Unable to strike a long-sought merger deal – at least long-sought by the larger U.S. firm – Boston Scientific (BSX; Natick Massachusetts) and Medinol (Tel Aviv, Israel) launched a war of words last month, with those words increasingly nasty as preliminary to a legal battle launched by the Israeli firm.
BSX has been attempting to acquire Medinol, its major supplier of stents and stent materials, for several months, but those negotiations were abruptly halted when the Israeli firm filed suit against Boston Scientific, charging fraud and theft of trade secrets. The U.S. company shot back, saying the lawsuit was a negotiating ploy intended to drive up the acquisition price for Medinol, and it used its mid-April annual meeting with market analysts to decry such tactics and to refute negative comments Medinol had attributed to Boston Scientific President and CEO Jim Tobin.
In the suit filed by Medinol, it claimed, among other things, that BSX had misappropriated its annual property but also had set up a "dummy" company for the purpose of stealing business from it. The Israeli firm said that Tobin had provided Medinol with a partial disclosure about the shell company, located in Ireland, that he had referred to his Boston Scientific colleagues as "crooks" and had made available many internal documents that "provide evidence of the fraud."
During Boston Scientific's meeting with analysts, Tobin said that he has "the highest confidence in the business ethics of the people I work with," and, specifically addressing reports that he was "passing information to Medinol on our independent manufacturing line," said that "any information that came from me or at my direction was given with Pete Nicholas' [BSX chairman] full knowledge and agreement." Tobin repeated his company's position that the lawsuit and other action by Medinol were all pointed to an ulterior motive: "to get us to pay a higher price for Medinol." He said that in its efforts to acquire the 80% of the Israel stent maker it does not already own, Boston Scientific made an opening offer last summer "we thought was reasonable." Tobin said that Medinol then countered with "a number that was in the stratosphere." After some posturing, "they came down significantly, but not nearly enough," Tobin said. "By year-end, they had come down to a figure that was in the ballpark, but still too high," while also continuing threats of legal action, he said. "By March, it actually looked like we were headed toward an agreement." Tobin said BSX at that point asked Medinol to sign a term sheet, but "they got seller's remorse and balked. Then they demanded to renegotiate." When Boston Scientific said no, he said, "they finally sued."
Tobin says the issue is clear: "This is all about leverage, plain and simple. It was about leverage when Medinol didn't want to give us our independent manufacturing line, and it's about leverage now when they are looking for more money."
Though continuing to express the company's desire to purchase Medinol, Tobin told analysts, "we will not be bullied, and we will not let Medinol hold our business hostage to their demands." He said that the plant in Ireland was set up because "Medinol was a start-up company [when the stent manufacturing and supply agreement between the two companies was set up in 1995], and there were real risks that it might not meet our supply needs." He said the contract "specifically provides for an independent [production] line." Medinol "was required by the contract to design and build the line and get us up to speed so that we could operate it ourselves. Medinol wouldn't do it, so we tried to do it ourselves," Tobin said.
He said that Boston Scientific never completed the stent production line in Ireland and "never sold a single stent made on it."
In a research report issued after the analysts meeting, Lehman Brothers (New York) medical technology analyst David Gruber, MD, cited Boston Scientific's pursuit of stent development options with and without Medinol, and lauded Tobin's efforts to build an organization infrastructure.
The difficulties with Medinol further help to explain Boston Scientific's activity in the acquisition market this year, which has resulted in the purchase of several technologies for the company's pipeline (see The BBI Newsletter, April 2001). But those technologies are not likely to emerge from the BSX pipeline any time soon, and the difficulties with Medinol threaten the company's continued ability to supply stents, primarily its NIR stent, to its customers. Tobin reported that the company has a backlog of products in that category, but an inability to strike a merger deal and a protracted legal battle threatens that supply.
Larry Haimovitch, president of Haimovitch Medical Technology Consultants (San Francisco, California) who follows the cardiovascular sector for BBI and its sister publication, Cardiovascular Device Update, termed the suit, for Boston Scientific, "the worst of any company's nightmares – to be in a joint venture or strategic alliance and end up not only in a dispute, but name-calling and finger-pointing in public."
Companies in cost-cutting moves
The current economic downturn has been reflected in the med-tech industry by companies issuing statements concerning cutbacks and layoffs to preserve their corporate presence.
Even as it reported record preliminary results for the first quarter ended March 31, diagnostic test maker Calypte Biomedical (Alameda, California) warned that it is sailing into troubled waters. Calypte posted preliminary 1Q01 revenues of $1.4 million, a record quarter for the company, but said its available financing may not sustain it at current levels through the second quarter. Nancy Katz, president, CEO and CFO of the maker of the only FDA-approved HIV-1 antibody tests that can be used on urine samples, said the company is "encouraged by our record revenues in the first quarter," adding that the revenue gain from $1.1 million in the year-earlier period "validates our business and marketing plans." But she said the decline in the price of the company's shares means that "our ability to access needed operating capital through our equity line has diminished substantially." Katz said the company will require "a substantial capital infusion," and noted that "we are also actively searching for strategic opportunities, including investment in the company, a merger or other comparable transaction, the sale of certain of our assets or a financial restructuring" in order to sustain current operations. She referred to various opportunities as "promising" but none were yet in place as of mid-April.
Other firms on shaky ground:
Pointing to performance problems in its ABS2000 system last June and a subsequent safety alert, Immucor (Norcross, Georgia) reported third-quarter and nine-month revenues sharply down. The maker of an automated instrument/reagent systems for the blood transfusion industry said revenues declined by $7.6 million to $50.8 million from the $58.4 million reported in the year-earlier period. Sales for the third quarter were $16.9 million, down from $19.2 million in the comparable quarter. Chairman and GEO Edward Gallup said that the company will lay off staff, close operations in the Netherlands and pursue other measures to reduce costs by more than $4 million. Officers of the company have agreed to a salary reduction averaging about 8% of their total base compensation. Immucor recorded about $1.3 million in nonrecurring expenses in the third quarter related to the implementation of the plan, with the bulk of the costs included in general and administrative expenses, primarily related to severance payments. Gallup said the cost reduction plan "should result in a return to profitability in future quarters." It removed the safety alert for the antibody screening and crossmatch assays performed on the ABS2000 in December. However, the safety alert remains in place for blood grouping assays. The firm's corrective action plan for blood grouping has been agreed to by the FDA and Immucor said it has begun implementing this plan. It warned that those performance issues may result in further delays in customers accepting instruments, which would continue to have an adverse effect on sales and earnings.
Bio-Plexus (Vernon, Connecticut), a maker of safety medical needles and other products, has filed for bankruptcy, saying that it expects to operate in a normal manner while it reorganizes its capital structure and seeks to attract additional financing. The company reported reaching an agreement with its principal lender, Appaloosa Management LP, to recapitalize the company with the goal of raising up to $10 million in new equity and debt financing. Besides raising new equity, the company hopes to eliminate the convertible debt held by Appaloosa and other investors and position itself for future growth in the needlestick safety industry. John Metz, president and CEO of Bio-Plexus, called the company's decision to file for bankruptcy protection "the quickest and most efficient way to restructure its balance sheet and raise the necessary capital for future growth. We are moving forward with this restructuring plan as quickly as we can, and we hope to have it completed by the end of the second quarter." Bio-Plexus holds U.S. and international patents on safety medical needles and other products under the Punctur-Guard, Drop-It and Punctur-Guard Revolution brand names.
Gliatech moves forward on Adcon-L
In a development related to the anticipated relaunch of its Adcon-L product outside the U.S. in June, Gliatech (Cleveland, Ohio) said it has completed an ISO 9001 audit conducted by KEMA Registered Quality NV, receiving a recommendation for recertification for the manufacture of Adcon-L and Adcon-T/N outside the U.S. The Adcon gel and solution are resorbable carbohydrate polymer devices designed to inhibit scarring and adhesions following surgery.
Gliatech implemented a voluntary recall of Adcon gel in January as a result of a recall by the supplier of a raw material component of the gel. The company said it has completed process development work and testing associated with the change in packaging of the raw material used in Adcon gel production outside of the U.S. and has initiated manufacturing validation runs of Adcon gel. Gliatech said it expects completion of the validation runs on schedule for the relaunch of Adcon-L outside of the U.S. in June. Relaunch of the product in the U.S. is subject to the submission and approval of the additional data identified previously as part of the FDA's Application Integrity Policy status. Gliatech also reported the expansion of its distribution network in Eastern Europe by entering into distribution agreements in Hungary and Poland. Upon relaunch, Adcon-L will be sold in 35 countries outside the U.S.