NuVasive Inc. (NSDQ:NUVA) said it still expects to post sales of roughly $655 million this year, despite a court decision earlier this month that boosted the royalty rates it must pay rival Medtronic (NYSE:MDT) after a $101 million patent infringement loss.
Earlier this month a federal judge raised the rates San Diego-based NuVasive owes Medtronic in their long-running dispute over spinal implant patents. NuVasive had been accruing royalties based on the rates the jury used to calculate the damages award, to the tune of about $11 million.
But Judge Cathy Ann Bencivengo ruled that NuVasive must pay 13.75% royalties on sales of its CoRoent XL implant, 3.5% higher than expected. NuVasive must shell out royalties of 8.25% to Medtronic on sales of its MaXcess retractor, 5% more than it thought.
NuVasive said in a regulatory filing Friday that it stands by its prior sales guidance.
"On June 21 2013, NuVasive, Inc. reiterated full year 2013 revenue guidance of approximately $655 million," according to the filing. A company representative did not immediately respond to a request for comment today.
The patent infringement case dates back to 2008, when a group of Medtronic subsidiaries sued NuVasive, accusing the San Diego-based company of infringing 9 patents relating to spinal implants. NuVasive in turn accused Medtronic of trespassing on 3 of its patents.
The jury issued a split verdict in the case in September 2011, awarding $101.2 million to Medtronic and $660,000 to its smaller rival. The companies settled their dispute over another patent last month, with NuVasive agreeing to pony up $7.5 million and a 3% royalty.
In addition to the royalties NuVasive owes its Fridley, Minn-based competitor, Bencivengo ordered Medtronic to pay a royalty of 5.5% on sales of its NIM-Eclipse nerve monitoring system to NuVasive.
Although the ruling sets the bar higher than NuVasive expected, the judge declined to lift it to the heights requested by Medtronic. The Fridley, Minn.-based medical device giant asked Bencivengo to award rates of 36% for the CoRoent implant and 11% for the MaXcess retractor device.
"The court agrees with [Medtronic] that the jury’s royalty-rate determination, if applied without adjustment to the ongoing practice of its patents, would not adequately compensate [Medtronic] for future profits it would forfeit by NuVasive’s competition in the market," the judge wrote, according to the documents. "The jury’s verdict reflects a lost profit component of approximately $75.7 million, about 55% of the amount proposed by [Medtronic] for infringement of all 3 patents. This fact indicates that [Medtronic]’s post-verdict negotiation position for a royalty sufficient to compensate it for giving up its profits should be considerably less. The jury found [Medtronic] is actually foregoing significantly less profits than the amounts [Medtronic]’s expert estimated when determining the royalty rates he proposed at trial."
NuVasive said the decision will add about $5 million to its royalties tab for 2013; Leerink Swann analyst Richard Newitter estimated the resulting hit to earnings per share at roughly 4¢-5¢ for fiscal 2013, in a research note sent to investors this morning. The ruling also adds about $6.5 million " to account for the historical difference between the post-verdict royalty rates determined today and the rates that were being used to calculate the litigation royalty expense accruals since September 2011."
"The vast majority of the litigation royalty expense accruals will end in February 2015 as certain Medtronic patents expire. As the verdict is being appealed, the company will accrue to the higher rates determined today and will begin to escrow funds on a go-forward basis," according to a press release.
"We are pleased to have an outcome regarding the ongoing royalty issue in our dispute with Medtronic so we can finally begin the appellate process. While we disagree with the court-ordered royalty rates, they are significantly lower than those sought by Medtronic after its motion for an injunction following the verdict was denied. Today’s ruling will have an immaterial impact on our liquidity and our ability to fund strategic initiatives. With this issue resolved, we will promptly and aggressively appeal the verdict and damage award to the Court of Appeals for the Federal Circuit. We intend to vigorously defend the investments we have made to pioneer the lateral approach to spine fusion surgery and to become the most innovative spine technology company in the world," NuVasive chairman & CEO Alex Lukianov added in prepared remarks.
NUVA shares were down 0.8% today to $23.90 apiece as of about 12:40 p.m.; the NASDAQ exchange was down 1.7% to 3,301.36 at that time.
