Genentech Faces $500 Million Charge After Large Punitive-Damage Award 

DAVID P. HAMILTON / Wall Street Journal 24jun02

Genentech Inc. said it will take a $500 million charge against earnings after a Los Angeles jury socked the biotechnology pioneer with $200 million (more below) in punitive damages stemming from a contract dispute with a southern California medical center.

Two weeks ago, the same jury awarded City of Hope National Medical Center, of Duarte, Calif., $300 million in compensatory damages in the case after deciding that Genentech acted with fraud and malice in withholding disputed patent-license revenue. Genentech, South San Francisco, Calif., said it will appeal the verdict, but meanwhile will take the half-billion dollar charge against second-quarter earnings.

"We plan to appeal and have great confidence in our position," Genentech Chief Executive Arthur Levinson said in a statement. Genentech's general counsel, Stephen Juelsgaard, said it is "highly unlikely" that the company would settle the case.

The punitive-damage award is less than the $300 million to $580 million that City of Hope attorneys had sought. Genentech isn't expected to face financial difficulty paying the award should its appeal fail, although Chief Financial Officer Louis Lavigne admitted that "this is a significant sum of money." The company held cash and short-term investments valued at $1 billion as of March 31.

City of Hope general counsel Glenn Krinsky said the center remains "supremely confident" of winning any appeal, adding that Genentech's attempts to overturn the verdict are "doomed to failure."

The dispute stems from a 1976 agreement in which Genentech funded City of Hope research, then licensed a resulting patent for inserting human genes into bacteria. Such bacteria can then be used to produce medicines such as human insulin or growth hormone.

The biotechnology concern paid City of Hope royalties of nearly $300 million after it licensed the technology to two pharmaceutical companies. But the medical center filed suit in 1999, charging that Genentech had improperly failed to pay royalties after licensing the technology to nearly two dozen other companies.

Genentech argued that it owed no royalties to City of Hope in the latter cases because the center's researchers hadn't discovered the genes in question. A first trial in Los Angeles County Superior Court ended in a hung jury that split 7-5 in the company's favor.

Genentech, the world's second-largest biotechnology company, has faced other charges of unethical conduct from its early days. In 1999, it agreed to pay $200 million to the University of California, San Francisco, to settle longstanding charges that it copied the university's technology for making human growth hormone.

Genentech shares rose $1.89, or 5.7%, to $34.84 in 4 p.m. composite trading Monday on the New York Stock Exchange, reflecting relief that the punitive award wasn't larger. News of the jury decision broke about 20 minutes before the close of normal trading.

City of Hope National Medical Center Awarded $200 Million in 
Punitive Damages in Lawsuit Against Genentech, Inc. 

Press Release 24jun02

DUARTE, CA.--(BUSINESS WIRE)-- Judgment Follows an Earlier Award of $300.1 Million in Compensatory Damages

City of Hope National Medical Center has been awarded $200 million in punitive damages by a Los Angeles County Superior Court jury in its lawsuit against Genentech, Inc. (NYSE:DNA). The jury had already determined that Genentech breached its fiduciary duty to City of Hope and acted with "malice" or "fraud" when concealing numerous licenses to groundbreaking technology based on research conducted by City of Hope scientists Arthur Riggs, Ph.D. and Keiichi Itakura, Ph.D.

Drs. Riggs and Itakura conducted their research under a 1976 agreement between City of Hope and Genentech. This research, which resulted in over 100 patents held by Genentech worldwide, led to the creation, among other things, of synthetic insulin, or Humulin(R), the world's first biotechnology drug. This discovery at City of Hope ushered in the biotech age.

The punitive award follows an award of $300.1 million in compensatory damages announced on June 10, 2002 after the jury determined that Genentech did not honor its obligations under a 1976 contract covering the Riggs-Itakura patent. Genentech is expected to appeal both judgments, which could delay payment to City of Hope for an extended period.

"We are pleased with the jury's decision to award punitive damages to City of Hope. Both compensatory and punitive awards will support our biomedical research aimed at curing life-threatening diseases," said Gil N. Schwartzberg, president and chief executive officer of City of Hope.

These awards will not affect the license that City of Hope has granted to Genentech for use of its monoclonal antibody technology. This technology is used in the manufacture of the medications Herceptin(R) and Rituxan(R) -- two of the most promising cancer drugs available today.

City of Hope National Medical Center is one of the world's leading research and treatment centers for cancer and other life-threatening diseases including diabetes and HIV/AIDS. A pioneer in the fields of bone marrow transplantation and genetics, City of Hope is a National Cancer Institute-designated Comprehensive Cancer Center. For more information, visit our web site at www.cityofhope.org. City of Hope ... where the power of knowledge saves lives.

CONTACT: City of Hope National Medical Center
Kevin Koga, 800/888-5323 (main)
818/516-4439 (cell)
626/728-6105 (pager)
KEYWORD: CALIFORNIA
INDUSTRY KEYWORD: BIOTECHNOLOGY MEDICAL
SOURCE: City of Hope National Medical Center

Genentech $200 Million Punitive Damages Hit by Jury

SIMON AVERY / AP 24jun02

LOS ANGELES -- A jury ordered Genentech to pay $200 million in punitive damages Monday to a research center that accused the biotech giant of failing to pay drug royalties.

The same jury awarded City of Hope National Medical Center $300.1 million in compensatory damages earlier this month. Genentech said it will ask for a new trial or appeal the verdict.

The dispute centers on a 1976 agreement between the company and the medical center.

City of Hope had sued Genentech in 1999, claiming the South San Francisco-based company for 15 years concealed $16.7 billion in sales of protein products, such as hepatitis vaccines.

City of Hope, which made some of the drugs, contended it was owed $457 million from the sales.

Sean Johnston, Genentech's vice president of intellectual property, said the agreement had stood for 20 years without dispute.

"We continue to be very disappointed in the outcome of this trial," he said.

Genentech said it will record a one-time charge of $500 million in the second quarter to cover the jury awards.

City of Hope had asked the jury to award between $300 million and $580 million in punitive damages. In awarding a lower amount, some jurors said they felt City of Hope had kept sloppy records and was therefore partly responsible for not receiving payments. Jury foreman Herman Askew said it was a difficult decision because the contract between the two parties was ambiguous.

"There really is no bad guy. It's just a business deal that wasn't clear," Askew said. "If the contract is still fuzzy to (the lawyers), how can it be clear to us?"

City of Hope said it was satisfied with the award. Attorney Glenn Krinsky said the medical center plans to use most of the award for research and to provide care to patients with cancer and other life-threatening diseases.