Could St.Jude And Aortech’s End Game Spell Trouble For Durata™ ?

In short

Last week we covered the developing shenanigans regarding Aortech and St.Jude’s relationship. And an interesting story it’s becoming as the two parties home in on what looks like an inevitable termination early next month. Or, in what may look like rather a long shot at the moment, it may end up as an acquisition. St.Jude have to be hoping so as AorTech’s coating technology underpins its Durata™ product.

Background

According to Aortech International PLC, it’s biggest client, St.Jude Medical Inc., has breached the contract under which Aortech supplies the coating on what is one of their most sensitive products, the Durata ICD lead, successor to the troubled Riata family. The coating, branded Elast-Eon™ by AorTech (Optim™ in its St.Jude guise) and proprietary to AorTech, has been supplied under the contract since 2006. Its incorporation into St.Judes ICD leads has seemingly been the biggest contributary factor in fixing the so-called “externalisation” issues suffered by St.Jude’s previous generation ICD lead product lines.

All good so far then, except that troubles have been looming for a while. As recently as September St.Jude made something of a faux pas by stating publicly that it had “acquired the exclusive intellectual property rights and necessary assets for the manufacture of Optim insulation used in CRM leads”.

Aortech were quick to point out the fact that St Jude had not acquired the exclusive intellectual property rights to Optim™. St.Jude was forced to issue a retraction of its original statement to this effect. That must have done wonders for relations.

Back to the here and now, AorTech remains the sole manufacturer and supplier of the material that St. Jude calls Optim, and retains ownership of the associated intellectual property and know-how. The two companies’ closeness extends to St.Jude’s purchase from AorTech of the plant and equipment to manufacture Optim, these assets being located in a facility which AorTech leases from St Jude.  AorTech continues to use these assets to manufacture Elast-Eon/Optim. Our guess is that somewhere in the entanglement of that particular deal lies the source of the alleged breach, but that remains speculation.

In any event it now transpires that the deal might not actually have been all that sweet for AorTech, which is rumoured to have been squeezed on price, to such an extent that it is actually making a loss on every sale. It’s perhaps unsurprising then that AorTech’s share price has enjoyed a near 50% ramp this morning following the news of its impending likely termination of the St.Jude deal.

So where’s it all going to end up? It’s no secret that AorTech is in the market for a disposal (the share price move points to that too) and that St.Jude is the most likely buyer. Indeed until the recent dispute they, and numerous other parties, large and small, were already at the negotiating table.

If it doesn’t end well however, St.Jude might just be in a pickle. While the company is issuing its own stout defence of the breach claim, it is also going to some lengths to convince observers that it has both inventory and alternative supply lines for Optim. AorTech obviously thinks not, its posture suggesting it is holding a good hand of cards.

AorTech’s clearly sees the demand for its technology and it would appear that the markets agree that its stars are lined up for the desired exit. Whether that ends well for St.Jude too remains to be seen.