Judge orders J&J to pay Auris investors more than $1B for merger violations

Dive Brief:

• A Delaware judge ruled Wednesday that Johnson & Johnson must pay Auris Health’s former investors more than $1 billion in damages after violating a 2019 merger agreement between the healthcare giant and surgical robotics firm.
• J&J did not provide Auris with resources to accomplish regulatory milestones — tied to more than $1 billion in additional payments — for its iPlatform robotic surgery system, according to the ruling in the Delaware Court of Chancery. The judge also ruled that J&J fraudulently prevented Auris from hitting a milestone for its Monarch platform.
• As a result, J&J owes former Auris shareholders about $1.01 billion in total damages. “We respectfully disagree with and intend to appeal the court’s decision, which read a ‘commercially reasonable efforts’ term to impose a commercially unreasonable obligation and result that was contrary to the factual record,” a J&J spokesperson said in an emailed statement.

Dive Insight:

J&J acquired Auris in 2019 for $3.4 billion in cash, with up to $2.35 billion connected to specific milestones. The deal helped J&J build out its surgical robotics business as it worked to gain ground in both the orthopedic and soft tissue markets.

Auris had developed two soft tissue robotic surgery platforms when acquired: iPlatform and Monarch. J&J bought the company as its own soft tissue robot, called Verb, fell behind schedule even after “colossal investments,” according to the ruling.

Despite Auris’ concerns that Verb was a potential competitor to iPlatform, the companies agreed on a merger deal that included milestone payments tied to market authorizations for specific procedures for Auris’ systems, as well as commercial goals. For example, $400 million was attached to iPlatform gaining 510(k) clearance for general surgery procedures by the end of 2021.

Vice Chancellor Lori Will wrote in the ruling that the milestones were “ambitious,” but Auris’ robots were on track to complete them, and the company secured J&J’s commitment to devote “commercially reasonable efforts befitting a ‘priority medical device’” to reach them.

“J&J’s promise to Auris was broken almost immediately after closing,” Will wrote. “Instead of providing efforts and resources to achieve the regulatory milestones, J&J thrust iPlatform into a head-to-head faceoff against Verb called ‘Project Manhattan.’”

Project Manhattan, the judge said, pitted the robotic platforms against each other based on the performance of certain procedures. Auris was concerned that iPlatform, which was months old at the time, would not be developed because the company “learned J&J’s robotics budget left no room” for both systems, and J&J “would either combine the robots or kill one.”

As a result, the Auris team spent time improving the iPlatform for the project rather than pursuing regulatory milestones. Both systems completed the designated procedures, and J&J decided iPlatform was the better investment. Still, the two robotics teams were combined, and iPlatform became a “parts shop” for Verb, according to the ruling.

“J&J knew Project Manhattan would hinder, rather than promote, iPlatform’s achievement of the regulatory milestones,” Will wrote. “It also knew that combining iPlatform and Verb would cause further complications. But J&J viewed the resulting delays as beneficial since it could avoid making the earnout payment.”

The judge ruled that J&J breached the merger contract by not providing Auris with the resources to achieve the agreed-upon regulatory milestones, initiating an employee incentive plan with different milestone targets, and not helping iPlatform achieve a de novo authorization after the Food and Drug Administration determined the 510(k) pathway was not suitable for the system.

J&J claimed that the merger agreement allowed it to use Auris products to support its overall robotics business rather than achieve milestones, and that the goals were missed because of iPlatform’s technical problems, according to the ruling.

“This defense is dubious; it was concocted after J&J was sued. The record indicates that the technical issues were both expected and solvable,” the judge wrote.

The judge found no breaches of the merger agreement regarding the Monarch robot’s regulatory milestones but ruled that J&J committed fraud that prevented Monarch from achieving a soft tissue ablation milestone with a $100 million payment attached to it. 

J&J told Auris the payment was seen as an “up front consideration” because the milestone was so certain to be met, according to the ruling.

Auris would use J&J’s Neuwave Flex ablation catheter with its Monarch system to achieve the goal. However, the judge stated that J&J did not tell Auris until after the closing of the deal that the FDA was investigating the catheter because a patient died during a clinical study, likely delaying a regulatory submission.

“Damages with interest exceed $1 billion, which compensates Auris’s former stockholders for the earnout payment they would have received absent J&J’s failed efforts and fraud,” Will wrote. “What remains irretrievably lost is the transformative potential of Auris’s robots.”

This post has been syndicated from a third-party source. View the original article here.