RNS Number:5648B
Medisys PLC
18 April 2006
Embargoed until 7am 18th April 2006
Medisys plc
("Medisys" or the "Company")
Proposed sale of the Hypoguard Group
Notice of Extraordinary General Meeting
Medisys plc today announces:
*the conditional disposal of the whole of its operating businesses
comprising primarily its Blood Glucose Monitoring business (the "BGM
Business") for a consideration of $42.8 million (approximately #24.2
million) in cash, subject to shareholder approval.
*that Medisys is to become an investment company seeking to invest or
co-invest in companies operating in the areas of medical devices,
diagnostics, biopharmaceuticals and healthcare.
Key Points:
*Sale will enable Medisys to realise significant value and provide the
Company with a substantial amount of cash to re-invest in companies the
Directors identify as having sizable market opportunity.
*Increased competitive environment in the BGM market has put severe
constraints on Medisys' working capital.
*Part of the sale proceeds will be applied to settle Medisys' term note
loan facility of $9.75 million (approximately #5.5 million) and overdraft
facility of $4.25m (approximately #2.4 million) with Bank of Scotland plc.
Following repayment of these facilities Medisys will be debt free.
*Medisys to concentrate its resources on seeking opportunities to invest
in companies which operate in the areas of medical devices, diagnostics,
biopharmaceuticals and healthcare.
*EGM will be held at 10.00a.m. on 4 May 2006 at the offices of Weber
Shandwick, Fox Court, 14 Gray's Inn Road, London WC1X 8WS.
Dr. David Wong, Executive Chairman commented:
"We believe the decision to seek a disposal of our Blood Glucose Monitoring
business is the best way to realise significant value for our shareholders and
for Medisys to progress debt free. The sale will reposition Medisys as a focused
investment company intending to invest in companies with strong niche market
positions in the areas of medical devices, diagnostics, biopharmaceuticals and
healthcare, where we believe significant investment and co-investment
opportunities exist.
"The Hypoguard Group is well positioned, in terms of product offering and
presence, in the blood glucose monitoring market, however a parent with greater
capital resources is required for it to successfully overcome the current
challenges it is facing."
Enquiries:
Medisys PLC
David Wong, Chairman 01394 446 717
Jonathan Chapman, Company Secretary
Weber Shandwick Square Mile
John Moriarty 020 7067 0700
Introduction
The Board of Medisys announces today that the Group has conditionally agreed to
dispose of the whole of its operating businesses comprising primarily its blood
glucose monitoring businesses, for a consideration (including amounts to be
applied towards repayment of all intra-Group loans) of $42.8 million
(approximately #24.2 million), to be satisfied in cash. The transaction is
structured as a sale of the entire issued share capital of two of the Company's
wholly owned Subsidiary Undertakings, namely Hypoguard Limited, and Hypoguard
USA, Inc. which, (together with Hypoguard Medical Products Inc., the wholly
owned subsidiary of Hypoguard USA, Inc.) comprise the Hypoguard Group. The
Hypoguard Group operates the Group's blood glucose monitoring and urine
chemistry businesses.
Given the size of the Hypoguard Group relative to Medisys the Sale is a Class 1
transaction under the Listing Rules and therefore requires, and is conditional
upon, the approval of Shareholders in general meeting. The purpose of this
announcement is to provide you with details of the Sale and to explain why the
Board considers that it is in the best interests of Medisys and its Shareholders
as a whole and recommend that Shareholders vote in favour of the resolution to
be proposed at the Extraordinary General Meeting.
Information on the Hypoguard Business
The Blood Glucose Monitoring Market
The Hypoguard Business is primarily focused on the distribution and the
development, manufacture, marketing and selling of blood glucose monitoring
("BGM") products used in the management of diabetes together with various lancet
products used for drawing the blood samples that a user would test with a BGM
product. A smaller component of the business is made up of manufacturing,
marketing and selling urine chemistry products and contract manufacturing
undertaken for third parties in the Hypoguard Group's Minneapolis facility
leveraging manufacturing expertise in dry reagent chemistry.
The Hypoguard Group markets a range of BGM products including the Supreme, the
Assure family, Advance Micro-draw and Quicktek. The Hypoguard Group derives the
majority of its sales from the US BGM market and each of its BGM product lines
is aimed at different segments of the US BGM market. In addition, the Hypoguard
Group is developing sales channels in Europe and Asia.
US BGM market
The US BGM market is currently dominated by four large branded manufacturing and
marketing companies: LifeScan (a division of Johnson & Johnson), Roche
Diagnostics, Abbott Laboratories and Bayer Corporation. The last few years have
also seen a number of independent companies entering the US BGM market offering
very low cost BGM products from the Far East.
There are three key segments within the US BGM market in which the Hypoguard
Group operates, which are Long Term Care ("LTC"), Mail-order and Retail.
Reflecting the differing characteristics of each of these segments, different
product offerings and a different sales and marketing strategy are employed in
each segment.
Long Term Care - this is the Hypoguard Group's core segment. The segment
includes nursing homes for elderly people and others requiring long term nursing
care. The estimated size of this market at retail prices is approximately $150
million. The products sold through this channel include the Supreme and Assure
range of products. These products are designed with feature sets that make them
suitable for institutional settings where glucose testing is typically
undertaken by nursing staff. The Hypoguard Group also sells the Haemolance range
of single use safety lancets into the LTC segment. The Haemolance products are
sold pursuant to the terms of a distribution agreement with a Swedish supplier,
HaeMedic AB Medical Products.
Mail Order - in the US, substantial quantities of BGM products are sold through
mail-order companies. The Hypoguard Group entered this market in 2002 with the
QuickTek product through an exclusive agreement with Gem Edwards Inc., a
business to business wholesaler within the mail-order segment. Subsequently in
2004, the Hypoguard Group signed a supply agreement for Advance Micro-draw with
Liberty Healthcare Group, Inc. ("Liberty"). Liberty provides products directly
to consumers, primarily on the US Federal Government funded Medicare programme,
which is essentially a nationally funded health insurance programme for
qualified persons aged 65 and over.
Retail - the Retail segment of the US BGM market is the largest segment,
estimated by the Directors to be worth approximately $1.1 billion and is
dominated by the large branded manufacturing and marketing companies noted
above. The Hypoguard Group's approach to this segment of the market has been one
of avoiding direct competition by offering its products to larger retailers on a
private label basis. This was done first with Wal-Mart for the innovative NewTek
product, which is an integrated cartridge based BGM product. Although NewTek
gained very positive initial feedback from diabetes educators, during the time
it was available its sales never reached a point where the product was
economically viable for the Hypoguard Group and was therefore withdrawn in 2005.
In June 2005, the Hypoguard Group started supplying Target Stores, the second
largest general merchandise retailer in the US, with a BGM product based on
Advance Micro-draw, which Target Stores brands as EasyPro. The EasyPro product
is marketed as a full featured but value priced product and, to date, has been
well received by Target Stores' customers.
European and International BGM markets
In July 2005, the Hypoguard Group signed a strategic alliance with A. Menarini
Industrie Farmaceutiche Riunite S.r.l. ("Menarini"), a large European branded
marketer of BGM products, under which the Hypoguard Group has developed and
supplies a Menarini branded BGM product. The Hypoguard Group also supplies BGM
products to Stada Arzneimittel A.G. ("Stada"), which Stada sells in Germany
under its own Stada brand, and to Nicholas Piramel India Limited ("NPIL") under
the Advance Micro-draw brand which NPIL sells in the Indian Sub-Continent.
Research and development
Historically, the Hypoguard Group has invested heavily in research and
development to develop its BGM products. As a result of this investment several
new products have been brought to market including: Advance Micro-draw, Flight
and QuickTek. Current research and development projects are concentrated on
achieving improved product performance and lower manufacturing costs on the
Hypoguard Group's current technology platforms.
Intellectual property
Historically, the Hypoguard Group has developed, or acquired through licences, a
wide range of intellectual property rights, including patents, registered
designs, design patents and trademarks, which cover its BGM product range.
Quality systems and regulatory
The design, development and marketing of medical devices are regulated in the US
by the Food and Drug Administration and comparable agencies in other countries.
In order to ensure that products are pre-cleared for market and comply with all
relevant regulations, a significant investment has been made in the Hypoguard
Business' quality systems. The Hypoguard Group has certification to ISO 9001,
EN46001 and ISO 13485 standards.
Manufacturing
The Hypoguard Group manufactures Supreme test strips, QuickTek test strips and
the Diascreen urine test strips products at its facility in Minneapolis and also
undertakes the final manufacturing processes and runs an automated packaging
line for the Advance Micro-draw platform products at that facility.
The other aspects of the Advance Micro-draw manufacturing process are contracted
out to third parties. These include the process of the specialist
screen-printing of the active inks and the electronics assembly and
manufacturing of the Advance Micro-draw BGM meters.
Financial information on the Hypoguard Group
The Hypoguard Group had net liabilities as at 30 September 2005 of approximately
#3.2 million. A summary of the trading results and gross assets for the
Hypoguard Group as extracted without material adjustment is set out below.
Year ended
30 September 30 September 30 September
2005 2004 2003
#'000 #'000 #'000
Turnover 30,187 35,627 38,976
Profit /(loss)
profit before
interest and tax (8,060) 1,458 146
Gross assets 16,653 17,556 13,824
Background to the Sale
Over the last 18 months the Hypoguard Group has been operating in an environment
that has been very challenging. These challenges can be broadly categorised as
follows:
Ever increasing intensity of competition
Long Term Care - in the LTC segment of the BGM market the level of competition
has increased both from established competitors and also from new entrants into
the market. This has resulted in a significant fall in average selling prices
and margins as the Hypoguard Group has been forced to reduce prices to retain
customers. In 2004, the Hypoguard Group was market leader for this segment of
the market (on a US dollar sales basis) with a market share of 37.5 per cent. In
2005, this market share had dropped to 28 per cent. Although the Hypoguard Group
has seen a stabilisation in the level of the competition in the LTC segment over
the first half of the current financial year, the Hypoguard Business continues
to operate at revenue and margin levels below historical averages. Revenues in
the LTC segment of the BGM and safety lancet markets in the financial year ended
30 September 2005 were #20.0 million, a reduction of 21.9 per cent on a constant
exchange rate basis from #25.6 million in 2004.
Mail Order and Retail - although the Hypoguard Group has had a certain level of
success in accessing these segments of the market, again conditions have been
challenging as a result of pricing being driven down by low cost Far Eastern
manufactured products and the market dominance of the four largest branded
manufacturing companies. In both these segments achieving repeat sales of test
strips once a BGM meter is placed with a customer is in large part driven by the
marketing and sales dollars put behind the product. Even though the Hypoguard
Group's market strategy is aimed at reducing the required level of that
investment by leveraging the brand and/or marketing power of large established
diabetes mail order suppliers and general merchant retailers there is still a
need to invest marketing funds directly against the products by the Hypoguard
Group. The NewTek product experience demonstrated that reliance on a retailer to
generate national awareness might not be enough to drive the required sales
growth in the product.
International - many of the same factors that affect the US Mail Order and
Retail segments are also seen in the international side of the business. Pricing
has been driven down by low cost Far Eastern manufactured products and therefore
the margins on which the Hypoguard Group is operating its international business
are challenging. It also remains to be proven whether the Hypoguard Group's
international partners can drive their businesses to achieve the levels of
strip-to-meter ratios that will generate meaningful profit for the Hypoguard
Group.
Constraints on Available Cash
The competitiveness of the environment in which the Hypoguard Group has operated
over the last 18 months has put severe constraints on the Group's working
capital. The Group has addressed this through taking steps to reduce overhead
costs, managing cash recourses in as prudent a manner as possible and seeking
further working capital resources on top of the overdraft facility provided by
Bank of Scotland plc through a committed share finance facility from the
Headstart Group of Funds. Nevertheless, the constraints on resources have had a
negative impact on the Hypoguard Business in a number of respects, including:
Research and Development - the nature of the BGM business sector requires the
Hypoguard Group to seek continually to identify and develop next generation
technologies to ensure the long-term viability of the business. A lack of
available resources has prevented the commissioning of longer term and more
ambitious BGM research and development projects in areas such as non-invasive
and minimally- invasive technologies, continuous monitoring and hospital
information systems. The Hypoguard Group has continued to invest in leveraging
its current technology platform to create multiple systems aimed at different
markets, such as Assure Pro, to achieve improved product performance and to
lower manufacturing costs. However, the constraints on resources have also meant
that the speed at which results have been achieved has been slower and have, as
a consequence, adversely impacted the potentially available market opportunity.
The current level of ongoing research and development spend is at an eight year
low.
Intellectual Property - the development and acquisition of new intellectual
property requires significant investment and is inherently linked to the ongoing
level of research and development activity undertaken by the Hypoguard Group.
The rate at which the Hypoguard Group has created new intellectual property, in
particular patentable inventions, has slowed owing to the constraints on
research and development investment.
New Product Marketing - as noted above, even where products are supplied as
own-label products or are sold through mail order sellers, the investment in
complementary marketing activities by the Hypoguard Group is often critical to
generate consumer awareness and demand and ultimately making the product a
commercial success. The constraints on the Group's cash resources has meant that
only very limited marketing activities have been undertaken to support the
launches of new products by the Hypoguard Group's retail and mail order
partners.
Post Sale Strategy
The Directors anticipate that the proceeds of the Sale (including amounts to be
applied towards repayment of all intra-group loans) of the Hypoguard Group will
be $42.8 million (approximately #24.2 million).
Using the proceeds of the Sale, the Company intends to settle its bank loan
facility with Bank of Scotland plc, for the amount of $9.75 million
(approximately #5.5 million) which, according to the Company's accounting
records, it had outstanding at 31 March 2006 and the overdraft facility with
Bank of Scotland plc for the amount of approximately $4.25 million
(approximately #2.4 million). In addition, the Company will satisfy other
outstanding debts (principally the amounts owed to Elan Corporation plc, and the
costs related to the Sale, which in aggregate amount to approximately #800,000
(excluding the amount payable to SG Cowen).
After consummation of the sale of the Hypoguard Group, the Directors intend to
cause Medisys to cease being an operating business, and therefore cease to
generate significant earnings. The Continuing Group's assets will consist
largely of cash resulting from the proceeds of the Sale. The Continuing Group
will also retain the intellectual property and equipment associated with the
Futura Safety Syringe. These assets were fully written off during the financial
year ended 30 September 2005. The Directors intend to put the remaining net
proceeds on deposit for use when the Directors have identified investment
opportunities, both individually and as a co-investor together with other sector
investors, in companies in the following broad sectors:
* medical devices and diagnostics - generally at the stage where the
investee company has already obtained or will likely soon obtain regulatory
approval to market the product;
* biopharmaceuticals - depending on the disease at which the product is
targeted, at all stages of the investee's company's development of a new
molecular entity; and
* healthcare management - including investee companies developing
proprietary healthcare information technology systems, healthcare services
and other novel applications in healthcare.
The Directors intend to identify opportunities in each case where the investee
company has products or services addressing a sizeable market opportunity, and
where management have a proven track record.
Medisys will be a company investing in companies which operate in the areas of
medical devices, diagnostics, biopharmaceuticals and healthcare. The Directors
do not anticipate that any of the individuals critical to the operation of the
Continuing Group will leave pursuant to the sale of the Hypoguard Group. The
Continuing Group will continue to be led by Dr. David Wong, the Company's
Executive Chairman. Dr. Wong has extensive knowledge of these sectors, and
through his broad and extensive network of industry and investment community
contacts, he will be instrumental in identifying suitable opportunities which
satisfy the Company's investment criteria. The Directors also intend to appoint
at least one new non-executive director with relevant industry and/or investment
experience. In addition the Board intends to identify and invite suitable
members of the scientific and medical communities to join a Medisys Scientific
Advisory Board. The Medisys Scientific Advisory Board's role will be to assist
Medisys in identifying and undertaking due diligence on potential investment
opportunities.
Following completion of the Sale Agreement, the Board, together with its
advisers, will consider whether it would be in the best interests of
Shareholders for the Company's shares to be admitted to trading on AIM rather
than remain on the Official List. The Board intends to make a definitive
decision in this regard in the next few months.
In the event that the Sale is approved by the Shareholders and the Continuing
Group decides not to move to AIM, the future of the Company's listing on the
Official List is uncertain. If the Company actively pursues the investment
strategy proposed by the Directors, whilst on the Official List, the Company's
shares will be suspended from trading. In such circumstances, trading in the
Ordinary Shares of the Company would only re-commence following an assessment by
the UK Listing Authority of the eligibility of the Company as a listed company
and the production of a satisfactory new applicant prospectus. The Directors do
not intend to pursue actively the proposed investment strategy of the Continuing
Group for as long as the Company remains on the Official List without first
satisfying the UK Listing Authority as to the Company's eligibility.
Reasons for the Sale
Taking account of the factors described in the section "Background to the Sale"
above, the Board believes that:
*the Hypoguard Group does not have a sufficiently robust and diverse
revenue base to survive any further deterioration in margins in the
competitive BGM market which will compromise its ability to remain as an
independent BGM company; and
*the lack of resources to invest in next generation products and markets
will negatively impact the long term prospects of the Hypoguard Group and
therefore the long term prospects of the Group.
Accordingly, the Board is of the opinion that the sale of the Hypoguard Group at
this point in time will maximise the value of the business for Shareholders.
In addition to the reasons outlined above and absent a sale of the Hypoguard
Group, within the next 12 months the Directors believe that the Company would
probably be required by the provider of its bank loan facility, Bank of Scotland
plc, to repay the amount of $9.75 million (approximately #5.5 million) which,
according to the Company's accounting records, it had outstanding at 31 March
2006. The equivalent balance at 30 September 2005 was $11.25 million, classified
as a current liability in Medisys' consolidated balance sheet in the audited
accounts dated 30 September 2005. Such a demand for repayment would require the
Company to examine refinancing options including potentially seeking further
equity financing from existing Shareholders and/or new investors.
A sale of the Hypoguard Group at this point in time will enable the Company to
realise significant value and provide the Company with a substantial amount of
cash to re-invest on the basis outlined above under the section headed "Post
Sale Strategy".
Principal terms and cost of the Sale
Under the terms of the Sale Agreement, the Company and Medisys USA, Inc. have
conditionally agreed to sell the entire issued share capital of each of
Hypoguard Limited and Hypoguard USA, Inc. respectively for a cash consideration
(including amounts to be applied towards repayment of all intra-Group loans) of
$42.8 million (approximately #24.2 million).
Completion of the Sale is conditional upon, inter alia, the approval of the
Shareholders at the EGM. If this condition has not been satisfied on or before
26 May 2006, the Sale Agreement will cease to have any effect.
The Company and Medisys USA, Inc. have provided customary warranties and
indemnities under the Sale Agreement. The warranties are subject to various
exclusions and caps on liability. Financial liability under the indemnities is
not capped.
SG Cowen will receive a fee of up to $1.5 million (approximately #0.8 million)
on completion of the Sale Agreement as payment for financial advisory and
investment banking services provided to the Company in connection with the Sale.
Current trading and prospects
In the event that Shareholders vote at the EGM not to approve the Sale, the
Company will continue to operate the Hypoguard Business. The Company reported
its preliminary results on 9 December 2005 for the period ended 30 September
2005 and published its annual report and accounts for that period on 15 March
2006. In addition, the Company issued a trading update on 15 February 2006. In
the trading update the Board indicated that, as anticipated in the preliminary
results, it has seen an improvement in the financial performance of the
Hypoguard Business as against trading in the financial year ended 30 September
2005. This improvement in the Hypoguard Business has been sustained, resulting
in the Company being effectively cash-flow neutral for the six months to 31
March 2006. The Directors, because of the factors outlined in the section
entitled "Reasons for the Sale" above, believe that there is a substantial risk
that the improvements seen in the Hypoguard Business' financial performance may
not be sustained and/or that the further improvements needed to take the Company
to profitability are sufficiently unlikely to materialise. The Directors expect
that the Company will also be required within the next 12 months to repay the
$9.75 million (approximately #5.5 million) bank loan facility and the $4.25
million (approximately #2.4 million) overdraft facility owed to Bank of Scotland
plc. Such a demand for repayment would require the Company to examine
refinancing options including potentially seeking further equity financing from
existing Shareholders and/or new investors.
Extraordinary General Meeting
As explained above, the Sale is subject to the approval of Shareholders at the
EGM. An Extraordinary General Meeting of the Company will be held at 10.00 a.m.
on 4 May 2006 at the offices of Weber Shandwick, Fox Court, 14 Gray's Inn Road,
London WC1X 8WS. At this meeting, an ordinary resolution will be proposed to
approve the Sale.
Recommendation
The Board believes that the Sale is in the best interests of Medisys and its
Shareholders as a whole and, accordingly, unanimously recommends shareholders to
vote in favour of the resolution set out in the notice of Extraordinary General
Meeting, which the Company intends to mail today together with a circular to
Shareholders that provides additional detail on the proposed Sale. The Directors
and persons connected with them intend to vote in favour of such resolution in
respect of their aggregate beneficial holdings of 20,100,138 Ordinary Shares
representing approximately 3.71 per cent of the current issued ordinary share
capital.
Expected Timetable of Principal Events
Date of this document 18 April 2006
Latest time for receipt of completed forms of proxy (1)
for the EGM 10.00 a.m. on 2 May 2006
Extraordinary General Meeting 10.00 a.m. on 4 May 2006
Completion of Sale(2) 12 May 2006
(1) Applicable also to online form of proxy and CREST Proxy Instructions
(2) This date is indicative only and will depend upon the date on which the
conditions to the Sale are satisfied
Sale of Safety Scalpel Business
An asset purchase agreement (the "Asset Purchase Agreement") dated 10 April 2006
between Hypoguard USA, Inc. and Merit Medical Systems Inc.("Merit") relating to
the Futura Safety Scalpel business together with certain assets used by
Hypoguard USA, Inc in carrying on that business (together the "Scalpel
Business"). The consideration payable by Merit was $750,000 on closing and
potentially an additional $500,000 upon Merit achieving sales of at least
600,000 units or over of Safety Scalpels in any six month period from the date
of closing of the agreement until the date 18 months from the date of closing.
Hypoguard USA, Inc. has given customary warranties in relation to the Scalpel
Business to Merit which are underwritten by an indemnity which is capped at the
amount paid by Merit under the Asset Purchase Agreement. Merit cannot bring a
claim under the Asset Purchase Agreement unless it is within 18 months from
completion of the Asset Purchase Agreement and the claim or claims exceed
$75,000 in aggregate. Under the Asset Purchase Agreement Merit has assumed the
liabilities of the Scalpel Business from the completion of the Asset Sale
Agreement and Hypoguard USA, Inc. remains liable for any liabilities that arose
prior to that date.
This information is provided by RNS
The company news service from the London Stock Exchange
END
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