The Tale of the tape

The Tale of the tape

The intellectual property lawsuit brought by Medtronic (NYSE:MDT) against Insulet (NASDAQ:PODD) is shaping up as heavyweight title bout which could dramatically alter the future of the insulin pump market and according to some experts may deal a fatal blow should Insulet end up on the losing end. Now once again Diabetic Investor wants to make clear we are not experts in intellectual property law and our thoughts expressed here are based on multiple interviews with noted experts from a series of disciplines. Furthermore as we noted yesterday we hold no legal degrees and do not claim to have any special expertise in this arena, we just understand the wacky world of diabetes devices.

Now that we have the disclaimer out of the way let’s take a look at the tale of the tape; according to Yahoo finance Medtronic’s market cap is slightly above $44 billion, they had full year revenues of $16.25 billion and have $2.5 billion of cash on hand. Insulet by comparison has a market cap of about one billion, revenues of $191 million and 70 million of cash on hand. Why are the statistics so important, simply because winning or losing isn’t just about who’s right and who’s wrong but equally about who can afford to fight. Medtronic has the clear advantage here as they can assign this lawsuit to an internal team who will coordinate with Kirkland & Ellis LLP the company’s outside counsel. These numbers are also important should Medtronic win as they will be used to calculate damages.

Speaking of which Medtronic’s lead attorney for the case is Luke Dauchot who has an impressive track, according to the Kirkland & Ellis web site:

“Biedermann Motech GmbH v. Medtronic (patent litigation)
United States District Court for the District of Massachusetts

  • As lead trial counsel for Biedermann, won patent infringement jury verdict in the amount of $226 million, second largest patent infringement award in 2007, and reportedly largest award in the history of Massachusetts

Medtronic v. NuVasive (patent litigation)
United States District Court for the Southern District of California

  • As lead trial counsel, won $101.2 million for Warsaw Orthopedic, Inc. (a Medtronic entity) in the first phase of a patent infringement dispute with NuVasive, Inc. The jury found that NuVasive’ s spinal technology infringed all three of Warsaw’s asserted patents.”

It seems as though Medtronic after losing to Mr. Dauchot decided it was better to hire him which as seen by the case against NuVasive was a very smart thing to do. It should also send a message that Medtronic not only believes they have a strong case but they are going for the jugular. This is the equivalent of the Detroit Tigers sending out their ace Justin Verlander to win game 5 of their playoff series against the Oakland A’s.  While there are no guarantees that Mr. Dauchot will do to Insulet what at what one time he did to and for Medtronic but based on his track record Insulet should be paying attention.

Representing Insulet is Robert Frank of Choate Hall & Stewart, who according to the firm’s web site;

“Lead counsel for Akamai Technologies in patent infringement case involving the delivery of Internet content.  After a three week trial, the jury returned a verdict in favor of Akamai in the amount of more than $45 million.  This was the largest verdict in Massachusetts and one of 50 verdicts in the United States.   Akamai Technologies  v. Limelight Networks, D Mass”

One person both firms will likely try and get in touch with is Luis Malave, currently President & CEO of Palyon Corporation, who was MiniMed’s director of research and development from 1991 through 2001, then went to Insulet in January 2002 as their COO until he departed in August 2010. Making matters even more interesting is that Mr. Malave is one of the inventors of the patents that are in dispute. But the intrigue doesn’t stop there, as Diabetic Investor has learned that years ago Medtronic sent a letter to Insulet regarding this very issue.

Now no one knows if Insulet ignored the letter or if Mr. Malave mentioned this possible issue to Insulet management or their board of directors. While the letter itself is standard operating procedure, basically the first step towards a possible lawsuit, the real issue is what did the company know, when did they know it and what, if anything did they do about it. If Mr. Malave warned Insulet that they were treading into dangerous territory and the company ignored the warnings it would create a huge advantage for Medtronic. If on the other hand, being intimately familiar with the patents since his name is on them, he felt comfortable with what Insulet was doing and expressed as much to the company, the advantage goes to Insulet.

No matter which side Mr. Malave takes Diabetic Investor believes that Medtronic has the upper hand here and not necessarily from a legal perspective. In an ironic twist the fact that Medtronic does not have a wireless insulin pump on the market may actually be an advantage as Insulet cannot turn the tables on Medtronic and claim that Medtronic is violating their patents. The fact is Medtronic has greater resources and time on their side. Understanding that Insulet has limited resources they can string this out basically forcing Insulet not just to spend more money but taking their attention away from more pressing matter like getting their new Eros pod through the FDA and onto the market.

There are also some ancillary benefits from bringing this action against Insulet as Roche who acquired Medingo years ago also has a patch pump which has been approved by the FDA. Although not on the market, Medtronic is sending a clear message to Roche and the many others who are working on a patch pump.

The fact is Medtronic really doesn’t have to score a victory here. No matter what the outcome they will still hold the number one market position in the insulin pump market. They can still proceed with their own patch pump program and with a victory could cripple Insulet as they did when they trounced Smiths Medical in court.  Even without a clear victory they could come out ahead just by the fact they made Insulet spend money they didn’t plan on spending, while distracting them when the company is at a critical juncture.

The bottom line here is that Insulet, no matter what the eventual outcome of the court action, can ill-afford the unexpected expense or distraction. The company MUST get the Eros pod through the FDA and then show they can actually make the new pod in the quantities needed without any quality issues. Considering that the FDA still has not approved Eros and the many statements made by Insulet it seems this is not a given. The lawsuit only intensifies the pressure on the company to execute which based on their track record isn’t a given either.

As we noted in the beginning of this post Diabetic Investor is not by any means an expert in intellectual property law and we don’t have a law degree. However, we have been known to place a wager in the past and based on that experience alone our money is on Medtronic as they can score a victory even if they don’t actually win the case outright.  The true shame is we would prefer they compete in the marketplace and not in court; that they would come out with their own patch pump and let patients decide which is better.  But as the old saying goes; “Those who can do, those who can’t sue.”