Medical Device Associate

In a move that it had promised to make last week, Cytyc (Marlbourough, Massachusetts) formally raised its offer for Vision Systems (Melbourne, Australia) to A$3.25 per outstanding share, a total consideration of A$692 million ($517 million).

The increased offer of A$3.25 per Vision Systems share represents a 53% premium to the A$2.13 price provided to Vision Systems' shareholders under the proposal by Ventana Medical Systems (Tucson, Arizona) to merge with Vision Systems. The offering price is also more than $195 million greater than Cytyc's own initial asking price for Vision that it made just over two weeks ago (Medical Device Daily, Sept. 15, 2006).

"The message is simple," said Patrick Sullivan, president/CEO of Cytyc. "Cytyc's tender offer is the only offer on the table, it is unconditional, and it offers value far superior to Ventana's proposal. Cytyc has repeatedly demonstrated its commitment to completing this transaction. Vision Systems' shareholders can receive cash for their shares within five days of accepting our offer."

In response to the sweetened offer, Vision dropped its recommendation of a bid from Ventana Medical, but stopped short of backing the higher Cytyc bid in anticipation of an even better price, a calculated move in an escalating game of financial brinksmanship.

In terminating the Aug. 11 agreement with Ventana, Vision Systems said it considers Cytyc's latest offer superior to Ventana's.

That better offer may come soon, since Ventana reported that it "continues to explore its options with regard to Vision Systems," including a potential, cooperative effort with another potential rival bidder, Danaher (Washington), to acquire Vision. That, it said, "is under active consideration."

In a move last week that the company made to prevent Cytyc from gaining outright ownership, Ventana purchased roughly 22 million Vision shares, or 10.2% of the total outstanding shares of the company on a fully diluted basis (MDD, Sept. 29, 2006).

Cytyc's new offer is being pitched at 175 times Vision's forecast earnings before interest and tax (EBIT) of A$3.95 million for 2007, according to Reuters Estimates – more than triple the EBIT multiple on which comparable U.S. medical device companies trade.

However, Vision's real earnings growth is only forecast to start coming through in 2008. Vision's EBIT is expected to jump to A$15 million in 2008.

John McDonough, president of Cytyc Development Corp., has said in the past several weeks that Ventana might struggle to win clearance from Australia's antitrust watchdog, the Australian Competition & Consumer Commission (ACCC), on the grounds that Ventana and Vision together would dominate the market for automated staining systems for diagnosing cancer.

However, an industry source told Reuters that Cytyc was citing too narrow a definition for the market – automated systems – in which Ventana and Vision operate. The broader market for staining includes manual systems, for which privately-owned Danish group Dako is the market leader, the source said.

The big attraction in Vision is its BioSystems arm, which sells automated machines to pathology labs and hospitals, analysts say. It locks in customers to high-margin, three- to five-year packages for the reagents used with the machines.

A source at Ventana, who wished to remain anonymous, told MDD that the antitrust allegations that Cytyc is making are absurd. "We've got some of the best anti-trust attorneys both in Australia and in the States — there's no way we would be going forward with this deal if we thought there was going to be a problem."

The source also questioned Cytyc's motivation for its offer, particularly in regards to a long-term strategy.

"Cytyc for years has been building up their women's health program, spending $600 million to do so. Now they are putting all of their money into acquiring Vision. They're saying this is the direction they need to go in [even though] it is essentially undercutting their women's health business and undercutting their great PE [price-to-earnings] multiple."

The Ventana source maintained that Ventana is a "fiscally disciplined," company and would not do anything to jeopardize its value in a protracted bidding war.

While not available for a comment to MDD at this time, Sullivan, in a conference call last month, discussed the company's rationale for wanting to acquire Vision.

"We are going to be adding to the Vision business significantly in the United States, I think, with our infrastructure," he said. "To say that Ventana has better costs synergies, from my perspective, is not accurate. I think we have as good, if not better, cost synergies. And for us, it is pure revenue synergies. The opportunity to generate the types of margins and the type of growth in earnings and revenues that we have targeted for ourselves is enhanced by this combination."

In response to analysts' concerns during the conference call that his company might get sucked into a bidding war with Ventana, Sullivan said that Cytyc is taking a "very disciplined approach. … [W]e have in the past walked away from acquisitions when they did not make financial sense. And I think we would do the same thing here, if it makes sense."

Despite Ventana's denial of antitrust concerns, Cytyc said it has written to the ACCC outlining its "continuing concern" about the anti-competitive consequences that an acquisition of Vision Systems by Ventana would have on Australia's pathology and healthcare markets.

"The combination of Vision Systems and Ventana would be a combination of the No. 1 and No. 2 players in the market," said Sullivan. "It will result in a combined market share of around 85%, blocking healthy competition, which is in the best interest of customers. In our view, Vision Systems' products threaten Ventana's market leadership position, and any Ventana proposal is a defensive strategy of acquiring a key competitor who has better technology."

The would-be suitors continued to pour on the rhetoric, with the ACCC saying on Tuesday that it had received a complaint from Ventana about Cytyc entering into pre-bid agreements for 13.5% of Vision's shares.

Ventana has argued that the move substantially lessens the prospects of a competitive proposal from another bidder and is inconsistent with various Australian Stock Exchange market rules.

Following that complaint from Ventana, Cytyc submitted a complaint of its own to the panel, saying that Ventana's requirement as per their merger agreement — that Vision give Ventana key details on any competing proposal as soon as Vision was approached — gave Ventana an unacceptable leg up when it acquired its 12% stake in Vision on Sept. 27.

Both Cytyc and Ventana have acquired stakes of at least 10% in Vision, preventing any rival bidder from moving to 90% and compulsory acquisition.

Additionally, Ventana, which had put litigation on hold pending the merger outcome, reported on Sept. 19 that it filed a patent lawsuit against a Vision Systems subsidiary in U.S. District Court in Boston. The complaint alleges some of Vision Systems' instruments infringe on a Ventana patent.

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