As the result of a lengthy and expensive court case, Medtronic (Minneapolis) will pay $1.35 billion to acquire substantially all of the spine-related intellectual property of Karlin Technology and Gary Michelson, MD, as well as related contracts, rights and tangible materials. After a three-month trial that ended in October 2004, a jury in Memphis last month awarded nearly $510 million in punitive and compensatory damages to Michelson, a spinal surgeon and inventor, and Karlin Technology, a company he founded, in their lawsuit against the Medtronic Sofamor Danek (MSD; Memphis, Tennessee) unit of Medtronic. The settlement will finally resolve all outstanding litigation and disputes between the parties.
The jury ruled that MSD had breached purchase and license agreements between the parties, engaged in wrongful conduct, infringed six patents owned by Michelson and intentionally underpaid royalties. It found, specifically, that MSD had infringed Michelson's and Karlin Technology's patents covering the company's Interfix Threaded Fusion Device System, LT Cage implant, Affinity Cervical Threaded Cage System and Infuse bone graft and other products.
The total compensation falls short of the $1.7 billion in damages Michelson originally sought when he claimed that Medtronic breached a patents agreement he made with spinal implant maker Sofamor Danek a decade ago, before it was acquired by Medtronic in 1999. The acquisition will transfer ownership of more than 100 issued U.S. patents, roughly 110 pending U.S. applications and about 500 foreign counterparts to Medtronic.
The patents pertain to spinal technology and techniques that have both current application and the potential for future patentable commercial products. The agreement also will transfer to Medtronic ownership of all inventions related to the diagnosis and treatment of the spine conceived or acquired by either Michelson or Karlin Technology in the 15 years following the closing and ends all of Medtronic's ongoing royalty payments to Karlin Technology and Michelson under existing license agreements.
Based on initial estimates, Medtronic would acquire technology based intangible assets valued at about $800 million related to the purchase of the intellectual property and license agreements. A portion of the $800 million, currently estimated to be in the range of $75 million to $175 million, is expected to be classified as in-process research and development that will be expensed when the transaction closes, anticipated to be within Medtronic's first quarter of fiscal 2006, which ends July 30, after the parties receive requisite regulatory approvals. In addition, Medtronic will pay about $550 million as an expense in the fourth quarter of fiscal 2005, related to the settlement of claims by Karlin Technology and Michelson.
"The acquisition of these assets will also end our ongoing legal dispute with these parties and allow Medtronic to place its full focus on improving the lives of patients," said Michael DeMane, president of Medtronic Sofamor Danek. The company said the acquisition could, over the long term, boost earnings.
VB continues push into orthopedics
As an equity investor, do you look for the next big thing in medical devices and continually diversify your portfolio, no matter the technology, or do you keep to a narrow sector and focus, focus, focus? One company that has decided to take the single-sector route is Viscogliosi Bros. (VB; New York), a closely held venture capital/private equity and merchant banking firm with its investment eye targeting the development and financing of the musculoskeletal/orthopedic technologies, a sector it estimates currently worth roughly $26.4 billion annually.
The company last month drilled down even further into this particular device mine, unveiling the launch of Spine Motion (also New York), the fifth spine non-fusion company it has founded or invested in since its inception in 1999 by brothers Marc, John and Anthony Viscogliosi. Spine Motion, founded in 2004, is itself focused on providing indication specific posterior non-fusion solutions for orthopedic spine surgeons and neurosurgeons focused on treating spinal conditions and diseases. "The launch of Spine Motion at the Spine Arthroplasty Society (SAS; North Palm Beach, Florida) meeting in New York signifies a very important day for VB and Spine Motion," said Marc Viscogliosi, a principal partner at VB as well as chairman and CEO of Spine Motion. "Our arrival here today is the culmination of many months of collaborative efforts by VB, Fixano and Spine Motion," he told The BBI Newsletter.
Spine Motion's initial foray is focused on two non-fusion technologies. One is the coflex, a posterior, non-fusion, interspinous, dynamically functional implant, which has a clinical history of more than a decade of use and has been implanted in more than 10,000 patients suffering from low back pain and lumbar spinal stenosis.
The second technology that the company is involved with is the Orthobiom, a device developed to treat adolescent idiopathic scoliosis, a condition in children which causes severe curvature of the spine and which is usually surgically treated with a spinal fusion procedure. Orthobiom, another piece of technology that has been in development for more than a decade, is a non-fusion alternative designed to preserve the motion and growth of the child's spine. The coflex, Spine Motion's core technology, is based upon the Interspinous U invented by Jacques Saman, MD, in 1994, which was acquired by VB in its recent acquisition of Fixano (BourgenBresse, France).
Fixano, established in 1987, manufactures a range of devices and instrumentation for surgical repair of disease or traumatic injury to the bones and joints. This includes spine arthroplasty and spine fusion systems; internal and external fixation systems for the fingers, hand, wrist, elbow; shoulder systems; foot, small-bone and long-bone trauma products.
Viscogliosi said he envisions Spine Motion becoming a "full product portfolio" business "that is indication-specific for the use of various non-fusion technologies." In other words, he said, this is a platform technology company. "It's not just one product. It's the concept of really listening to the surgeons about what their clinical challenges are and developing a full range of products to address those challenges." Concurrent with the founding of the company, Spine Motion established international operations in Wurmlingen, Germany, and formed Spine Motion GmbH.
In addition to Spine Motion, VB has been involved in the founding and management of such companies as Spine Solutions, maker of the ProDisc artificial disc system acquired by Synthes-Stratec (Oberdorf, Switzerland) in 2003 for $350 million and prosthetic nucleus device developer Raymedica (Minneapolis). VB also was a leading investor in spinal implant maker Spine Next (Bordeaux, France), purchased by Abbott Laboratories (Abbott Park, Illinois) in October 2004 for $60 million and Orthonics (Atlanta), a company developing new biomaterials for spinal disc repair and regeneration.
While VB was initially started by the brothers in 1999, Viscogliosi said that the roots of the company go back quite a bit further. He said that his brother Anthony began specializing in the orthopedics industry in 1988, and he and John also began to focus on the sector in about 1992. He said during that period before the inception of VB, "we worked together at various Wall Street firms following the orthopedics industry as analysts and bankers."
From the onset, VB focused most of its attention on orthopedics because, according to Viscogliosi, the sector offered a compelling and diverse investment and business creation opportunity. "It's really going to be one of the classic long-term growth industries in healthcare," he said. He noted that the brothers' interest in the sector also is a personal one. As a child, Anthony was involved in a bicycle/auto accident in which he was seriously injured and suffered significant orthopedic trauma injuries requiring a life-long recovery process.
Since its inception, VB has led or participated in more than 40 transactions in the musculoskeletal/ orthopedics industry. It has sponsored five venture capital and single-purpose investment vehicles and, in January 2004, funded Orthopedic Investment Partners with $2 million, the first hedge fund dedicated exclusively to investing in publicly traded medical device companies, with a primary focus on musculoskeletal firms.
Vasomedical pares staff for CHF focus
Realignment, frequently a harbinger of the negative, can also be a good news story, according to Vasomedical (Westbury, New York), which last month said that recent staff reductions will help it preserve resources for movement into a broader, more profitable market in this case, congestive heart failure (CHF). Besides reducing staff the total number of those released not disclosed the company said it will make other budget tightening efforts in a realignment initiative with estimated savings of $3 million annually.
Vasomedical is the developer of enhanced external counterpulsation therapy (EECP) technology, a system that uses a number of large blood pressure-type cuffs that are placed around portions of the body, with air then pumped through them to assist in improving blood flow and the heart's pumping action. President and CEO Thomas Glover said that Vaso-medical has so far focused "on the angina marketplace, and that it has been very successful there." The company has sold 800 systems in the U.S., he said, and "now, we've got an opportunity to focus on CHF." He said the company wants to place more resources toward the CHF market.
After already having a clearance for treatment of angina since 1997, Vasomedical received FDA clearance of its EECP system for CHF in mid-2002, at the time putting the potential market at 10-fold that of the angina treatment opportunity. But other critical steps were necessary over the past three years before marketing to the CHF segment could be launched, Glover said. Those steps included upgrades of the EECP system and, perhaps more importantly, the rollout of results from its Prospective Evaluation of EECP in Congestive Heart Failure (PEECH) study unveiled at this year's meeting of the American College of Cardiology (Bethesda, Maryland).
Those results indicated that EECP therapy was significantly more effective in improving a patient's exercise duration than optimal pharmacologic therapy alone. Additionally, overall quality of life, as reported on the Minnesota Living with Heart Failure scale, also improved significantly among patients treated with EECP therapy.