Money in Spines and ADR

[Alastair]

Medtronic does spinal tap by Tara Croft
Mon Apr 25, 6:00 AM ET



At first glance, the $1.35 billion price Medtronic Inc. agreed to pay Friday, April 22, in order to secure its spinal franchise looked excessive. The deal to buy the intellectual property of Karlin Technology Inc. and its founder Gary K. Michelson, however, alleviates a huge headache for the Minneapolis company.

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"I saw the number and about fell out of my chair," said William Blair & Co. LLC analyst Benjamin Andrew. "And then you start to break it down."

To do that, one must trace the story back to 1994, when Michelson and Karlin Technology sold the rights to his spinal fusion surgery inventions and techniques to Memphis-based spinal company Sofamor Danek. Medtronic, in turn, purchased Sofamor Danek for $3.8 billion in 1999. The division became Medtronic Sofamor Danek and recently reported annual sales of $1.8 billion.

In 2001, however, Medtronic, led by spinal division president Michael DeMane, sued Michelson for $200 million for breach of contract, claiming that the 1994 agreement applied to all Michelson's inventions even after that year. Michelson countersued, saying Medtronic had underpaid on royalties and infringed on six of his post-1994 patents.

Three years later, in October 2004, a Memphis jury ordered Medtronic to pay Michelson $400 million in damages for patent infringement and $159 million in unpaid royalties. Medtronic vowed to keep fighting.

Not any more. "It just cleans up a lot of baggage and allows them to move forward unobstructed in furthering their spine franchise," said Susquehanna Financial Group LLLP analyst Mark Landy. "It appears that the last thing you would have thought was that the two sides would reach an agreement � you have to give them credit."

Under the terms of the deal, $550 million of the price would settle the claims of Michelson and Karlin Technology, an amount the company was ordered by the courts to pay anyway. The bulk of the remaining $800 million is for the purchase of more than 100 issued U.S. patents, more than 110 pending U.S. applications and approximately 500 related foreign counterparts. Medtronic also gets all spine-related inventions conceived or acquired by either Michelson or Karlin Technology in the 15 years following the close of the deal. A smaller portion of the $800 million, estimated to be in the range of $75 million to $175 million, is expected to be classified as in-process research and development. The deal is expected to close within the next two months.

The deal also relieves Medtronic of any future royalty payments to Michelson. Estimated at $40 million this year, the royalties would have only gone up as the business grew, Andrew said, adding that Medtronic frees itself of $25 million to $30 million a year in legal expenses.

"It has been quite a substantial financial burden for us for the last several years," said Medtronic CFO Gary Ellis in a conference call with analysts on Friday.

Additionally, Medtronic designers now need not worry about how to develop something to avoid one of Michelson's many designs.

Weighing the terms of the acquisition and its benefits against the financial and developmental distractions that would have lingered for years, analysts agree the deal is a financial wash. "It strengthens [Medtronic's] near-term and long-term pipeline in what for them is a very key business," said Stifel, Nicolaus & Co. analyst Gregory Simpson. "They get access to everything [spine-related] this guy invents for the next 15 years."

It could be a healthy payout for Medtronic, considering Michelson is seen as a prolific � albeit eccentric � inventor. "People say he's eccentric," Andrew said. "The guy is an amazing inventor � he deserves to be eccentric."

The acquisition is not expected to immediately add to earnings, but Medtronic said it does have the potential to boost earnings over a longer-term time frame. Medtronic stock was down just 25 cents Friday afternoon, trading at about

[Harrison]

Given what I researched about Medtronic (some of which I posted here, ) and heard from doctors about the Medtronic "lobby" blocking the insurance commissions' efforts to cover ADR -- I can't help thinking that the company is just too big and too powerful!

It's one thing to be profit-seeking, it's another to abuse the power at the expense of patients' well being. I don't want to believe that all this is true, but if it quacks like a duck -- it's ain't a donkey!

[Rein]

Originally posted by Harrison:
[qb]... and heard from doctors about the Medtronic "lobby" blocking the insurance commissions' efforts to cover ADR -- I can't help thinking that the company is just too big and too powerful!
[/qb]

Rich, have you seen this in print anywhere?

Does anyone know where we can track the insurance commission's proceedings online?

Do you think a hit man's fee would be about the same as a self-pay for a single level ADR? (Kidding! I too am having a XXX day...)

[Harrison]

...not seen it in print, just heard it from several different medical professionals...

[Kim]

This is really really troubling to think that a company could have that much influence over the insurance commision but knowing how our government is, I would not doubt it one bit. SHEESH. That really stinks
Kim

[Harrison]

I am guilty of passing on what I think to be true, built upon my own research. If we can get some facts on the Medtronic lobby, that will be interesting and helpful...

[Harrison]

The Medtronic PR machine is just getting revved up...check out the latest article here, also in the article library.

[Kim]

OK so who is this guy who is touting these terrible results? And why do I see everything contrary to that everywhere else? I mean we all know that no surgery is perfect, there are complications and no surgery is for everyone. I think it would have been prudent to have stated who this doc was and where he is coming from.
Kim

[Harrison]

Kim, I agree. That's why tracing information to the source is so key in journalism -- and that's what separates sensational tabloids from professional reporting.

That principle also explains why I've been so opinionated on the Medtronic-sponsored articles and studies -- clever in conception and perhaps moreso in deception.

Don't get me wrong, if there's "bad" stuff out there regarding any artificial discs - bring it on! But with credible writing, research and analysis please...

[Kim]

I totally agree. We need all the credible info that we can get our hands on but one thing we do not need is scare tactics. The whole article stunk of scaring the public about ADR. I really got stunned when the guy said something to the effect that he had never heard of the North American Spine Society. Did you notice that they never stated what this docs credentials were or anything? Hmmm