What If Nevro Loses Legal Battle to Boston Scientific?

At least one analyst sees a bright future for Nevro, even if the company is holding the short end of the stick at the conclusion of a longstanding patent dispute with Boston Scientific.

Nevro and Boston Scientific have been clashing over intellectual property since shortly after FDA approved Nevro's Senza spinal cord stimulation (SCS) system in May 2015. Now, Nevro is suffering a massive stock dip prompted by a surprise preliminary ruling in the case. Are investors throwing the baby out with the bathwater on this one?

"While it's nearly impossible to make an educated call on a fluid legal dispute, which frankly could go either way, we seek to provide both a more comprehensive construction of the legal process – both past and future – to hopefully mitigate any future surprises similar to today, and a reasonable valuation framework for assessing a risk/reward at current levels," said Jason Mills, an analyst at Canaccord Genuity, in a report he issued Wednesday.

U.S. District Judge Vince Chhabria adopted a tentative ruling in Nevro's intellectual property suit against Boston Scientific around spinal cord stimulation patent infringement. Chhabria said he would likely remove five of the seven patents included in the suit due to ambiguity in the wording and structure of the company's original patents. If this happens, those patents would be removed from the case.

"Conversations with third-party patent attorneys have led us to an understanding that in California district courts, decisions issued in the final ruling have historically tended to be in line with tentative rulings," Mills noted in his report.

In May 2015, shortly after FDA approved Nevro's Senza SCS system, Boston Scientific filed petitions with the U.S. Patent and Trademark Office that challenged the validity of Nevro's patents. Later that year, the petitions were denied. Then, in late 2016, Nevro filed a patent infringement lawsuit against Boston Scientific.

Even if the judge throws out five of the patents in the suite, at least one claim will survive, which means Nevro could potentially win on summary judgement, or the claim could go before a jury, Mills explained.

The bad news for Nevro is that if five of the patents are tossed out of the lawsuit, they will effectively be invalidated as U.S. patents, allowing Boston Scientific to use the previously patented technology, Mills noted. However, Nevro will likely file an appeal if that happens.

"We see tailwinds outweighing headwinds," Mills said, pointing out that in the SCS market in general, the total addressable market "remains quite large and significantly underpenetrated, at approximately 7%, in our estimation."

The analyst estimates that the SCS market grew last year by 13%, resulting in a $1.7 billion market, and he expects the market to grow 11% by the end of 2018.

"Regardless of legal outcomes, we view a significant growth opportunity still in front of Nevro, even if the firm were ultimately to lose its IP battle with [Boston Scientific] and face another competitor in the high-frequency space," Mills said. 

Beyond Nevro's current market opportunity, the analyst said a large determinant of the company's future growth will be indication expansion into areas like painful diabetic neuropathy (PDN).

"The fact that the PDN study has taken longer than expected to get up and running is a bit frustrating," Mills acknowledged in his report. "That said, the opportunity is still quite compelling in this area."

In an earlier report from Mills, issued in May, he also pointed out that technology like Nevro's offers an alternative to opioids, an issue that is gaining more and more attention in healthcare. He also said Nevro has been expanding its sales force to drive more share gain.

Nevro has been on another industry analyst's radar as well. Needham & Co.'s Mike Matson included the company on his list of the 25 most attractive public medtech companies in terms of potential M&A targets. To read more insights about the companies that made Matson's list, see this story: 25 Most Attractive Medtech Companies on the M&A Radar.

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