UPDATE 4-PDL drops after Genentech patent letter

Fri Aug 13, 2010 9:21pm EDT

* PDL says gets Genentech letter on European patents

* Letter says some products do not infringe PDL's patents

* PDL to enforce rights to Europe patents through 2014

* PDL shares fall as much as 20 pct, touch 7-yr low (Adds Genentech comment)

By Krishnakali Sengupta

BANGALORE, Aug 13 (Reuters) - PDL BioPharma Inc (PDLI.O), which licenses its technology to Genentech, said the biotech giant has claimed its drugs do not infringe PDL's European patents, throwing into doubt royalty revenue that accounts for about a third of PDL's sales.

Genentech, a unit of Roche Holding AG (ROG.VX), currently makes royalty payments to PDL for the use of antibody humanization technology in several of its products, including blockbuster cancer drug Avastin.

Shares of PDL fell 20 percent to hit a more than 7-year low of $4.97 in early trade, but recovered some of those losses to trade at $5.20 Friday afternoon on Nasdaq.

PDL Chief Financial Officer Christine Larson said the Genentech letter it received on Wednesday neither addressed the issue of royalty payments nor challenged the validity of its patents.

"The curious thing about this letter is that they are basically saying that (Genentech) thinks the technology described in the patents is not the technology that (they) are using," Larson told Reuters.

PDL contends that the two companies are bound by a 2003 deal, under which Genetech agreed that the PDL patents are valid and cannot be challenged without facing substantial damages.

It said the letter did not state what actions, if any, the Roche unit intended to take with respect to its assertions.

The letter also did not make the claim that Genentech products were not subject to PDL's U.S. patents, which would cover products made in the United States and sold there and outside the country.

Genentech said in a statement that it expects a response from PDL to its assertions, "but in general, our agreements and discussions are confidential" and it had no further comment.

UNEXPECTED CHALLENGE

"This was totally unexpected and it clearly creates an overhang on PDL's stock, and we believe it will continue for at least a quarter," JMP Securities analyst Charles Duncan said.

Incline Village, Nevada-based PDL said royalties on the Genentech products that are made and sold outside the United States accounted for about 30 percent of its revenue in the first half of 2010.

"We had an open dialogue with Roche in March, and none of this came up then. So I don't know what motivated them in the last 5 months (to take this step)," CFO Larson told Reuters.

PDL asserted that its European patents on the technology run through 2014 and it intends to vigorously enforce those rights. (Reporting by Krishnakali Sengupta in Bangalore, additional reporting by Deena Beasley in Los Angeles; Editing by Anthony Kurian and Gopakumar Warrier)

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