The four year spine patent dispute between Dr. Gary Michelson and Medtronic, Inc. came to a mind-boggling conclusion on Friday when Medtronic announced that it would settle for a cool $1.35 billion - the largest one-time intellectual property award in U.S. history. Michelson, a Los Angeles spine surgeon, and his licensing firm, Karlin Technology Inc., will share the total amount. Michelson noted that he also is planning to contribute $200 million of the money to a medical research foundation he is starting.
Under the settlement, which Medtronic portrayed as a strategic acquisition, the Company will acquire more than 100 patents, 110 pending U.S. patent applications and approximately 500 foreign counterparts and related contracts and rights for $800 million. Medtronic said the deal also gives it ownership of any new Michelson spinal inventions in the next 15 years. The prolific inventor said he will spend at least the next six months helping Medtronic understand the inventions it was acquiring in the settlement. Medtronic will also pay an additional $550 million to settle all legal claims. Importantly, the settlement relieves Medtronic of having to pay further royalties to Dr. Michelson which were amounting to as much as $40 million annually.
Billion dollar smile: "I'm obviously very pleased"
Dr. Gary Michelson (Bloomberg)
Dr. Michelson is well known in the industry for prodigiously inventing and patenting numerous spine implants, surgical tools and techniques. During the 1990's Michelson licensed his inventions to Sofamor Danek, which Medtronic acquired in 1999 for $3.3 billion. In 2001, Medtronic sued Michelson for over $200 million, charging that he was marketing some of his inventions to competitors. Michelson turned out to be anything but a pushover and countersued, charging that Medtronic had failed to develop the inventions he had licensed to the Company, was infringing on his inventions and was therefore depriving him of tens of millions of dollars in royalties.
Last fall, a federal jury ruled in favor of Michelson and ordered Medtronic to pay over $500 million in compensatory and punitive damages. The jury also said Medtronic owed royalties on sales of products that used Michelson's inventions, an amount that could have totaled $1 billion over two decades. The utterly tenacious Dr. Michelson didn't give up there and sought to appeal the court's decision seeking up to $1.7 billion from Medtronic. Neither side would say what led to Friday's $1.35 billion agreement, but it does resolve all outstanding litigation between the parties, removes the stigma of a court case that wasn't going well for Medtronic and ultimately gets everyone out of the "valley of the lawyers" as we like to call it.
Those new to the orthopedic industry may find this type of settlement to be excessively large, but if we look at the spinal implant industry more closely, things start to make sense. First, the worldwide spinal implant industry, according to our estimates, was approximately $3.1 billion in 2004 and is growing at a healthy 16% per annum clip. Second, Medtronic dominates this extraordinarily fast growing and profitable market with well over 1/3 of the segment's revenues. Third, this valuable patent portfolio is so fundamental to spine that it substantially improves Medtronic's intellectual property position in the spinal implant chess game. In fact, the settlement gives Medtronic so much potential leverage over this multi-billion dollar industry that the deal is subject to antitrust clearance from the federal government.
Our own search at the U.S. patent office confirmed the widely known notion that many of Dr. Michelson's patents involve cages and plates that are core areas of Medtronic's business. Others involve general methods, techniques and/or tools that can help surgeons achieve optimal outcomes. Quite a bit of the technology is for plain vanilla spinal fusion while other inventions may possibly help Medtronic in the disc replacement field.
While the investment community is divided on this outcome, we believe that this settlement is large, but not excessive over the long run given the size, rapid growth and critical importance of intellectual property ownership in the spine industry. Incidentally, Medtronic expects to end its April 30 fiscal year with about $4.5 billion in cash and the Company expects to distribute the settlement across one-time charges, R&D, legal expenses and others so we find it hard to believe that this cash rich behemoth will be materially impaired.
