Ending a 2-year-old dispute, Cambridge Antibody Technology plc and Abbott Laboratories reached an agreement concerning Humira royalties payable to CAT under a 1995 deal.

At issue was the royalty rate expected for sales of the rheumatoid arthritis drug approved in December 2002. In 2003, Cambridge, UK-based CAT received its first funds - well below the 5.1 percent rate it was anticipating, stirring a legal controversy.

"There were certain circumstances under which Abbott might have been able to offset royalties paid to third parties down to a minimum of 2 percent," said Peter Chambré, CAT's CEO. "In 2003, Abbott told us they were only going to pay us 2 percent."

But CAT's interpretation of "third parties" differed from Abbott's. The Abbott Park, Ill.-based company believed that it could reduce payments to CAT in order to pay other companies that have technology featured in Humira. CAT argued that the royalty-sharing provision referred only to third-party rights covering CAT's antibody libraries and phage display technology. A UK court sided with CAT last December, with the justice saying that Abbott's view "makes little or no commercial sense."

Abbott logged an appeal, dragging the litigation out, but this week the matter was settled. The deal includes a $255 million payment from Abbott to CAT, and CAT will use the money to buy out all future royalties owed to its licensors: the Medical Research Council, Scripps Institute and Stratagene Corp., of La Jolla, Calif. The third parties shared in the royalties because they hold the patent for CAT's technology, which was used to develop Humira. Stratagene said it expects to receive $14.6 million, after taxes, from that $255 million, and will recognize it in the fourth quarter.

CAT also will receive a reduced royalty of nearly 2.7 percent on sales of Humira made from Jan. 1, 2005, onward - slightly less than it would have received under the previous agreement. Its original 5.1 percent royalty was split with MRC, Scripps and Stratagene, leaving CAT with a royalty stream of about 3.1 percent. But for sales made after Jan. 1, 2005, due to the buyout of the patent holders, CAT will receive the 2.7 percent royalty.

The reduced royalty, however, will be offset somewhat by payments of about $9.4 million made every January by Abbott to CAT for the next five years. From each of those payments, CAT will pay its licensors $2 million, leaving it with about $7.4 million.

"We're very pleased to have a settlement with Abbott," Chambré said. "It allows us to put behind us the uncertainty of litigation, and provides certainty on our royalty rates going forward."

The relationship between CAT and Abbott began in early 2001 when Abbott acquired the pharmaceuticals business of BASF, which included the global operations of Knoll Pharmaceuticals Co. Inc., of Mount Olive, N.J. CAT had an agreement with Knoll, started in 1993 and updated in 1995, which gave it royalty rights to Humira sales. The agreement called for CAT to receive 6 percent royalties on the first £100 million (US$177.4 million) in sales, 5.5 percent on the next £50 million, and 5 percent royalties thereafter. When blended, the rate comes to about 5.1 percent.

Humira had sales of about $959 million worldwide for the first nine months of this year. Abbott is expecting sales of $1.3 billion for the full year. The product is marketed throughout the U.S. and Europe, and recently gained approval as a first-line treatment of moderate to severe early rheumatoid arthritis and psoriatic arthritis. The company also has submitted regulatory applications in the U.S. and Europe for Humira to treat ankylosing spondylitis.

While the settlement between CAT and Abbott takes care of all royalties from the beginning of 2005 onward, it does not account for the disputed 2 percent rate paid to CAT in 2003 and 2004. That issue was taken care of last year, Chambré said, when the UK court found in favor of CAT.

"After the high court trial, Abbott paid us the full royalties back to the date of the first sale," he said, "so we have received 5.1 percent through to the end of 2004. And under this agreement, we are retaining all of those royalties."

Another component of the settlement involves ABT-874, a second Abbott compound that CAT has isolated and optimized with its technology. Abbott is developing it in Phase II trials for multiple sclerosis, Crohn's disease and psoriasis. Under the settlement terms, CAT will receive a 4.75 percent royalty on future sales of ABT-874, but it will share that royalty with MRC, Scripps and Stratagene, leaving it with about 3 percent.

"There is no buyout of our licensors" for that compound, Chambré said.

CAT's stock (NASDAQ:CATG) rose 25 cents Wednesday to close at $12.54.