Medtronic Terminates $738 Million EOFlow Acquisition Amid Patent Disputes, Seeks New Path in Diabetes Care

Dec 08, 2023 20:27 CST Updated 20:28

Medtronic

Medical Device Manufacturer

Announced its intention to acquireAbout half a year after EOFlow,Huge market attention and intellectual property disputes have led toMedtronicFinally decided to terminateThis transaction.

Recently, Medtronic officially submitted a report to the U.S. Securities and Exchange Commission (SEC),In the document, Medtronic officially stated that "based on several breaches of the agreement," it has terminated the acquisition of EOFlow, a manufacturer of insulin patch pumps. Meanwhile, Medtronic indicated that it does not believe any termination fee is required for ending this acquisition.

A Single Stone Raises A Thousand Ripples: Affected by this news, EOFlow (KOSDAQ:294090) plummeted to the daily limit down at yesterday's opening, dropping 29.93% from the closing price, and continued to fall by 27.88% today. The total market value is 219.3 billion Korean won (approximately 1.18 billion Chinese yuan), compared to 683.1 billion Korean won (approximately 3.69 billion Chinese yuan) in early March when the acquisition news first broke.

The $738 million acquisition fell through, with EOPatch entangled in lawsuits. Medtronic timely "hit the brakes," avoiding potential acquisition risks. However, Medtronic's goal of striving to "reverse the downturn" in the diabetes business is still in the process of finding a breakthrough.

Target Company Involved in Patent Dispute

Medtronic "Hits the Brakes"

Frontier Technology Innovation R&D: Efficiency is Life. As a rising star in insulin infusion technology innovation, the R&D progress of Insulet and EOFlow has always been highly anticipated by the industry. Not long ago, the two companies became involved in a trade secret intellectual property dispute over insulin infusion patent technology, which was also seen by the capital market as the trigger for Medtronic's abandonment of the acquisition of EOFlow this time.

In May this year, Medtronic announced that it would acquire EOFlow for $738 million (approximately 5.2 billion RMB) to expand its diabetes treatment product portfolio. At that time, a series of agreements were signed to acquire all shares of the latter. The acquisition is expected to be completed in the second half of 2023, subject to meeting the minimum tender condition and certain customary closing conditions, as well as obtaining regulatory approval.

Medtronic did not provide detailed disclosure regarding the specific "violations" involved in the acquisition agreement with EOFlow. However, some industry experts believe that EOFlow's intellectual property dispute with Insulet may bring uncertainties to its products.

Insulet has long been a leader in the insulin patch pump industry, but when news broke in May this year that Medtronic had acquired EOFlow, Insulet's stock price plummeted dramatically.

Insulet Corporation was founded in 2000 and is headquartered in Massachusetts, USA. It is a medical device supplier. Insulet's Omnipod Insulin Management System mainly includes the infusion pump (Pod), controller (PDM), and corresponding mobile app. The infusion pump can continuously deliver insulin for up to 72 hours, eliminating the need for patients to self-administer multiple daily injections, providing a unique alternative to traditional insulin delivery methods for those undergoing insulin therapy.

In August this year, Insulet Corporation filed a lawsuit against EOFlow in the U.S. District Court for the District of Massachusetts, alleging that EOFlow’s EOPatch insulin pump infringes on three patents of its Omnipod patch pump and that the product design is "essentially identical." Additionally, three former Insulet executives who joined EOFlow, as well as Insulet's contract manufacturer Flex, have been named as defendants.

Insulet claims that the EOPatch not only bears an "astonishingly similar" appearance to its product, the Omnipod, but also shares many internal components that are highly similar.

Comparison of Insulet's Omnipod (left) and EOFlow's EOPatch (right)

More attention-grabbing is the fact that EOFlow has poached three former executives from Insulet: Luis Malave, former Chief Operating Officer of Insulet, is now the President of EOFlow; Steven DiIanni, former Director of Mechanical Engineering, has been hired as a consultant for EOFlow; and Ian Welsford, former Director of Regulatory Affairs, is the company’s Chief Technology Officer, who is also named as a defendant in the lawsuit.

Previously, Insulet strongly stated in its filed complaint: "Once EOFlow discloses Insulet's trade secrets to its competitor Medtronic, which has unlimited resources, through the acquisition, it will cause direct and irreparable harm to Insulet, potentially even depriving Insulet’s trade secrets of all their value."

In March this year, a German court issued a preliminary injunction against EOFlow Company based on another patent case. It will also be banned from sale in Europe and the US in the future, and face huge compensation.

Now, Medtronic has announced the termination of the acquisition of EOFlow. Although this closure represents a lost potential pathway for Medtronic to enter the insulin patch pump market, in a statement, they expressed: "We will continue to develop differentiated patch pumps for the market and hope to bring them to market one day."

At the same time, Medtronic stated in a filing with the U.S. Securities and Exchange Commission that according to the agreement, Medtronic is not required to pay any termination fees, and Medtronic expects that the termination of the transaction will not have any impact on its earnings per share for the fiscal year 2024.

Diabetes Business Seeks to Reverse Decline

When Will Medtronic Turn the Tide?

As a leading company in the global medical device field, Medtronic has established a vast product portfolio in four medical areas: cardiovascular, surgical and critical care, neuroscience, and diabetes, covering more than 70 key disease areas.

However, the clinical trials of renal denervation products were hindered, the launch of the Hugo robot was delayed, and the diabetes business received a warning from the FDA, which have become significant business factors contributing to Medtronic's sharp decline in stock price in recent years.

As early as the 2022 JP Morgan Conference, Medtronic Chairman and Chief Executive Officer Geoff Martha mentioned in his speech the setbacks encountered by these three businesses, and expressed hope that the restructuring of the diabetes division could reverse the declining trend.

In terms of structural adjustments, at the beginning of 2022, Medtronic announced that Que Dallara would serve as Executive Vice President and Business President of its diabetes division. Que Dallara previously served as President and CEO of Honeywell and worked for sensor manufacturer TE Connectivity for a decade, in addition to spending several years on business development and acquisition strategy at Microsoft.

In terms of sales, Medtronic's diabetes division is the smallest among its four segments. However, Medtronic views it as a high-growth opportunity due to the increasing global demand for diabetes care, and the company possesses the technology and logistics to develop and distribute these devices.

On November 21, 2023, Medtronic announced its financial results for the second quarter of fiscal year 2024 (FY24), ended October 27, 2023. The report showed that Medtronic achieved revenue of nearly $8 billion in the second quarter, a year-over-year increase of 5.3%, with organic growth of 5.0%. Among this, the diabetes business generated revenue of $610 million in the second quarter, a year-over-year increase of 9.7%, with organic growth of 6.7%. However, in the U.S. market, revenue was $4.175 billion, with a year-over-year increase of only 2.6% and organic growth of 3.0%.

Prior to this, Medtronic's diabetes business faced an unprecedented market challenge due to a warning letter from the U.S. FDA. In October 2021, Medtronic expanded the recall of the MiniMed 508, Paradigm pump remote controls, and MiniMed 600 series pumps. Both recalls were classified as Class I, posing risks of serious injury or death. This recall significantly impacted Medtronic's diabetes business. In December 2021, Medtronic received a warning letter from the FDA, citing inadequate handling of the insulin pump and remote control recalls. Following the public release of the warning letter, Medtronic's stock price dropped more than 11% in a few days to $99.53.

Following this, Medtronic's commercialization process for diabetes-related products in the U.S. was almost entirely halted, significantly impacting sales revenue in the American market. The performance of the diabetes business largely depended on international markets. In the third quarter of the 2022 fiscal year, despite an overall net profit growth of 16.5%, the diabetes business generated only $584 million in revenue, representing a 7% decrease year-over-year and a 5% organic decline. Looking at the overall performance in the first three quarters of the 2022 fiscal year, diabetes revenue reached $1.741 billion, reflecting a 1.4% year-over-year decline, making it the only segment with a negative growth rate.

Until April this year, Medtronic announced that the FDA had lifted the warning letter related to its diabetes business headquarters. In the same month, Medtronic also announced that its MiniMed 780G system, equipped with the Guardian 4 sensor, received FDA approval for use in individuals aged 7 and above with type 1 diabetes.

In September, Medtronic's new integrated, disposable Simplera™ Continuous Glucose Monitor (CGM) received CE certification. Additionally, Medtronic's diabetes product pipeline includes the InPen smart insulin pen.

The insulin pump market is highly valuable, with numerous domestic and international medical device giants competing fiercely. Recently, there has been a surge in global merger and acquisition news related to the diabetes sector. Apart from Medtronic, Abbott is also acquiring and integrating diabetes products to expand its business scale in the diabetes field.

Medtronic originally planned to complete the acquisition of EOFlow by the end of this year, entering the patch pump market. How will this $738 million acquisition turmoil impact Medtronic's strategic layout in the insulin patch pump sector? After the termination of this deal, is it possible for Medtronic to reassess its strategy for entering this field? The New Media Center of *Pharmaceutical Economy News* will continue to monitor the situation.

Editor: Zhu Di