By David Benoit
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)
The U.S. Court of Appeals for the Federal Circuit upheld the validity of two Wake Forest patents for Kinetics' vacuum-pressure devices. The court also upheld a Texas jury's decision in 2006 that, while the patents were valid, Blue Sky Medical Group Inc., which has since been acquired by Smith & Nephew, had not infringed upon them with its gauze-based wound treatments.
Kinetic shares rose 11.6%, or $2.80, to $26.89 in recent trading as a JPMorgan analyst said the decision would uphold the status quo for the company. Smith & Nephew shares slipped 3.8% to $34.97.
Shares of Kinetic had previously been weighed down on fears the appeal would overturn the validity of the patents and allow increased competition into the market place, said analysts, though they also warned Monday's rise could be short-lived.
"This is the outcome which we had deemed most likely and which we consider fundamentally neutral to the stock," said Piper Jaffray analysts in a note. "We expect the near-term strength in the stock to settle back over the next couple of days as investors become refocused on the long-term challenges facing the company's VAC business."
Kinetic said in a release the decision that the decision confirmed its beliefs and would use it for the basis of expanding its intellectual property.
"KCI will continue to enforce its intellectual property rights which allow us to invest in new technologies that help millions of patients around the world," Chief Financial Officer Catherine Burzik said in a release. "We remain committed to new product offerings and improvements in the areas of negative pressure and V.A.C. therapy, which we expect to launch in the coming months."
Smith & Nephew couldn't be reached for immediate comment.
Nearly three-quarters of Kinetic's sales come from the products, which are used to help clean and promote healing in a variety of tough wounds, from gunshots to diabetic ulcers, and are used in hospital and home-care settings.
Competition from Smith & Nephew, which is a larger company with a bigger sales network, has been picking up since it acquired Blue Sky. The company currently markets the gauze-based system that was at the heart of the current appeal.
The original decision had sent the shares of Kinetic plunging 41% when delivered as the allowance of any competition seemed troublesome. But gauze-based systems have proven little effective compared to Kinetics' biggest seller, a foam-based system which is more popular in hospitals.
But in December, Smith & Nephew said it was going to offer a similar foam system in the first quarter and was promptly sued by Kinetic again.
Kinetic said the dressing kit infringes several of its patents, including three licensed from Wake Forest University Health Sciences. The suit is scheduled for trial next October.
Two weeks ago, the U.K. High Court ordered Smith & Nephew to stop selling the foam product in the U.K. after Kinetic filed suit there as well. The injunction prohibits Smith & Nephew from marketing the device until a decision can be made on the patents in the U.K.
The company has not launched a product in the U.S. yet, though JPMorgan analyst Michael Weinstein didn't think the court's latest decision would change the plan and warned more trouble could arise soon.
"Smith & Nephew has already announced its intent to launch a foam-based device later this quarter, and we don't expect their plans to be deterred by today's decision," he said. "As such, there is likely to be more litigation ahead, and the overhang of competitive pressure is likely to persist until the market can determine how high-quality the next generation of competitive devices will be."
-By David Benoit, Dow Jones Newswires; 201-938-2472; david.benoit@dowjones.com
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