A Diagnostics & Imaging Week

A nearly three-year-long patent dispute between two medical diagnostics companies reached an unexpected ending recently with one company agreeing to buy the other's rapid diagnostics business.

Inverness Medical Innovations (Waltham, Massachusetts) has agreed to acquire the rapid diagnostics business from ACON Laboratories (San Diego) for $175 million. The deal ends a patent infringement case brought by Inverness in 2004 over some of ACON's core rapid test technology.

ACON's lateral-flow immunoassay business, which is what Inverness is acquiring, had 2005 revenue of $50 million and operating income of $17 million. As part of the announced settlement, Inverness also will acquire ACON's newly-constructed manufacturing facility in Hangzhou, China.

The acquisition is expected to close in the first or second quarter, with the Hangzhou manufacturing facility to be acquired through a separate closing expected to occur by the end of 2Q06.

The aggregate purchase price for the acquired business, including the manufacturing facility, will be $175 million, subject to adjustment for working capital and net indebtedness with Inverness assuming, on a consolidated basis, up to $4 million in indebtedness related to the Hangzhou facility.

Inverness will pay ACON about $75 million at the closing of the acquisition and $20 million upon closing on the Hangzhou facility. The remainder of the aggregate purchase price will be paid on completion of certain milestones related to achievement of functional manufacturing targets related to the products sold in each of the territories.

The purchase price will be paid by issuing an aggregate of up to $50 million of Inverness common stock to ACON, with the remainder being paid in cash.

The deal involves ACON's business in the U.S., Canada, Western Europe, Israel, Australia, Japan and New Zealand. The two companies said they also expect to enter into an agreement at the time of the closing under which Inverness would agree to acquire ACON's rapid diagnostic business in the rest of the world in about three years, subject to satisfaction of certain future financial performance and operational conditions.

Inverness CEO Ron Zwanziger said that by acquiring the majority of the rapid diagnostic test business of ACON, "who has proven to be an efficient manufacturer of both consumer and professional diagnostic products, we are adding significant revenues at attractive margins as well as manufacturing capabilities that will benefit us companywide."

Zwanziger said, "We are pleased to fully settle our in-fringement claims against ACON," adding that the strength of the company's patents "will be validated in several key jurisdictions through the issuance of permanent injunctions, including findings of infringement."

He said that in order to leverage the ACON business's "unique and successful operating philosophy," Inverness intends to continue that business as a stand-alone sales unit operating through its existing distribution channels.

David Doyle, a partner in the New York law firm of Morrison & Foerster, which represented ACON in the underlying patent litigation, said, "This is a tremendous outcome for both companies, one that we have been hoping for ever since the patent litigation commenced several years ago. We are pleased that the company has forged a partnership with Inverness to advance its innovative diagnostic capabilities internationally."

In other legalities:

• The U.S. District Court in Denver has dismissed a longstanding patent infringement lawsuit filed by Medtronic (Minneapolis) against BrainLAB (Westchester, Illinois). The suit originally was filed in 1998.

The court ruled that, as a matter of law, BrainLAB's image-guided surgery/radiotherapy products do not infringe any of the patents involved in the suit, determining that the evidence does not support a finding of infringement.

In September, a Denver jury had reached a verdict finding that BrainLAB infringed four patents held or licensed by Medtronic, and determined that a reasonable royalty on BrainLAB product sales in the U.S. amounted to $51 million.

The court's ruling set aside that jury verdict and precludes the injunction Medtronic had been seeking.

"We are pleased to see that the court has confirmed the uniqueness of our image-guided technology and that our technology does not infringe Medtronic's patents," said Stefan Vilsmeier, BrainLAB founder and CEO. "We look forward to continued success in our surgical navigation business and to supplying our partners with our advanced technology."

• The Birmingham News last week reported that a federal judge has denied the latest attempt by Richard Scrushy, former CEO of HealthSouth (Birmingham, Alabama) to have the Securities and Exchange Commission (SEC) lawsuit against him dismissed, paving the way for a trial in 2007.

It reported that in a one-page order, without elaboration, U.S. District Court Judge Inge Johnson denied Scrushy's motion for dismissal and said that the SEC lawsuit can proceed – almost three years after its filing. The charges include two counts of fraud and four counts of fraud-related claims.

The SEC is attempting to recover hundreds of millions of dollars it describes as ill-gotten gains as the result of the accounting fraud at HealthSouth while Scrushy headed the rehabilitation chain.

Johnson previously set a schedule for depositions and expert witness preparation to last through this year, with a trial slated to begin April 2, 2007.

The SEC amended its lawsuit against Scrushy three times after the case was put on hold pending the outcome of a criminal fraud trial against him. Scrushy was acquitted of all charges in that case last June.

In the SEC lawsuit, Scrushy's lawyers had argued the SEC failed to justify its charges with enough evidence that would cause a reasonable person to have a strong inference that the HealthSouth founder was involved in the accounting fraud. That fraud produced a false inflation of the organizations revenues by about $2.6 billion over the period 1996 to 2002.

HealthSouth is one of the nation's largest providers of outpatient surgery, diagnostic imaging and rehabilitative healthcare services, operating facilities nationwide.