Medtronic (NYSE:MDT) owes $15.4 million to bone cement maker Pabban Development for breaking the terms their 2008 acquisition deal, a federal jury in California ruled last week.
Irvine, Calif.-based Pabban, which developed a bone cement system for spinal surgeries called Natrix, claimed the technology had key improvements over other bone cements at the time, according to court documents. That aroused Medtronic’s interest after the Federal Trade Commission ruled that its July 2007 acquisition of Kyphon could only go through if Kyphon sold off its bone cement delivery system, according to the documents (Johnson DePuy subsidiary acquired the Kyphon system for roughly $100 million in 2008, according to the documents).
In August of that year, Medtronic agreed to acquire the Natrix assets from Pabban, according to the documents, for an up-front payment of nearly $18.8 million and a series of milestones worth another $9.3 million. The deal also contained a royalty arrangement worth an additional $22 million, according to the documents, for a total deal value of about $50 million.
Medtronic paid the 1st $18.8 million installment, but balked at making further payments and spiked its supply deal with a Pabban subsidiary, court records show, claiming that Pabban concealed problems with the Natrix system. Pabban sued Medtronic in March 2010.
"Medtronic’s stated justification for terminating the supply agreement were alleged defects in the Natrix product. Yet the claimed ‘defects’ were a result of Medtronic’s changes in the processing and packaging of the Natrix system," Pabban claimed, according to the documents.
Medtronic countered that Pabban CEO Nick Herbert claimed that Natrix would be market-ready in time for the North American Spine Society’s annual meeting in October 2008, despite problems with Natrix’s packaging system.
"Prior to closing of the [deal], Kyphon requested permission to test the Natrix system in its own facilities. Pabban refused Kyphon’s request because of purported concerns with confidentiality. It turns out, however, that Pabban refused to provide Kyphon with access to the Natrix system for testing because such testing may have revealed the product was defective and not market-ready," according to the documents. "Pabban was attempting to correct dangerous saline leaks on the same day that Kyphon paid in excess of $18 million for a medical device that Pabban represented was market-ready and to be used on patients [emphasis theirs]."
But trial jury in the U.S. District Court for Central California agreed with Pabban, finding that Medtronic breached the acquisition agreement and awarding more than $15.4 million in damages. The jury also cleared Pabban on Medtronic’s counter-claim that Pabban and Herbert committed fraud in allegedly concealing problems with Natrix.
