Clearing the legal docket

Clearing the legal docket

These past few weeks have seen a flurry of legal activity in the wacky world of diabetes devices. As we have noted on numerous occasions when it comes to protecting intellectual property this is a full contact sport not for the weak of heart. Looking at past legal fights patent litigation can go well beyond protecting intellectual property rights but can and is used an as tactical weapon against an up and coming competitor.  Just ask anyone who was using a Cozmo insulin pump which was effectively put out of business because of a nasty patent battle.

According to well written piece posted back on the 13th on the MassDevice web site; “Johnson & Johnson (NYSE:JNJ) and Medtronic (NYSE:MDT) agreed to a confidential settlement of a lawsuit brought by Medtronic MiniMed accusing J&J’s Animas diabetes business of infringing patents, according to a regulatory filing.

MiniMed sued Animas in May 2012, alleging that the Animas OneTouch Ping glucose management system and the IR 1250, IR 2020 and IR 2000 insulin pumps infringe 9 MiniMed patents. Although MiniMed later withdrew 2 of the patents from the suit, is pressed ahead with the case on the remaining 7 patents, seeking injunctive relief and damages, according to the filing.

Last month the companies agreed to put the case to bed for unspecified terms; Judge Ronald Lew of the U.S. District Court for Central California dismissed the suit with prejudice July 31, according to court documents.”

This settlement follows additional settlements between Dexcom (NASDAQ:DXCM) and Abbott (NYSE:ABT), Insulet (NASDAQ:PODD) settlement with Becton, Dickenson (NYSE:BDX) and Medtronic settlement with the federal and state regulators. Johnson and Johnson (NYSE:JNJ), the current owners of Animas, continues to fight a lawsuit over generic test strips. A fight which they appear to be losing based on the opinions of several experts.

Yet even with all this legal maneuvering Diabetic Investor senses that change is coming. While we don’t anticipate that patent disputes will go away entirely, we do believe that patent litigation won’t be used as the blunt instrument it once was.  The reason isn’t because patent litigation isn’t effective, the reason is money. The fact is patent litigation is extraordinarily expensive and in today’s world this expense is being examined more closely. Put another way before a company goes out and spends millions protecting their intellectual property they better be damn sure this cost will pay off.

Right now Medtronic, Animas, Insulet and Tandem (NASDAQ:TNDM) are involved in nasty fight for market share in the insulin pump arena. Dexcom is fighting Medtronic for supremacy in the continuous glucose monitoring market, while JNJ, ABT and Roche are struggling to survive in the conventional blood glucose monitoring market. Back when times were good and device companies were fat and happy, patent litigation as costly as it is was, was part of the marketing budget.  A tool used to impact market share. Today with margins shrinking, each share point over-emphasized and budgets cut to the bone patent litigation is no longer a cost effective tool.

There is also a second part to this story as the cost of doing business continues to increase while margins are decreasing. Using the insulin pump market as an example there are hundreds of companies who believe they can build a better mouse trap. They can do it better, faster and cheaper than the current group of companies. Yet the one thing these newbies don’t have is market share and without scale it’s nearly impossible to make a profit.  Back in the day companies like Medtronic would use litigation to prevent or at minimum delay newcomers from coming in and stealing share. Today it’s not they don’t care rather they are daring these newbies to enter the fight. They are basically saying; “Hey if you think you can do it better, faster and cheaper go ahead and try. In fact we not only dare you we double dare you.”

The honest truth is should any of these newbies come close to showing they can actually back up all their bluster with actual results it’s then when established companies will bring out the patent litigation hammer. Honestly it doesn’t matter which diabetes device market one plays in as the principle applies equally. Insulin pump, CGM or BGM it just doesn’t matter.  We hate to repeat ourselves but when it comes to devices scale is critical, the days of gaining a toehold in a market and making a nice profit are gone for good. The cost of doing business is too high and the margins just aren’t there.

The fact of the matter is a company like Medtronic or JNJ likely has looked at the bottom line and said enough already. Although the terms of the settlement are unknown, for the moment anyway, its likely they won’t prevent JNJ from doing what they want do and be able to sell Animas. As we have previously reported it’s a matter of when not if JNJ sells off Animas.

The same is likely true with Dexcom, Insulet and Abbott.  Why waste valuable resources on a fight that even if won, won’t yield much in the way of a payoff. These established companies know they have bigger fish to fry, like staying in business and making profit, that matter more than who supposedly stole who’s intellectual property. This doesn’t mean that this type of litigation will go way, not at all; rather litigation will be used when there is a true not implied threat.

It’s about time everyone wake up and realize the business of diabetes has changed forever. That just because diabetes continues to grow at epidemic rates on global basis that gaining even a small share is not easy. That change to reimbursement along with tougher regulatory scrutiny has altered the course of how drugs and devices are marketed; that these changes have forever altered the business model. How patent litigation is used is just one more example of how this business has changed.