Baron Nathan Rothschild once famously said to "buy when there's blood in the streets, even if it's your own."
Many shareholders of Bovie Medical Corporation (BVX) must feel that any blood in the streets has to be theirs. Since late June 2009 when Bovie hit an all-time high of $10, it has fallen over 70% to only $2.75 (1/31/2013) while the Dow has risen over 50%.
During this time, Bovie was sued by Medtronic (MDT) and Salient Surgical (then private, now owned by MDT) for patent infringement and settled to avoid worse damage. It filed a lawsuit against a former Director and key employee, Steve Livneh, who then counter-sued alleging a laundry list of wrongdoing (fraud, breach of fiduciary duty, negligent misrepresentation and breach of good faith and fair dealing, to name a few), leading to a settlement in which Mr. Livneh was awarded approximately $700,000 and a license to produce and sell Bovie's most promising technology in China. The company was also sued by shareholders alleging a litany of misconduct.
Nor have Bovie's woes have not been confined to the courtroom. Then-COO, Moshe Citronowicz, was exposed as falsely claiming to hold an Electrical Engineering degree, although the company decided to keep him on board in a different role following disciplinary action. In another turn of events, Bovie waited until a drop by almost half from its peak share price before making a private placement that brought more shares onto the market and may well have contributed to the collapse in its share price that followed.
A Deal with a Big Company: The Natural Path Forward
So why would anyone have bought stock in this company and stuck with it through the misery of the past few years? Bovie is developing new surgical technologies with large market sizes (see the second table here). The J-Plasma system alone has been reiterated as representing a $2 billion market opportunity. For a company valued at less than $50M, market success of its products could mean a huge return for shareholders.
The flip side to large market potential is usually correspondingly large resources needed to pursue and take full advantage of that potential. For a small company of limited means with potentially huge technology, accessing such resources can occur in several ways, not all of which are mutually exclusive. The company can sell part or all of its technology. It can license it. It can raise capital to pursue the market itself. It can partner with one or more larger firms with strong and extensive distribution channels in exchange for the partner getting a slice of the action. Or it can seek to be acquired by a larger firm with the resources to take the technology to market.
Years Pass, the Wheels Spin
For years, many shareholders have felt that a Bovie acquisition is the most likely final outcome, with a strategic partnership or other deal as a possible forerunner. Statements by Bovie management have been consistent with this theory: "As previously stated, discussions continue with larger companies regarding possible strategic partnerships involving some of the Company's new product efforts." (October 28th, 2008); "While no agreements have concluded to date, discussions continue with other companies regarding the possibility of strategic partnerships." (March 13th, 2009); "In addition, we continue to hold discussions with larger companies as potential partners and agreements remain a viable possibility." (August 10th, 2009); and "While there can be no assurances as to how they will conclude, discussions regarding collaborations with larger companies are intensifying as to one or more of our new technologies that could result in an agreement or agreements." (November 9th, 2009).
In the first months of 2010, Bovie announced two contracts related to product sales. The first was on January 7th, and consisted of "the signing of a supplier agreement between Medline Industries and Amerinet for Bovie branded electrosurgical generators and accessories. Amerinet is one of the largest group purchasing organizations in the United States with over 2,400 member hospitals … Medline is one of the world's largest distributors of hospital supplies and has exclusive distribution rights to Bovie branded generators in the United States." And on April 20th, Bovie "today announced it has been awarded a contract by the General Services Administration (GSA). Bovie's Federal Supply Schedule (FSS) was awarded by the Office of Acquisition and Materiel Management's National Acquisition Center (NAC) ... The NAC is the largest combined contracting entity within the Department of Veterans Affairs (VA) and is responsible for supporting the healthcare requirements of the VA as well as the needs of other Government agencies."
Could either of these two contracts have been the agreement Bovie talked about for so long? The author's belief is no, they don't fit the bill. In the first case (Medline / Amerinet), the sales involved seem too small to justify the implied importance of a possible forthcoming strategic partnership or other deal, the generators involved are not a "new product effort," and later communications from the company indicate this wasn't the possible deal they were alluding to. In the second case, again the sales seem too small and the contract was with a government agency, not a private company.
Bovie was then silent on a possible deal for a long time.
Could a Deal Still Be on the Table?
After no apparent follow-through on a deal and only a couple of years of silence, one might wonder if a deal had become a dead issue.
However, on March 29th, 2012, the Bovie news release on 2011 Q4 and annual results included the following paragraph: "In other developments, the company announced today that it has signed several interim and related product development agreements with a major multi-national medical device company in anticipation of a final developmental and manufacturing agreement expected to be completed in the second quarter this year." On July 10th, Bovie issued a press release describing progress in clinical testing of the long-awaited J-Plasma system. The press release also stated that "In unrelated news, the company reported that its previously announced anticipated developmental and manufacturing agreement with a large multi-national medical device company remains in the due-diligence and negotiation stage."
Although it has been almost a year since Bovie "signed several interim and related product development agreements with a major multi-national medical device company" and the "final developmental and manufacturing agreement expected to be completed in the second quarter this year (2012)" has yet to materialize, Bovie has not indicated an agreement is no longer in the works, leading us to believe it may still be coming, though delayed.
Other Reasons for Hope
As mentioned above, Bovie's big value is its intellectual property (IP). The company has been busy building its patent portfolio and advancing the state of development of its technology.
Russell Cleveland, whose funds collectively are the largest Bovie shareholder, had this to say: "Bovie has launched the new J-Plasma system and the results have been very good. It is new technology which cauterises tissue to stop bleeding. Surgeons like it as in most surgery there is a need to control bleeding, so it is of major importance. We have got quite a bit in Bovie and we are adding to it. It will be an acquisition candidate at some point."
Small companies whose exit strategy is to be bought by a larger company will usually seek to build relationships with firms they view as potential acquirers. Such relationship building often includes adding employees, consultants or board members with ties to potential acquirers.
The author hopes to address Bovie's connections to larger medical device firms in a future article, as well as to examine its technology in greater detail.
Even if consummating a major agreement with a much larger medical devices firm doesn't happen and it takes a long time to build market share and become significantly profitable in Bovie's new markets, the company should not be in any jeopardy. For example, total current assets are over $16M, including almost $5M in cash and cash equivalents. Total current liabilities are under $2M and long term debt (associated with construction of Bovie's Florida factory) is $3.5M.
The author would like to thank participants in the Yahoo Bovie Medical message board for sharing research and insights and especially Mr. Mike Bolser, with whom the author has had a number of informative conversations.
Disclosure: I am long BVX.