Biomedix Incubator Ltd. (TASE:BMDX), controlled by chairman Zeev Bronfeld and Meni Mor, has notified the TASE that the limited partners in Medica Venture Partner's Medica II Fund oppose its merger with the company. Nevertheless, the parties are pursuing the merger without delay or postponement. Medica and Biomedix signed the merger agreement in early July.
Sources inform ''Globes'' that Medica II Fund's investors opposing the merger are Psagot Investment House Ltd., Vintage Investment Partners, Clal Insurance Enterprises Holdings Ltd. (TASE: CLIS), and Menorah Mivtachim Holdings Ltd. (TASE: MORA), which together own 37% of the fund.
"Globes" has obtained a copy of a letter that investors wrote to Medica managing partner Dr. Ehud Geller, which states, "The transfer of assets to Biomedix was an excuse to extend the management services of the general partner (Geller - G.W.) more than necessary, and in order to continue to enrich the general manager at the expense of the limited partners."
Medica is due to invest NIS 19 million in Biomedix, and transfer to it assets worth NIS 50 million, in exchange for 42% of Biomedix, reflecting a 94% premium on its market cap on the day the deal was signed. Geller personally arranged the deal, which gives him a generous NIS 4 million a year in management fees.
The opponents of the merger add, "This transaction is tainted with serious conflict of interests, and if completed, it will benefit the controlling shareholder of the general partner, and will harm the limited partners."
Geller said in response, "The Biomedix-Medica merger is an excellent deal for both parties. We are trying to explain and persuade the parties at interest on both sides to this effect, and we will do so quietly in conversations with them."
In addition to the NIS 4 million in annual management fees, Geller will receive an option on 7% of Biomedix's shares at a strike price of NIS 0.52 per share, double its current market price, and a bonus on the sale of Biomedix assets amounting to 20% of the capital gain on the sales.
A source in the life sciences industry said, "NIS 4 million in management fees is unacceptable, not even at a venture capital fund. The normal fee is 2% of the principle; to get NIS 4 million, Medica would have to manage NIS 200 million in assets."
The Medica II Fund, established in 2000, is close to the end of its life; i.e. it is due to sell its holdings and distribute the proceeds to its limited partners - which include Psagot, Vintage, Menorah and Clal Insurance in this case - or else distribute the assets themselves as a dividend in kind. The fund's contract states that if it is liquidated, Geller's rights to management fees are also terminated.
Medica II Fund's investors say that they want their cash when the fund is terminated, and see no reason to keep it in Geller's hands for him to continue managing it and receiving fees. "These are liquid assets, or are almost liquid assets, and therefore require no management," state the investors in their letter.
Biomedix and Medica explicitly cited the liquidity of the assets when they tried to persuade Biomedix's shareholders about the benefits of the merger. The Medica II Fund has NIS 19 million in cash and stakes in four companies: 2.2% of laser esthetics device maker Lumenis Ltd., which may again go public in a few years; cash flow from the sale of bronchoscopy company superDimension Inc. to Covidien plc (NYSE: COV) for $310 million; possible cash flow from the sale of Collgard Biopharmaceuticals to Halo Therapeutics Inc. for $1 million plus royalties in 2011; and 14.8% of hypertension treatment device maker InterCure Ltd. (TASE: INCR-L), which has a market cap of NIS 23 million, following the sale of the controlling interest in the company to XTL Biopharmaceuticals Ltd. (Pink Sheets:XTLBY); TASE:XTL).
In general, Medica's investors argue that the transfer of its assets to Biomedix, when they are in liquid condition, or close to it, just before the fund's lifespan ends, is a violation of the fund's contract, as it is tantamount to an improper new investment at the end of the fund's lifespan. As far as the investors are concerned, Geller has violated the fund's articles of incorporation several times by not distributing its assets, even as he continues to collect management fees under the merged company.
Medical II Fund's investors are therefore demanding the immediate cancellation of the merger with Biomedix and the distribution of the fund's assets as soon as possible either in cash or in kind to them.
Biomedix investors also oppose the merger
Several of Biomedix's shareholders, who hold stakes through TASE shells, also object to the merger. Biomedix began as the parent company of the Kiryat Shmona incubator Meytav Technological Enterprises Innovation Center Ltd., and it now owns substantial stakes in several public life sciences companies: Allium Medical Ltd. (TASE: ALMD) (21%), NasVax Ltd. (TASE: NSVX) (21%); CollPlant Holdings Ltd. (TASE: CLPT) (15%); and Gefen Biomed Investments Ltd. (TASE: GEFEN) (74%), as well as 6.4% of CheckCap Ltd.
The market cap of these holdings is NIS 54 million, compared with Biomedix's market cap of NIS 30 million. Biomedix has reached the stage at which it can no longer create value for its shareholders under Bronfeld and Mor's management, and they decided to bring in an outside manager for its holdings.
Sources in the life sciences industry do not question Geller's skills. Medica has chalked up impressive exits, such as the sales of Percutaneous Valve Technologies (PVT) to Edwards Lifescience Inc. (NYSE: EW) for $100 million, Ventor Technologies to Medtronic Inc. (NYSE: MDT) for $155 million, and superDimension to Covidien.
But the management fees that Geller is seeking worry Biomedix's investors as much as they do Medica's investors. They can use up the Medica's entire investment in Biomedix within four years. When the merger was announced, Geller told "Globes", "The management cost replaces the current administrative expenses, and are only NIS 500,000 more. The management fees that we charge are lower than the fees charged by Clal Biotechnology Industries Ltd. (TASE: CBI), which uses a similar model."
Biomedix's shareholders are due to approve the merger on August 20, and the executives of the company and of Medica are trying to persuade them to vote in favor of it.
Published by Globes [online], Israel business news - www.globes-online.com - on August 9, 2012
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