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Has Cochlear got its “head in the sand” over potential $380 million legal bill?

US

The Cochlear Ltd (ASX: COH) share price is down 4% to $205.54 this morning despite the hearing aid business reconfirming guidance for net profit between $290 million to $300 million over FY 2020, which would represent growth of 9%-13% over FY 2019.

The group also reiterated new products continue to sell well as it invests heavily in research and development to maintain its market-leading position in large addressable markets.

It also flagged that it’s making good progress in constructing a new manufacturing facility in Chengdu, China, that should help open up the huge Chinese healthcare market going forward. 

However, its chairman Rick Holliday-Smith also had a reminder for investors that the group still faces a potentially huge legal bill over a patent dispute with U.S. hearing aid researcher Alfred Mann Foundation.

Cochlear is currently appealing a court verdict that it pays US$268 million (c.$A389m) in damages to the Alfred Mann Foundation, with Goldman Sachs analysts also reporting the plaintiffs have asked for US$123m (c.A$178m) in pre-judgement interest. 

The initial claim quantum was based on the ruling that Cochlear had infringed on two patents across four claims, with an original US$131 million in damages being calculated as 7.5% in lost royalties on base sales of US$1.8 billion.

However, in November 2018 a US District court judge more than doubled the compensation to US$268 million due to a finding of “wilful infringement” by Cochlear. 

I’ve also had it confirmed by representatives of the Alfred Mann foundation that the total now being sought is around US$391 million (A$568 million on an FX-adjusted basis) when including ‘pre-judgement’ interest. 

However, I’d caution there’s zero guarantee Cochlear ever has to pay anything like this amount out.

At its AGM today it confirmed it has launched an insurance bond of US$335 million as part of the appeal process. 

Of course a U.S. appeal court may throw out Alfred Mann’s additional claim or its claim completely which would be a huge win for Cochlear investors. 

On the other hand the accusation that Cochlear has been understating its liability and overstating its grounds for appeal may prove watertight if Alfred Mann’s charge that Cochlear has “its head in the sand” over the court process proves correct. 

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Returns as of 6th October 2020

Tom Richardson owns shares of Cochlear Ltd and Dicker Data.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Cochlear Ltd. The Motley Fool Australia has recommended Cochlear Ltd. 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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