Covidien (NYSE:COV) is on the hook for a $175 million milestone owed by subsidiary ev3 Inc. to a company it acquired 11 years ago, plus another possible $100 million in interest, after a Delaware jury’s decision last May.
The jury in the Delaware Superior Court ruled that ev3 broke its contract with Appriva Medical when it denied the $175 million milestone for Appriva’s Plaato device, which it acquired in August 2002 in with a $50 million cash payment and the milestone payments, according to court documents.
Appriva’s co-founders, Dr. Michael Lesh and Erik van der Burg, sued ev3 for failing to pay the milestones for Appriva’s Plaato percutaneous left atrial appendage transcatheter occlusion device, designed to prevent strokes by correcting a structural heart defect. Private equity-owned ev3 breached the contract by failing to devote enough resources to getting the Plaato device to market, according to the documents.
The 1st, $50 million milestone was due upon the FDA’s approval of a Phase III investigational device exemption trial by Jan. 1, 2005. A 2nd, $25 million milestone was owed if ev3 registered a minimum of 300 patients in a European registry trial by Jan. 1, 2008, according to the documents, with another $50 million due upon application for pre-market approval from the FDA and a final $25 million due upon FDA granting the PMA.
But ev3 decided to pursue a different design for the IDE trial that was not randomized, after the company’s PE owners tried and failed to find additional investors to fund it. The FDA denied their bid for the non-randomized IDE trial in May 2003, according to the documents, prompting ev3 to attempt and fail to renegotiate the milestone agreement with Appriva. Preparations began for an initial public offering in late 2004 and early 2005 and scrapped the Plaato program in September 2005 "based on several considerations," according to the documents. Covidien acquired ev3 for $2.6 billion in July 2010.
The jury in Delaware found for ev3, awarding the milestones plus interest but ruling against awarding punitive damages.
Mansfield, Mass.-based Covidien estimated that the loss could cost up to $275 million, including interest. The medical device company said it filed motions for judgment as a matter of law and for a new trial.
"The company has assessed the status of this matter and has concluded that it is more likely than not that the finding will be overturned, and, further, intends to vigorously pursue all available means to achieve such reversal. Accordingly, no liability has been recorded with respect to any damage award," Covidien said in a regulatory filing.