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If a court ruling made late on Friday holds up, the battle for market share in the U.S. between Edwards Lifesciences' (NYSE: EW ) Sapien family of transcatheter heart valves and Medtronic's (NYSE: MDT ) CoreValve may be over before it begins. In a rare move for the med-tech industry, a judge granted a motion for a preliminary injunction against sales of the CoreValve that would effectively put Medtronic on ice until at least 2016. Medtronic is going to fight this decision, but it definitely seems likely to reignite optimism for Edwards' position in this market.
A rare move
Over the last 10 or 15 years, injunctions have become relatively rare in the med-tech world. Instead of banning the sale of products found to infringe upon another company's patents, courts have instead favored monetary damages and mandatory royalties. Such was the case, for instance, between Medtronic and NuVasive regarding patents in the spine surgery space.
In an unexpected move, Friday night the U.S. District Court for the District of Delaware granted a preliminary injunction against Medtronic's CoreValve as a result of finding that the product violates Edwards' "Andersen ", or "'552," patent. Edwards has been taking Medtronic to court around the world for patent infringement, with most of the findings going Edwards' way. The expectation in this case was that Edwards would prevail and that Medtronic would not be barred from the market (and would instead have to make sizable payments to Edwards).
Medtronic immediately filed a motion to stay the injunction and will certainly appeal it. If the injunction stands, Medtronic will be allowed to continue using the CoreValve in U.S. clinical trials and will be allowed to sell it in specified cases where Edwards does not have a comparable product (like the 29mm size). Outside of those instances, though, Medtronic would be blocked from the U.S. market until the Andersen patent expires – most likely in 2016 if Edwards succeeds in getting a two-year extension to the patent.
Can Medtronic win on appeal?
Medtronic is looking at an uphill battle to get this injunction overturned on appeal. The best chance Medtronic may have is in the public interest test – not only are there are a wider range of CoreValve sizes available, including versions at the large end (29mm) and small end (18F), but Medtronic recently reported data at the ACC showing a statistically significant benefit to the CoreValve in high-risk patients versus surgery, with an all-cause mortality of of 14.2% versus 19.1. Edwards' Sapien valves have not shown a similar benefit.
The injunction already creates a mechanism for dealing with those differences in product offerings, so I am not sure that Medtronic can build a convincing case that the public interest is significantly harmed by this injunction. Moreover, even if the injunction is reversed, it seems probable that a large portion of Medtronic's profits from this product would be conveyed to Edwards.
More litigation could preserve Edwards' advantage
This is unlikely to be the end of Edwards' attempts to use litigation to enforce its patents and maintain deep economic moats around its transcatheter heart valve franchise. Medtronic has already been found to be willfully infringing the Cribier/'825 patent, and that patent runs through the end of 2017. It may prove to be the case, then, that the Cribier patent keeps Medtronic, as well as St. Jude Medical and Boston Scientific, out of the U.S. market until 2017.
Edwards is likely to launch its Sapien III valve family in 2016, and this new product line should be much more competitive with the CoreValve product, as well as the St. Jude/Boston Scientific offerings. The end result could be that Friday's decision gives Edwards the opportunity to hold 80% of the U.S. market through 2016/2017, at which point the number of surgeons trained and experienced with the Sapien valve will constitute a significant hurdle for would-be competitors. While there are still long-term questions regarding utilization rates in the U.S., as well as reimbursement and Edwards' ability to grow the market on its own, the improved near-term cash flow alone adds three or four dollars to the stock's DCF-based fair value.
The Bottom Line
This was a big win for Edwards, and the stock was up more than 12% today. For Medtronic, the prospective loss of revenue and profits from U.S. transcatheter heart valve sales is not huge in absolute terms, but the company has recently seen significant setbacks in its renal denervation and peripheral drug-coated balloon programs. Eventually these "minor-to-moderate" setbacks start to add up, and Medtronic may find it increasingly difficult to meet even modest growth expectations. With that, don't be surprised if Medtronic commits significant resources to appealing this decision and/or starts looking into M&A as a means of augmenting long-term growth.
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