Genentech Inc., the country's pioneering biotechnology firm, lost the first round in its bitter legal battle with the Food and Drug Administration over Human Growth Hormone (HGH), a genetically engineered drug used to treat children suffered from dwarfism.

Genentech launched its lawsuit last March, claiming that the FDA violated its property rights when it approved a competing form of HGH made by the Indianapolis-based pharmaceutical giant Eli Lilly and Co. But in a decision made public yesterday, a federal court in Washington dismissed the first of Genentech claims against the FDA and paved the way for a second decision, expected next year, that could have far-reaching consequences for federal regulation of the burgeoning biotechnology industry.

At the heart of the case was the Orphan Drug Act, a law passed four years ago by Congress that used tax credits and the promise of a market monopoly to encourage companies to develop drugs for rare diseases. Dwarfism, which afflicts no more than 10,000 children in the United States, is one such disease under the law.

Genentech developed Protropin, a genetically engineered form of HGH, two years ago, and was granted a seven-year market monopoly by the FDA.

But this spring the FDA approved Humatrope, another form of HGH made by Eli Lilly, pointing to scientific evidence that Lilly's product was superior to Protropin. Genentech denied that and asked for a temporary restraining order blocking approval of Humatrope on the grounds that it violated the promise of a monopoly under the Orphan Drug Act.

The court rejected the request for a restraining order last March, at which point Genentech embarked on an alternative legal strategy. Humatrope, they claimed, and by extension Protropin and all the other HGH products under consideration, did not meet the definition of orphan drugs at all because they were no different from the HGH that appears naturally in the human body, and which has been extracted from cadavers and used to treat dwarfism for years.

This was the argument dismissed by U.S. Federal Judge Stanley Harris, in a 26-page judgment handed down on Friday. With the judgment, Genentech is now back where it started, awaiting a decision on its original claim that the approval of Humatrope violated its rights under the Orphan Drug Act.

Over the past seven months, the case has divided the biotech community and sparked a round of hearings on the Orphan Drug Act to be chaired in the House this October by California Democrat Henry Waxman. In particular, the FDA has been criticized for its failure, in the four years since the act was passed, to issue any comprehensive interpretation of how, for the purposes of the Orphan Drug Act, it defines a "drug."

Since the case began, consumer groups and some sources within the industry have charged that a number of biotech firms have taken advantage of the FDA's silence on the Orphan Drug Act to twist the provisions of the law for financial gain. In fact, in its legal action against the FDA, Genentech was joined by two other biotech firms interested in entering the HGH field, all asking the agency to clarify the process by which it distinguishes one biotech product from another.

Harris repeated that criticism in his decision, explaining that "lacking either a legislative or administrative pronouncement," the court will be "forced to make case-by-case determinations based on the broad policies embodied in the act."

Analysts said the effect on Genentech was less clear, especially since the balance of the lawsuit was still pending.

"For practical purposes, I don't see this as affecting them at all," said Kathy Behrens, a biotech industry analyst with Robertson Colman in San Francisco. Even though Genentech claims that Lilly was unfairly given permission to enter the HGH market, its product, Protropin, is still vastly outselling Humatrope. This year, according to Behrens, Genentech will reach $90 million in sales of Protropin, compared to between $7 million and $10 million for Lilly's Humatrope.