GS: ILMN (IL/N): Settled legal dispute with ABI.
Gained $15MM on property sale.
52-Week Range US$10-3
YTD Price Change -29.50%
Market Cap US$164.9mn
ILMN and Applera (ABI) and its Applied Biosystems Group settled all outstanding legal
disputes between the two companies. The companies exchanged royalty free licenses. In
addition, ILMN will refund to ABI $8.5MM of the $10MM in research funding received
in Nov. 1999. ABI will have no financial claims on ILMN's genotyping products. The
settlement lowers the risk of an adverse decision against ILMN and any related financial
obligation. ILMN also completed the sale of its San Diego facility for a net gain of
$15MM and signed a genotyping agreement with Galileo Genomics with a value of
$1.5MM. We maintain our In-line rating on ILMN based on its broad technologies, rapid
sales growth, and increasing dominance in the genotyping market. Risks to our view
include weaker sales, slower than expected sales, and dependence on financial markets.
Our coverage view remains Neutral.
1. BACKGROUND OF THE ABI LITIGATION
In November 1999, Illumina and Applera's (ABI) Applied Biosystems Group agreed to
jointly develop a SNP genotyping system based on Illumina's BeadArray Technology and
ABI's assay chemistry and scanner technology. In July 2002, ABI indicated that the planned launch
of the system in mid-2002 would be delayed a second time. The delay led Illumina to launch its
own SNP genotyping system in July 2002. Subsequently, ABI sued Illumina for patent
infringement and breach of the 1999 agreement. Illumina countersued for breach of contract and
other allegations. In December 2003, the San Diego Superior Court ruled that the contract dispute
be resolved by arbitration. ABI was seeking cash damages of more than $60MM. The dispute was
scheduled to start begin arbitration in December 2004.
2. DETAILS OF THE SETTLEMENT
a. The settlement dismisses the patent infringement suit brought by ABI as well as the remaining
claims in the breach of contract suit and other allegations filed by Illumina.
b. The Joint Development Agreement entered signed by the companies in November 1999 will be
terminated.
c. The companies will exchange royalty free cross-licenses to certain intellectual property rights.
Management indicated that ABI will not have access to Illumina's fiberoptic nor bead technologies
to develop competing products.
d. As part of the November 1999 agreement, ABI provided funding repayable to ABI out of the
profits of the products from the collaboration. Under the settlement, Illumina will repay ABI
$8.5MM using proceeds from a property sale (see below). Illumina will remove the $10MM
liability from its balance sheet. The remaining $1.5MM will be recorded as a one-time gain in
Illumina's Q3/04 income statement. The conclusion of the dispute may lower Illumina's legal
expenses starting in Q4/04.
3. COMPLETED SALE-LEASEBACK OF SAN DIEGO FACILITIES FOR $15MM IN NET
PROCEEDS
Illumina announced that it has completed the sale of its San Diego facilities consisting of several
buildings and an undeveloped tract of land. The company also entered into an initial 10 year lease
of these facilities. Sale proceeds were $42 million. After payoff of a mortgage on the property and
transaction expenses, Illumina will record net proceeds in excess of $15 million. $8.5MM will used
for repayment to ABI. The remaining $6.5MM will add to Illumina's cash reserve.
4. SALE OF BEADSTATION SYSTEMS TO GALILEO FOR GENE DISCOVERY
PROGRAMS
Illumina announced that it has signed an agreement with Galileo Genomics with a value exceeding
$1.5MM to be recognized in Q3/04 - Q1/05. Galileo has purchased two Illumina BeadStation 500
GX genotyping systems that can analyze 1.2MM genotypes per day combined. The list price is
$150,000/system. The remaining value of the agreement will primarily be from consumable and
reagent purchases by Galileo. Galileo will use Illumina's BeadStation system for fine mapping of
candidate regions in a minimum of five disease gene discovery programs. The information can be
used for GeneMaps in developing therapeutics, diagnostics and pharmacogenomic services. The
first study involves analysis of SNPs in Crohn's Disease. Illumina licensed royalty-bearing
diagnostic rights to Galileo's osteoarthritis gene discovery program, one of the five programs
covered under the agreement. The companies can expand the agreement to include 27 additional
disease discovery programs that Galileo is studying.
I, Maykin Ho, Ph.D., hereby certify that all of the views expressed in this report accurately reflect
my personal views about the subject company or companies and its |
