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Igen stands to gain more from court victory


For the past month, the shares of tiny, money-losing Igen International Inc. have traded at a daily average near $40, making them more valuable than the shares of many far larger companies - including international pharmaceutical giant Novartis AG.

Even so, some analysts believe, buying a slice of the Gaithersburg-based maker of medical diagnostics should cost even more: $79, $80, even $100 a share.

Why? Because its recent court victory has put Igen in a position to get far more out of Roche Diagnostics than the $505 million in damages awarded by the jury. It might be able to get $1 billion more, analysts say.

The verdict has left Roche, the world's largest diagnostic-testing company, on the brink of losing one of its fastest-growing diagnostics businesses. Now it may be forced to buy Igen to keep it.

Otherwise, said analyst Dennis R. Roth of Chesapeake Securities Research Corp., Roche is "going to have to say [to Igen], 'Here's the keys to the kingdom.'"

Shares of Igen were trading near $23 in late September. They climbed on speculation of a big win for Igen as its Oct. 23 trial against Roche approached. The stock hit a high of $42.15 the day after the Jan. 10 verdict in U.S. District Court in Greenbelt. Some investors then sold, knowing the compensatory and punitive damages awarded fell far short of the more than $1 billion the company had sought.

But analysts such as John Putnam of Gruntal & Co. said sellers failed to recognize that the verdict also gave Igen the right to terminate its contract. And it gave Igen rights to all Roche machines that use Igen's technology. Those two parts of the verdict, he said, all but hand Igen the 7,000-plus Roche customers now using the machines in hospitals, clinical reference laboratories and blood banks.

The Roche equipment that uses Igen technology to test for everything from cancer markers to heart disease accounts for an estimated $250 million to $500 million of Roche Diagnostics' annual revenue. Only a percentage of that money now goes to Igen in the form of royalties. If Igen took over the customers, it would get all of it.

"Investors do not fully appreciate the huge windfall that Igen will eventually reap," Putnam wrote a week after the verdict. The true value of the damages, he estimated, is at least $1.5 billion. He said that puts the reasonable value of Igen's stock at $74 to $90 a share.

Roche inherited the breach-of-contract suit when it bought Boehringer Mannheim GmbH. Igen had sued that company in 1997 after giving Boehringer a license to use its technology.

Roche built a series of machines, most of them part of its Elecsys line, that rely on Igen's technology and signed up customers for them. But Igen claimed Roche violated its contract in myriad ways, including by underpaying royalties, hiding records needed to compute them and unfairly competing.

U.S. District Judge Peter J. Messitte summarily ruled that Roche had breached the contract in four ways. The jury's verdict added another five.

Roche, which didn't return phone calls for this article, has said it will appeal. Igen has said it will terminate its license with Roche immediately if it prevails on appeal, as analysts expect.

Stefan D. Loren, an analyst with Legg Mason Wood Walker, said he expected shares of Igen to trade in a range near their present value until the appeal is concluded. "If this license comes back to Igen, Roche is going to have to do everything it can to get it back - including buy Igen," Loren said. "If I were Roche, I would seriously consider paying $1 billion for this company."

Igen Chairman Samuel J. Wohlstadter did not comment directly on a potential sale of his company. But he said in a Thursday conference call with investors that Igen previously had hired Lehman Bros. and has "started to talk to other companies about what Wall Street can do to advance the interest of shareholders."

Not everyone agrees that Igen holds all the cards.

Analyst Birgit Kulhoff of Lombard, Odier & Cie said Roche still has patents on the machines. Despite the verdict, she said, Igen wouldn't be able to simply take over the instruments and get their blueprints. Yet even Kulhoff acknowledged that the machines are useless without Igen's technology, something she agreed the jury gave Igen the right to pull.

"If Igen really would insist on that, Roche wouldn't be able to use them either," Kulhoff said.

Roche has sought to minimize the verdict, saying it will continue to serve customers and develop new products for the machines. Igen wouldn't immediately have the wherewithal to take over such a business itself. It likely would have to form a new license agreement with a Roche competitor.

But analysts said the pressure on Roche is mounting. Roche competitors such as Abbott Laboratories, they said, are using the verdict to lure away Roche customers.

Roche is expected to ask that the verdict, or portions of it, be thrown out. Messitte, who presided over the 10-week trial, will enter a judgment and rule on any post-verdict motions, probably by sometime in April.

Now, analysts said, Roche must either settle with Igen by agreeing to pay higher royalties or buy the company or its technology.

Any outright takeover likely would have to be friendly, however: Igen's board of directors has adopted a "poison pill" plan to dissuade hostile ones.

Roth puts the value of a Roche purchase or settlement at $80 to $100 per Igen share. Analyst Robert A. Parente wrote that the value of Igen's technology license is a "wild card." He doesn't think Igen's technology is an easy fit with some potential partners, so he expects Igen to keep working with Roche on a settlement.

Greg Kiernan is the chief executive officer of Westchester County, N.Y.-based Sonostar Ventures LLC and has invested in Igen. He said shareholders likely will pressure Igen to come up with a lucrative settlement or sale.

"They have to solve this," he said of Roche. "They can't afford to lose all their customers to Igen."

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