J&J Sued for Misleading Auris Investors Over 2019 Buyout

By Jef Feeley | October 13, 2020

Johnson & Johnson was accused in a lawsuit of falsely promising billions of dollars in future payments to Auris Health Inc. investors last year when J&J agreed to spend as much as $5.7 billion to acquire the company.

Fortis Advisors LLC alleged Monday J&J executives deceived investors when they promised future payments based on the performance of Auris’s robotic systems, designed to perform safer and more efficient lung biopsies.

J&J officials “violated the parties’ merger agreement with the specific objective of defeating the former stockholders’ right to billions of dollars” in so-called earn-out payments, according to the Delaware Chancery Court suit.

Kim Montagnino, a J&J spokesman, denied the company sought to avoid making more than $2 billion in future payments to Auris investors. “This lawsuit is wholly without merit,” Montagnino said in an emailed statement Monday.

When it acquired Auris, the world’s largest maker of health-care products said the deal would accelerate J&J’s expansion into the market for digital surgery products. A few months later, it acquired the rest of Verb Surgical Inc., another robotic-surgery system make, that it didn’t already own. Verb had been a joint venture between Google & J&J.

J&J paid $3.4 billion in cash for Auris as part of the 2019 buyout and agreed to pay as much as $2.3 billion more based on future performance of the Auris business, according to Fortis’ suit. The prospect of future payments is included in the merger agreement, the fund’s lawyers added. Fortis was acquired by PNC Financial Services Group in 2017.

Fortis officials contend J&J never intended to make the earn-out payments. Auris and Verb were forced into a contest to show which system performed better. After winning that so-called “bake off,” Auris was saddled with employee transfers from Verb that slowed progress on development of its system, Fortis’ lawyers said in the suit.

Slow-Walking Approvals

Officials of J&J’s Ethicon unit, into which Auris and Verb were folded, also interfered with the robotic-surgery company’s ability to earn the future payments by refusing its expansion requests and slow-walking efforts to get U.S. Food & Drug Administration approvals tied to the payments, according to the suit.

The agreement required Ethicon and J&J to use “commercially reasonable efforts” to help Auris achieve the regulatory milestones, Fortis officials said in the suit. J&J CEO Alex Gorsky also is named as a defendant in the case.

Montagnino, the J&J spokesperson, pointed to the company’s recent securities filings disclosing the FDA’s unwillingness to give Auris system fast-track approval. “As a result, our development and commercialization time lines have been impacted,” she said in her statement.

The case is Fortis Advisors LLC v. J&J, 2020-0881, Delaware Chancery Court (Wilmington).

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