Genex Corp., the financially troubled Rockville biotechnology company, said yesterday that it has sued G. D. Searle & Co. for more than $40 million, alleging fraud, concealment and violations of federal securities, antitrust and anti-racketeering laws.
Searle had no comment on the suit yesterday, and a spokeswoman at the company's Skokie, Ill., headquarters said Searle had not seen a copy of the court filing.
The suit, filed in U.S. District Court for the District of Maryland, stems from Searle's decision not to renew a contract that provided Genex with its biggest source of revenue. The suit argues that Genex should be paid $40 million in actual damages, asks for punitive damages at least equal to the actual damages and seeks treble damages because of violations of antitrust and other federal laws.
Since 1983, Genex has provided Searle with the amino acid L-phenylalanine, a key ingredient in the popular sweetener aspartame, which Searle markets under the trade names NutraSweet and Equal. Searle, the pharmaceutical and medical products giant, said in June that it would not renew Genex's supply contract, which expires Oct. 31 and accounted for 88 percent of the biotech company's revenue in the first half of this year.
According to Genex's lawsuit, the cutoff "has had, and will have, a devastating impact on Genex," coming after Genex invested about $17.5 million in a manufacturing plant to produce the amino acid. Last month, Genex said it would lay off almost all of its 75 employes at the plant, representing about 25 percent of the company's total work force. The plant, in Paducah, Ky., became fully operational only at the end of last year, and will be closed by Oct. 31.
The lawsuit alleges that Searle made "material and false representations" leading Genex to believe that Searle wanted a long-term supply relationship, and thereby induced Genex into increasing its production capabilities.
"Genex was misled into believing that Searle was interested in a long-term relationship with it when Searle's true interest, which it concealed from Genex, was in obtaining only an interim supply from Genex while it secretly proceeded with internal plans to produce L-phenylalanine at its major new aspartame facility in Augusta, Ga.," according to Genex's court filing.
Searle has never given a reason for terminating Genex's contract, but Searle has increased both its capacity to produce amino acid and its L-phenylalanine purchases from its Japanese partner, Ajinomoto Co.
Searle is the only manufacturer and seller of aspartame for use as a sweetener in this country. The company also dominates overseas markets for the product. Demand for aspartame exploded in 1983 after the Food and Drug Administration approved it for use in carbonated beverages. Major soft drink companies immediately began using aspartame instead of saccharin to sweeten their low-calorie beverages, and Searle faced a severe shortage of L-phenylalanine in 1983 and 1984, Genex said. Searle's sales of aspartame increased to $535 million last year, from $336 million in 1983 and $74 million in 1982.
Genex alleges Searle "set about to induce other companies" to provide large volume supplies of the amino acid until Searle could increase its own production capacity. Purification Engineering Inc., of Baltimore, also lost its only customer for its only product when Searle stopped buying its L-phenylalanine in January.
Genex claims that Searle's "pattern of intentional misrepresentation" violated securities law because Genex was led to believe that the two companies had long-term business commitments, and that belief convinced Genex to sell to Searle warrants to purchase almost 10 percent of Genex's stock.
Genex alleges that Searle violated antitrust laws by "abusing its monopoly power" over aspartame sales when it conditioned L-phenylalanine purchases on Genex's disclosing to Searle otherwise secret manufacturing technology.
Although Genex has been gravely hurt by the loss of the Searle contract, financial analysts say the company is not in danger of bankruptcy. Its resources include about $4.5 million in cash, valuable real estate in Gaithersburg and Rockville and a widely respected protein engineering program.
The company said Monday that it has three new research contracts, which together are worth about $5 million. Genex spokeswoman Shellie Roth said the company is renewing its efforts to generate revenue through contract research and is still seeking to lease or sell the Paducah plant.