Surprising Court Victory For EW—But Legal Wrangling Remains: Analysts

Shares of Edward Lifesciences (EW) were climbing as high as 15% in Monday morning trading, after a federal court late Friday sided with the firm in its patent infringement lawsuit against Medtronic (MDT). The decision stipulated an injunction against the sale of Medtronic's Transcatheter valves, although the firm plans to appeal the ruling. (Medtronic, by contrast, was falling 4.2%.)

Analysts were weighing in on the decision today. Canaccord Genuity's Jason Mills and Jeffery Chu reiterated a Buy rating and $84 price target on the stock, calling the court victory surprising and important:

While we believe EW has a better chance than we previously thought of being granted a permanent injunction against MDT, we still expect EW to ultimately cash in via other forms of equitable relief in lieu of a final injunction: (1) lump-sum future damages; and (2) continuing royalties. Importantly, none of these potential outcomes are factored into our forward model.

What's more, EW will have at least one more shot at winning further concessions from MDT, as EW filed a motion seeking a permanent injunction against MDT following a mid-January finding that MDT willfully infringed EW's Cribier TAVR patent. A jury awarded EW $393M at that time in this case. We had expected this award to be tied up in appeals for several years; however, EW could use its increased leverage to push MDT to pay sooner.

Stifel Nicolaus's Robert Wise and his team were more cautiously positively: While maintaining a Buy rating and $75 price target on the stock, they note that they don't want to adjust their numbers, as the saga of appeals and counterappeals will likely drag on through the court system for some time (although, if upheld, they note that Friday's victory would help Edward LIfesciences maintain greater-than-expected market share).

Their thoughts on the two names:

MDT Next Steps: Seeking Emergency Stay and Decision Appeal.Medtronic will seek an emergency stay in the Delaware courts — the judge hearing the stay request is not the same judge (Judge Sleet) that rendered the PI judgment. If the request for an emergency stay is rejected, the injunction will be enforced by the end of the week. The process of appeal will likely take 12-24 months. In parallel with the appeal, MDT and EW are expected to negotiate carve-outs whereby CoreValve will be made available to certain patients sub-sets that are not adequately addressed by Sapien.

EW: Early But Important Legal Win. Factors that we expected to play into the decision on CoreValve carve-outs include: different valve labels, sizes, and delivery approaches and the likely “near-term” XT approval. On one hand Sapien has no 29MM valve, therefore patients with larger size annulus will need CoreValve. Complicating the negotiation is that EW has both a high risk and an inoperable indication vs. MDT’s extreme risk label alone. Also, the lack of a 29MM Sapien valve would be obviated with XT approval. We would expect EW to err on the side of generosity to not lose the PR battle and alienate doctors and patients.

As for Medtronic, Citigroup's Matthew Dodds and Nicholas Nohling maintained a Buy rating and $71 price target. They too found the decision a surprising one, as they had thought an injunction would be very unlikely.

Their thoughts:

There is Room for Carve Outs, But No Specific Mechanism – As part of the public interest component of the decision, Judge Sleet is allowing for "carve out" usage of Corevalve in existing centers (no new centers can be trained) and as part of ongoing clinical trials. While MDT and EW were ordered to immediately enter into discussions on potential carve outs, there is no specific mechanism in place to get an agreement done – only a hearing set for 5/21. We believe that this means if an emergency stay is not granted, the company will have to cease all US Corevalve sales until an agreement occurs.

MDT's Move to Stay the Injunction Makes the Decision Messy – MDT will file a motion to the Delaware Federal Circuit Court of Appeals to stay the injunction. This is expected to go in front of a 3-judge panel and while there is no guarantee on timing – a stay till 4/22 was granted for this filing – MDT believes the odds are high a ruling will occur within time. As we noted above, the lack of a mechanism to come to an agreement on carve outs should aid MDT's case.

Worst Case Scenario is $0.06 EPS Hit in F2015, $0.08 in F2016 – The Andersen patent is currently extended to 5/15 and a final PTO ruling could take the patent to 3/16. If we assume MDT is completely off the US market until 4/16, our sales forecast would drop by $160MM in F2015 and $225MM in F2016 (it's likely too late for this ruling to have any impact on F2014). Assuming a 50% incremental OM contribution and a 30% tax rate, we arrive at a $0.06 EPS hit in F2015 and a $0.08 hit in F2016 which would represent just a 1% and 2% hit to our EPS forecasts, respectively, which would suggest a roughly $1 decline in the stock based on our valuation of 16x 2015E EPS.