Tuesday, December 04, 2007

A Precision Move

We couldn't help but find a few interesting tidbits regarding the announcement that diagnostics maker Precision Therapeutics Inc. would merge with Oracle Healthcare Acquisition Corp.

First off, this is the first deal struck in the life sciences industry involving a special purpose acquisition company that we've seen in some time, not since Ithaka Acquisition Corp. acquired cooling company Alsius Corp.

Second, we'd just finished writing an article showing how well public investors have embraced diagnostics and imaging companies like Genoptix Inc. and Virtual Radiologic Inc. much to the benefit of the VCs in those companies. (Check out the upcoming START-UP for the full analysis.)

So here we have a diagnostics company that opted to pass on an IPO and embrace a SPAC-buyout. Why? Well, if the deal is consummated it'll likely turn out to be a good move for Precision.

Despite the rational exuberance for diagnostics, IPO buyers weren't likely to give as warm an embrace of Precision as they've given Genoptix simply because the financials aren't there yet. Nanosphere Inc., for example, is doing well but not nearly as well as Genoptix, possibly because its business isn't as developed.

With its cancer diagnostic product on the market (go here for details) Precision brought in $1.7 million in revenue over the first nine months of this year while reporting a loss of $13.5 million. Genoptix is pulling in far more revenue and now is actually making millions. Obviously, public investors prefer companies that actually report income rather than losses or they'll suspend that rule for biotechs and device companies with high upsides.

That certainly isn't to say Precision won't get there. It's just not there yet.

So Precision management probably is wise to put down the IPO dice and accept the merger with Oracle, which comes with a ticker symbol and, more importantly, $120 million in cash.

The company's board likely will have to share power and returns. But the capital and ticker give Precision's investors a surer route to an eventual exit.

With venture investors already committing $73 million to the company, finding attractive terms for more private capital likely would have been difficult if the IPO failed. According to Precision's S-1 filing, the company's largest shareholders include Adams Capital Management, Quaker BioVentures, TVM Life Science Ventures, Birchmere Ventures, Stephens & Co.

So what's in it for Oracle, which was started in 2005 by hedge fund manager Larry N. Feinberg, who founded of Oracle Partners,L.P., a healthcare-focused hedge fund in 1993. David Hamilton at VentureBeat asked that very question today.

We obviously can't say for sure other than to draw on Feinberg's standard comments about the company's strong management team and the fact that "the ChemoFx test has been validated in numerous clinical studies and has been reimbursed by both Medicare and commercial payors."

But one very real issue might have been that Oracle appears to be running out of time.

SPACs are not open-ended things. IPO investors acquire shares in a SPAC because they trust the management team will take that money and buy a company at an attractive price, thereby creating a strong business with valuable shares. But they'd like to get that money back at some point if such a deal can't be made. So all SPACs have an expiration date, so to speak, when investors are promised their money back--minus fees and other costs--if no company is acquired. Oracle shareholders must vote to approve any deal.

Oracle Healthcare raised its capital through an IPO of its own on March 8, 2006. As per the structure of most SPACs, Oracle management had 18 months to find a company to acquire or else return the capital back to its investors.

On Sept. 8--the final day of the deadline--Oracle signed a letter of intent to acquire another company, according to Oracle's most recently quarterly filing. The signing of the letter gave Oracle management a six-month extension.

However, the filing goes on to state that the letter of intent regarding that purchase was terminated on Oct. 17, freeing up Oracle to find another deal before the pending March 8, 2008 deadline.

Enter Precision.

We're not suggesting this is merely a marriage of convenience. Precision--with Oracle's support--could grow into a diagnostics powerhouse.

But given how long such a deal can take--ask Alsius and Ithaka management about the six months or so the SEC took to review their paperwork--this may be Oracle's last shot at completing a deal that could produce some real returns for its investors and managers, unless there is a provision for another extension that we can't unearth.

Seems like a potential win-win.

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