CryoLife, which is pursuing the purchase of Medafor with all the subtly to a WWF cage match and whose spokesperson was “Golden Goose” in a 2008 stock manipulation scheme (see OTW February 2, 2010), appears to be marching into uncharted territory. Could CryoLife have misled Wall Street Analysts?
Here is the verbatim Q&A between Gregory Brash, research analyst at Sidoti and CryoLife:
Greg Brash: “Just wanted to clarify one more on Medafor. If this deal doesn’t end up going through, you should—there shouldn’t be any issues with your ability to distribute the product and it should still be your option to renew when the deal ends, assuming keep hitting the minimum purchase agreements. Am I correct on that?”
CryoLife (either Steven Anderson or CFO Ashley Lee): “That’s correct. Our current agreement runs through the middle of next year and assuming that we continue to meet our purchase requirements, which we have done to-date, then the agreement would renew for another three years.”
Actually, Medafor twice sent to CryoLife legal notices to terminate the supply agreement. The first one was withdrawn in mid-2009 when CryoLife agreed to stop violating its terms. The second notice of intent to terminate the existing supply agreement was delivered to CryoLife in early December 2009 and took effect January 18, 2010—one month ago.
Did CryoLife fail to mention that Medafor had filed an intention to terminate the agreement? Would this qualify as material information when asked a direct question by Wall Street analysts? The news that the notice to terminate was filed is available on Medafor’s website but is NOWHERE to be found on CryoLife’s Web site.
Medafor Fights Back
Approximately one week ago, Medafor sent a letter to its shareholders disclosing additional information regarding the CryoLife offer including details of the Board of Director’s unanimous rejection of the CryoLife bid.
“Grossly Inadequate” was the board’s answer to CryoLife’s $2 per share cash and stock bid. To start with, said Medafor’s board, the supply contract with CryoLife is valued between $40 million to $50 million so why accept, in effect, $40 million now? Next, sales to CryoLife account for only 20% of Medafor’s sales, so selling the whole company for $2 per share seems patently ridiculous. Finally, and this is the coup-de-grace, of those sales to CryoLife, Medafor’s own sales organization generated $5.1 million of CryoLife’s reported $6 million in sales. In other words, Medafor’s own sales force accounted for 85% of CryoLife’s reported MPH product sales.
As of last week, only five of Medafor’s 550 shareholders have accepted CryoLife’s $2/share offer. CryoLife has sent several letters to Medafor’s shareholders and this week repeated its offer on the conference call with analysts. Less than 1% of Medafor’s shareholders have accepted it despite the direct solicitations and implied threats.
The five shareholders who tendered their shares to CryoLife for $2/share represent 11% of Medafor’s shares outstanding. After reading Medafor’s letter to CryoLife, those five shareholders may want to ask for their shares back.
A Brief History of CryoLife’s Hostile Takeover Attempt
This past January 13, 2010, CryoLife CEO Steve Anderson, told Medafor’s board that his company had bought 1.6 million Medafor shares, amounting to 8% of the company. Anderson also sent a letter to Medafor’s board of directors offering $2 per share in cash and stock for the remaining 92%.
That unsolicited offer was the third one from CryoLife to Medafor. The first one came last November and it had no price attached to it. CryoLife, at the time, was one of Medafor’s distributors for its MPH hemostat.
MPH is a micro porous polysaccharide hemostatic powder which stops bleeding in virtually any surgery. It is CE Mark approved (since 2003) and has an FDA pre-market approval (since 2006). The product works. When applied to the surgical site, it rapidly dehydrates blood and accelerates the clotting cascade. It’s easy to use, doesn’t promote infection and is absorbed within 24-48 hours. Other surgical hemostats can take three to eight weeks to fully break down. MPH is cheap and generates very good gross profit margins for whatever company is selling it.
Medafor said, in effect, thanks but no thanks to CryoLife’s first purchase offer.
Two months after that, CryoLife tried again. This time CryoLife CEO Anderson put a price on his offer—$25 million in CryoLife stock—which trades on the New York Stock Exchange under the symbol “CRY.”
Medafor’s answer was, again, “No.” This time Medafor CEO Gary Shope gave a reason—CryoLife’s $25 million price tag for Medafor was less than the $40 million value of the supply contract. Medafor was simply not available at such an obviously low price.
But, of course, CryoLife CEO Anderson has a long and well documented record of employing brute force tactics. Two months after Medafor’s second “no”, Anderson sued Medafor in U.S. District Court for the Northern District of Georgia alleging breach of contract, fraud, negligent misrepresentations and violations of the Georgia RICO racketeering statutes.
The District Court judge granted Medafor’s motion to dismiss on December 9th and in the process characterized CryoLife’s lawsuit as a “shotgun pleading.” Days later Medafor gave CryoLife a notice of intent to terminate the existing supply agreement by January 18, 2010.
And those events set the stage for CryoLife and its CEO Steve Anderson’s current attempt to take over the 11-year-old, St. Paul, Minnesota-based Medafor.
Medafor Keeps Growing
Medafor, which is profitable, has been growing sales at an annual compound rate of 75% per year since 2005. Medafor is a private company and does not disclose its financial performance, but suffice it to say that 99% of its shareholders (all of whom receive copies of the company’s financial records) have opted to keep their shares away from CryoLife.
Going forward, Medafor has announced that it is planning to launch different versions of its flagship MPH product into the OB-GYN, orthopedic and urology markets—none of which are served by CryoLife.
CryoLife’s Financial Performance
This week CryoLife announced that sales (excluding Medafor’s MPH—which is sold as Hemostase by CryoLife) rose 2.1%. Sales of Medafor’s MPH product through CryoLife rose 292% to $6 million and tripled CryoLife’s overall growth rate from 2.1% to 6.3%.
CryoLife’s largest business—BioGlue—declined in 2009. BioGlue’s unit sales fell 2% and revenues before the effect of currency changes fell 4%. CryoLife’s profit margins continue to come under pressure (gross profit margin fell by 204 basis points to 62% of sales).
The good news is that CryoLife generated strong cash flow in 2009—to approximately $16.6 million. That, in turn, left the company with almost $30 million in cash on its books. Cash, presumably, that CryoLife is offering to Medafor shareholders.
What Are CryoLife’s Options?
With 89% of the shares and 99% of the shareholders supporting Medafor’s board, it will be nearly impossible for CryoLife to successfully acquire Medafor—at least at the current bid. For the last four years, Medafor’s sales have risen at an annual compound rate of 75% and Medafor is profitable. If that growth rate continues and the one fact that both CryoLife and Medafor can agree to is that sales of MPH are likely to continue to grow rapidly, then Medafor’s valuation is no doubt several multiples higher than CryoLife’s $40 million bid.
Could CryoLife afford to offer, say, $100 million in cash for Medafor? With barely $110 million in equity and eroding profit margins, the short answer is “no.” If the offer is CryoLife stock, then the answer is likely “yes” although Medafor would end up owning roughly 50% of CryoLife and, in effect, control the company.
What can CryoLife CEO Anderson do? We see three options:
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Attempt to force a Medafor shareholder meeting. While CryoLife probably can’t force a shareholder meeting under Minnesota law, even if it did it would likely be a disaster for Anderson. Not only would CryoLife’s bid be rejected, but the vitriol directed at Anderson would, we expect, be astonishing to behold.
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File a new lawsuit. Given the failure of the past lawsuit, all a new lawsuit would do is spend more of CryoLife’s resources. At some point CryoLife’s own shareholders would start to wonder about CEO Anderson’s use of corporate resources to pursue what is increasingly looking like a misguided use of millions of dollars of corporate funds.
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Do nothing. In this scenario, CryoLife would be compelled find an alternative surgical hemostat since Medafor is ending its distribution agreement with CryoLife and then simply allow its Medafor investment to grow over time—unless, of course, the shareholders who sold stock to Anderson ask for their stock back. Oops.
The Weirdness of CryoLife
While Steve Anderson ponders his next move, Medafor appears to have started pounding the nails into this deal’s coffin. At the last call with analysts, CryoLife CEO Steve Anderson forgot to mention the details of Medafor’s letter to him and did not address the issues Medafor raised. Ironically, CryoLife’s best option may well be to let Medafor’s current management build value for its shareholders—sans a distribution agreement with CryoLife. Who knows, maybe CryoLife’s $4 million investment in Medafor stock could someday be worth $40 million, $50 million or more.
