On April 25, 2013, a company named Orthophoenix, LLC registered itself in the state of Delaware and then, the following day, acquired over 500 of Medtronic, Inc.’s kyphoplasty patents.
Six years ago, Medtronic paid $4.1 billion for Kyphon Inc. Buried somewhere in those assets were these patents. Quietly and, perhaps, unexpectedly a mystery company emerged and with no fanfare, no press releases, bought these patents from Medtronic.
In May, Orthophoenix put a group of companies on notice that they may be infringing these just bought patents.
Who are these guys and what is going on?
Orthophoenix Lawsuits
Orthophoenix sent letters to at least six orthopedic companies and, in the process, claimed that their products infringed the just purchased Medtronic intellectual property (IP). On June 5, 2013, Orthophoenix filed lawsuits in Delaware against Sintea, LLC, Soteira Inc., Osseon Therapeutics, Inc., Ascendx, Dfine, Inc. and Wright Medical Technology, Inc. The lawsuits disclosed the acquisition of the Medtronic patents.
According to the lawsuits, Orthophoenix alleges those six companies are infringing on 12 separate kyphoplasty patents related to instruments and procedures.
The first question that comes to mind is: Who are these guys? The second, what patents did Medtronic sell and why?
Kyphoplasty
First, a little kyphoplasty and Kyphon history.
Kyphoplasty is an outpatient procedure used to treat painful compression fractures in the spine. In a compression fracture, all or part of a spine bone collapses. The procedure is also called balloon kyphoplasty. The doctor places a large needle through the skin and into the spine bone. Real-time x-ray images are used to guide the doctor to the correct area in the lower back.
A balloon is placed through the needle, into the bone, and then inflated. This restores the height of the vertebrae. Cement is then injected into the space to make sure it does not collapse again.
Kyphon Inc.
In 1994, Mark Reiley, M.D., an orthopedic surgeon from Berkeley, California, Arie Scholten, an engineer and inventor of surgical products, and Dr. Karen Talmadge, a Harvard University biochemist, founded Kyphon Inc. Funding followed in 1996. Two years later, the FDA cleared the company’s inflatable bone tamps.
The company went public in 2002 and by 2003 surpassed $100 million in worldwide sales. By 2004, the FDA cleared Kyphon’s bone cement for use in kyphoplasty, patient numbers reached 100, 000 and another $100 million in sales came through the cash register. The next year another 87, 000 patients were treated and cumulative sales roared past $300 million.
In 2006, one of the company’s sponsored clinical study wrapped up and the investigators were able to get their kyphoplasty results published and Medicare assigned it a reimbursement code. The company then launched a functional anesthetic discography procedure. Patient numbers reached 285, 000. Cumulative sales topped $400 million.
$4.1 Billion Gamble
Medtronic bought Kyphon in 2007. The deal and price tag were not without controversy.
Industry insiders told OTW at the time that the price Medtronic paid for the technology was way too high and the patents were ripe for challenge. Shortly after the acquisition, Medtronic hired a new CEO and Chairman. The new CEO, Omar Ishrak, was openly critical of acquisition strategies pursued by his predecessor. He said the company would change the way it evaluated and executed future mergers and acquisitions.
The financial performance of the Kyphon division did not pan out as hoped. After the acquisition, Medtronic’s management reported to its shareholders that Kyphon sales were flat and that the company was losing market share. Only recently with the company’s core spine business (excluding Kyphon and Infuse) performing well, has the company become a market share gainer.
The Kallmes Effect
In 2009, two years after buying Kyphon, an orthopedic surgeon from the May Clinic, David Kallmes, published the results of a study in which he claimed that he found no difference between vertebroplasty and a placebo procedure in treating patients with VCF (vertebral compression fractures). Dr. Kallmes completed another study in 2012 comparing kyphoplasty to vertebroplasty. The two procedures are similar except the balloon is used in kyphoplasty. Dr. Kallmes has not yet reported the results of his work, but, as Wells Fargo analyst Larry Biegelsen has noted, if the Kallmes study shows no difference between the two treatments, then the pressure on Medtronic’s Kyphon division would probably increase. Considering everything, Biegelsen has advised his clients that Kyphon’s sales in 2013 will likely reach $333 million (2.0% of total Medtronic sales). If Biegelsen is right, then Kyphon’s sales would have declined another 5% from expected 2013 levels.
In 2011, Noridian Administrative Services, a Medicare contractor, determined there was no clear evidence that kyphoplasty was different from vertebroplasty.
According to Biegelsen, spine surgeons have told him that Dr. Kallmes’ study is unlikely to show that kyphoplasty is superior to vertebroplasty on the primary outcome measures of pain and back specific functional status. He notes the Kallmes’ study is relatively small (n=112) which makes it difficult to show a statistically significant difference.
“Nevertheless, Dr. Kallmes’ study and the similar Australian study (also published in NEJM in August 2009)…resulted in about a 30% decline in combined kyphoplasty and vertebroplasty procedures in 2010 and about a 15% decline in Medtronic’s Kyphon sales during the year following the [study] publication. If Dr. Kallmes’ head-to-head study shows no difference between the two procedures, we believe some physicians and payers will…conclude that kyphoplasty is also no better than a sham procedure. If this is the case, Medtronic’s Kyphon sales could decline further, ” added Biegelsen.
Medtronic is not talking about the sale of the patents. Biegelsen said it appears to him that the sale of the patents is an opportunity for Medtronic to leverage the Kyphon IP. Medtronic told him that it remains committed to the Kyphon business.
Who Are These Guys?
So back to the question of who is Orthophoenix?
We tracked down the Orthophoenix headquarters to a Dallas office building which also houses a company called IP Nav, a full service patent monetization firm headed by an attorney named Erich Spangenberg. That company is the licensing advisor to Orthophoenix.
Spangenberg and IP Nav
We reached Spangenberg in his London office on June 11, 2013.
Spangenberg said that Orthophoenix is made up of a group of investors experienced in medical devices. He said the group heard rumors in 2012 that Medtronic was interested in selling their patents. The Orthophoenix investors made an offer and Medtronic accepted. He did not disclose the price of the patents and Medtronic has not reported the sale in any SEC filings.
Medtronic did not confirm or deny the sale of the patents. But after rumors swirled that the company did not report the sale because it had an ownership interest in Orthophoenix, a Medtronic spokesperson denied any relationship with Orthophoenix. Spangenberg also confirmed that Medtronic had no interest in Orthophoenix.
We asked Spangenberg about Kyphon’s uninspiring financial performance and why would his group want to buy such an asset. He candidly said that while the technology may not have performed well financially for Medtronic, numerous competitors were aggressively pushing the market. And hence, creating licensing opportunities for IP investors.
As IP Nav’s founder, Spangenberg has advised patent owners in hundreds of enforcement, acquisition, commercialization and monetization transactions. Prior to founding IP Nav, he was a partner at the law firm of Jones Day (corporate), senior vice president of investment banking at Donaldson, Lufkin & Jenrette, and president of Smartalk Teleservices and also of Acclaim Ventures Group.
He’s a Periclean Scholar from Skidmore College and holds an MSc from the London School of Economics. He received his law degree from Case Western Reserve University.
“Litigious, Patent-Holding Company”
According to his web site, Spangenberg owns companies that actively engage in enforcement, acquisition, commercialization and monetization transactions.
A November 2012 Forbes articles said Spangenberg has an “empire” of 247 IP-focused companies, “most of which were created with the sole purpose of holding patents and filing lawsuits against those unlucky enough to infringe them.” . The same article, according to Forbes, cites PatentFreedom as counting more than 500 suits filed by his corporations since 2005. “Spangenberg’s lawsuits are so numerous that even he may not be able to track them: In 2008, a court awarded Mercedes-Benz and Chrysler $3.8 million when one of Spangenberg’s companies sued the auto giants for patent infringement, violating a settlement they had already agreed to with another of his firms over the same issue, ” continued the Forbes article.
Corporate Counsel magazine described IP Nav, as one of the “largest, and most litigious, patent-holding companies” and writes that he advises a “sue first, ask questions later” approach
Spangenberg doesn’t disclose revenue of his business. But public records show that he and his wife, Audrey, also an IP lawyer, own a $9.3 million home in Dallas and two half-million dollar condominiums in Las Vegas.
Some critics call lawyers like Spangenberg “patent trolls.” A February 2013 article in InsideCounsel says, “They don’t make anything. Their sole business is to license their patents and sue those who resist purchasing licenses.” The article continues that when a company sues for patent infringement, the defendant is likely to countersue with their own allegations of infringement.
The Spangenberg Defense
In the Forbes article, Spangenberg says his practice protects innovation in an age when it’s especially crucial to America’s future, as low-cost U.S. manufacturing becomes a thing of the past. “A strong protection of IP rights is important to protecting our economy. The world would be a better place if people understood intellectual property. I don’t understand why just because it’s prevalent, it should be free.”
Did Medtronic get a good price for the patents for which it once paid over $4 billion? Are the patents defendable in court? For those answers we’ll have to wait for Medtronic to disclose the price and terms of the deal in SEC documents and the outcome of Orthophoenix’s lawsuit against the six orthopedic companies. For now we know a little more about Orthophoenix. Spangenberg promised to tell us more in the future.
