Judge orders J&J to pay over $1 billion to Auris investors for merger violations

Diving certificate:

• A Delaware judge ruled Wednesday that Johnson & Johnson must pay more than $1 billion in damages to former Auris Health investors because the company violated a 2019 merger agreement between the healthcare giant and the surgical robotics company.
• J&J failed to provide Auris with the funds to meet regulatory milestones — coupled with over $1 billion in additional payments — for its iPlatform robotic surgery system, according to the Delaware Court of Chancery ruling. The judge also ruled that J&J fraudulently prevented Auris from meeting a milestone for its Monarch platform.
• As a result, J&J owes former Auris shareholders a total of approximately $1.01 billion in damages.”“We disagree with the court’s decision and intend to appeal. It uses a ‘commercially reasonable efforts’ clause to impose a commercially unreasonable obligation and result that is contrary to the facts,” a J&J spokesperson said in an emailed statement.

Diving insight:

J&J took over Auris in 2019 for $3.4 billion in cash, with up to $2.35 billion tied to certain milestones. The deal helped J&J expand its surgical robotics business and seek to gain a foothold in both the orthopedic and soft tissue markets.

At the time of the acquisition, Auris had developed two platforms for robotic soft tissue surgery: iPlatform and Monarch. J&J bought the company because its own soft tissue surgery robot, called Verb, was behind schedule despite “enormous investments,” the decision states.

Despite Auris’ concerns that Verb was a potential competitor to iPlatform, the companies agreed to a merger agreement that included milestone payments tied to market approvals for certain procedures for Auris systems as well as commercial goals. For example, $400 million was tied to iPlatform if it receives 510(k) clearance for general surgical procedures by the end of 2021.

Vice Chancellor Lori Will wrote in her decision that the milestones were “ambitious,” but Auris’ robots were on track to meet them, and that the company had secured a commitment from J&J to “make commercially reasonable efforts appropriate to a ‘priority medical device'” to achieve those goals.

“J&J’s promise to Auris was broken almost immediately after the deal was signed,” Will wrote. “Instead of devoting effort and resources to meeting the regulatory milestones, J&J sent iPlatform into a head-to-head duel with Verb called ‘Project Manhattan.'”

In Project Manhattan, the judge said, the robot platforms were pitted against each other based on the performance of certain processes. Auris was concerned that the iPlatform, which was already months old at the time, would not be developed further because the company “learned that J&J’s robot budget did not have room” for both systems and J&J “would either combine the robots or eliminate one of them.”

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. Nevertheless, the two robotics teams were merged and iPlatform became a “spare parts warehouse” for Verb, according to the ruling.

“J&J knew that Project Manhattan would hinder rather than help iPlatform’s achievement of regulatory milestones,” Will wrote. “J&J also knew that combining iPlatform and Verb would create further complications. But J&J viewed the resulting delays as beneficial because it could avoid the earn-out payment.”

The judge ruled that J&J violated the merger agreement by failing to provide Auris with the resources it needed to meet agreed-upon regulatory milestones, by setting up an employee incentive plan with different milestone goals and by failing to help iPlatform obtain reapproval after the U.S. Food and Drug Administration (FDA) determined that the 510(k) approach was not appropriate for the system.

J&J claimed that the merger agreement allowed the company to use Auris products to support its entire robotics business rather than meet milestones, and that the targets were missed due to technical problems with iPlatform, the ruling said.

“This defense is dubious; it was invented after J&J was sued. The record shows that the technical problems were both foreseeable and solvable,” the judge wrote.

The judge found no violations of the merger agreement regarding the Monarch robot’s regulatory milestones, but ruled that J&J committed fraud that prevented Monarch from meeting a soft tissue ablation milestone that would have resulted in a $100 million payment.

J&J told Auris that the payment would be considered an “upfront payment” because there was a high degree of certainty that the milestone would be achieved, the ruling said.

Auris would use J&J’s Neuwave Flex ablation catheter with its Monarch system to achieve that goal. However, the judge said that J&J did not inform Auris until after the deal was finalized that the FDA was investigating the catheter because a patient had died during a clinical trial, which likely delayed a filing for approval.

“The damages, plus interest, exceed $1 billion and compensate Auris’ former shareholders for the earn-out payment they would have received but for J&J’s failed efforts and fraud,” Will wrote. “What remains irretrievably lost is the transformative potential of Auris’ robots.”