Europe in the third quarter along with its paclitaxel-eluting Achieve stent, the result of a licensing agreement with Cook.

In a move to offset the negative implications of the termination of the actinomycin-D program, Guidant reached a co-exclusive agreement with Novartis to use its investigational everolimus drug on its coronary stents. The firm will initiate human clinical trials with the compound, which is from the same family as Rapamycin (sirolimus) by year-end.

Although the Novartis agreement allows Guidant to hedge its bets with both internally and externally developed drug-eluting stents, the deal underscores Guidant's dependence on an outside partner to get such a product to market.

Nevertheless, the company has the unique position of being the only major player with a strong presence in both the drug-eluting stent and congestive heart failure device markets.

"Guidant faces a 'pain before pleasure' scenario as stents from J&J will likely depress Guidant's sales temporarily in 2003," according to Banc of America Securities device analyst Kurt Kruger. "Then in late 2003 or early 2004 the company will likely snap back when it serves up its own coated stent."