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Cochlear Limited (ASX:COH) share price sinks lower on patent infringement news

The Cochlear Limited (ASX: COH) share price has had a disappointing start to the week and has sunk notably lower in early trade.

At the time of writing the hearing solutions company’s shares are down 4% to $172.41.

Why are Cochlear’s shares tumbling lower?

This morning the company announced that the United States District Court in Los Angeles has ruled against it in the patent infringement lawsuit by the Alfred E. Mann Foundation for Scientific Research (AMF) and Advanced Bionics LLC (AB).

According to the release, damages totalling approximately US$268.1 million (A$372.8 million) have been awarded to AMF and AB. Management has made it clear that it will appeal the judgement, though the outcome of an appeal is not expected to be known for two years.

Cochlear’s CEO Dig Howitt didn’t appear to be expecting this decision. He said “We are surprised by the decision and do not agree with the reasons given by the judge. We will continue to defend this case and the next step in the litigation process is our appeal to the U.S. Court of Appeals. The case is likely to take years to finally resolve.”

To stay the execution of the judgement pending the outcome of the appeal, the company will need to lodge a US$335 million insurance bond with the court within 14 days to secure the judgement amount and any interest and costs. Management advised that it has debt and other facilities available to cover the amount of the insurance bond.

What was the patent infringement?

This case has been dragging on for a number of years. Back in 2014 a jury found that a group of the company’s implants, sound processors, and software infringed two of AMF’s patents.

The jury also found that the infringement was “willful”, rejected Cochlear’s argument that the patents were invalid, and awarded the foundation US$131.2 million in damages.

Since then there have been numerous rulings in favour and against Cochlear, eventually leading to today’s news.

Should you buy the dip?

While this is disappointing news and could impact its FY 2019 results due to adjustments to its provisions, it is worth noting that the patent at issue in the litigation has now expired. As a result, the judgment will not disrupt Cochlear’s business or customers in the United States.

Because of this, I believe Cochlear’s long-term growth potential has not been impacted and it remains a great buy and hold investment alongside fellow healthcare stars CSL Limited (ASX: CSL) and ResMed Inc. (ASX:RMD).

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Cochlear Ltd. and ResMed Inc. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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