Johnson & Johnson Sued Over Failing To Deliver Promised Post-Merger Returns To Auris Investors

Johnson & Johnson JNJ stands accused in a lawsuit of deceiving investors regarding performance-based earnings from Auris Health Inc, a medical-robot company it acquired last year for $5.7 billion, Bloomberg reported Monday.

What Happened: The lawsuit, filed in the Delaware Court of Chancery, alleges that executives of the New Jersey-based drugmaker “violated the parties’ merger agreement” with the “sole objective” of depriving Auris’ shareholders of billions in earn-out payments.

The payments were reportedly promised post-merger and are based on Auris’ robotic systems, which are used to perform lung biopsies.

Fortis Advisors LLC alleges that Johnson & Johnson executives forced Auris to compete with Verb Surgical LLC, another robotic surgery firm it acquired months later which was originally a joint venture with Alphabet Inc GOOG GOOGL unit Google. 

After winning the inter-company contest, Auris was made to absorb Verb employees, which slowed down its progress, Fortis alleged. The firm claimed that the pharmaceutical giant had no intention of making the payments.

Johnson & Johnson’s Ethicon unit, under which both Auris and Verb operated, also allegedly interfered in the former’s operations and came in the way of achieving regulatory milestones, alleged Fortis.

“This lawsuit is wholly without merit,” a company spokesperson told Bloomberg — ascribing the failure to achieve regulatory milestones to the fact that the United States Food and Drug Administration didn't extend fast-track approval to Auris’ system.

Why It Matters: The multinational drug giant paid $3.4 billion in cash for Auris and agreed to pay $2.3 billion based on Auris' future performance in line with “predetermined milestones.”

The company is also embroiled in other legal matters. Last month, New York Governor Andrew Cuomo unveiled civil charges against the drugmaker over allegations of downplaying the risks attached to opioid drugs.

Johnson & Johnson earlier this month agreed to pay $100 million to settle over 1,000 suits related to its baby powder which allegedly caused cancer in users, Bloomberg reported.

Price Action: Johnson & Johnson shares closed about 0.6% higher at $151.84 on Monday and gained another 0.26% in the after-hours session.

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