Knott Partners Expresses Concern Regarding Proposed BioVeris-Roche Transaction
NEW YORK, May 23, 2007 /PRNewswire/ -- An open letter to Sam Wohlstadter, Chief Executive Officer of BioVeris Corporation, from Tony Campbell, Partner at Knott Partners LLC, which holds 4% of BioVeris' outstanding stock.
Dear Mr. Wohlstadter:
I am a Partner in Knott Partners, LLC, a New York-based hedge fund. Knott Partners is the beneficial owner of 1,094,000 shares of the common stock of BioVeris Corporation (the "Company"), which places us among the Company's largest institutional investors. We currently hold 4.0% of the Company's outstanding shares and have been long term shareholders of both the Company and Igen International, Inc. ("Igen").
We write to express our concerns regarding the Company's proposed merger with Roche Holdings Ltd. ("Roche"). We have extensive experience in investing in the health care sector with a focus on small-cap companies. We carefully monitor the underlying business strategy, operations and financial performance of each of our investments. Based on our analysis of the Company below, we have significant reservations regarding the proposed Roche transaction. We have attempted to address these reservations through less formal means both before and after the announced transaction, but the Company has refused to return our calls.
1. The Company Has Undervalued the Point-of-care and Vaccine Business -- Since 2004, Company management has expended $73 million in research and development on the point-of-care and vaccine business. Management also expressed optimism regarding these business sectors at the Company's 2006 annual meeting and stated that we should expect an announcement regarding a pharmaceutical partner soon. Given these facts, we question management's decision to sell these divisions at less than the R&D it has expended since the separation from Igen. We also question the sufficiency of management's efforts to pursue a pharmaceutical partner to help commercialize its vaccines in order to offset some of this R&D. Lastly, we question why management continued to expend R&D resources on its point-of-care and vaccine businesses once it knew that it had a potential acquirer who did not value these businesses highly. 2. Retention of Houlihan Lokey -- The Company's board established a Special Committee of Independent Directors to evaluate the Roche transaction. The Special Committee retained Houlihan Lokey to advise it on the proposed transaction. While we respect Houlihan Lokey as a financial advisor, we believe the firm is not well known for serving in this capacity in the biotech space. We question whether a firm better known for evaluating biotech deals would be better suited to serve in this role. 3. Consolidation in the Diagnostic Industry -- As we have seen in the past year, the diagnostic industry is rapidly consolidating (e.g., GE/Abbott, Siemens/Bayer, the bidding war for Biosite). We believe this consolidation stems from the attractive cash flow and growth characteristics of the industry and the difficulty for competitors to break into this field and compete with established providers such as Roche and BioVeris. In light of this situation, we would have expected the Board of Directors to fully consider strategic alternatives before agreeing to the Roche transaction, including exploring the prospect of a full auction and due diligence process with numerous entities. We believe this would have resulted in a higher purchase price for the Company. 4. Questionable Valuation -- We are concerned that the Company's financial advisor, Lehman Brothers, undervalued the Company in connection with the proposed transaction. The shareholders do not have the results from the out-of-field audit being conducted for 2005 and therefore have no firm basis to conclude that the size of out-of-field sales would not be meaningfully above management's estimate of $30 million for 2005. Moreover, we feel that the purchase price does not adequately assign value to what is rightfully the Company's cash assuming payment of the proper 2004, 2005 and 2006 royalty stream. Lehman's valuation appears to only have assigned value to the future royalty stream without including the 2004-2006 stream. By our calculation, this 2004-2006 stream could be worth as much as $80 million or more than $3 per share. We further believe that Lehman's valuation does not fully account for the possibility that BioVeris could invalidate the license that forms the backbone of Roche's immunochemistry business. This business -- which provides a significant revenue stream for Roche -- could be placed in jeopardy absent the proposed transaction with BioVeris. Like the 2004-2006 royalty stream, the added value of insuring the viability of Roche's immunochemistry business should have been reflected in the valuation provided by Lehman.
We believe an appropriate solution for the Company might be: (1) to spin out the point-of-care and vaccine business and use the proceeds to pay a dividend to shareholders; and (2) bump the offer by $3.00 -- $5.00 or more to account fully for the value of ECL business to Roche. As investors, we are disappointed that we will not get a chance to invest alongside Sam and his value-creating team. We would welcome the opportunity to speak with you personally to discuss our concerns. Thank you in advance for your careful consideration of this matter.
Sincerely, Tony Campbell, Partner Knott Partners, LLC Contact: Anthony Campbell 516-364-0303
CONTACT: Anthony Campbell of Knott Partners LLC, +1-516-364-0303
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Posted: May 2007
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