AorTech’s Statement Tells St.Jude Story

In short

In case you missed it, this is the story of how a Scottish polymer company and an American cardiac device leviathon got all tangled up late last year, and subsequently settled their differences to the satisfaction of all parties (according to the releases from both sides).

AorTech’s financial statements for the period to the end of September offer up an interesting insight into the goings-on.

Background

There are a few defining stakes in the ground of this particular tale. Firstly the fact that AorTech has been trying to sell out for a little while, without success. Secondly, that its deal to supply St.Jude with the polymer that it relies on to coat its Durata ICD lead was a pretty bad one (for AorTech) and that the company was on its uppers for the latter part of 2012. And finally the other key factor is St.Jude’s reliance on the AorTech-derived coating and indeed Durata itself, to pull itself out of the hole left by the troublesome Riata ICD lead. Both parties needed this to end well for each other.

So how does the financial statement from AorTech enlighten us? Find it here. Let’s first look at this alleged breach of contract that has been implied by AorTech, but about which no details have been released. Now that it has been resolved, with no party accepting any liability (but St.Jude having to cough up $3.9m), one can’t help thinking that the breach and the awfulness of the contract might be related.  The chairman himself describes the contract as uneconomic, and to demonstrate just how awful it was, the fact is that AorTech received $724k revenue on polymer sales to St.Jude in the six months to end September 2012, against a cost of sales of $806k. This  reached the bottom line looking like more than $1.5m loss in six months. No wonder there were some sweaty palms.

What happened next is that the financially challenged AorTech generated interim funds by issuing loan notes, secured on the company’s polymer IP and repayable at 100% premium plus 15% interest on any additional value created. The loanees must be grinning from ear to ear at this moment because their repayments crystallised the moment St.Jude got its cheque book out in the resolution of the companies’ differences.

And what happens next? Well, the words of AorTech’s chairman are pretty clear. He doesn’t want the polymer business and will get rid of it as soon as a company more suitable to the demands of supplying such a critical and high volume material can be found.

So ends another chapter of a funny old tale in which a small company jumps into a bad contract with a big one for reasons we can only speculate to be that it got a bit star struck and excitable… never a good place from which to negotiate. In fairness, polymer production costs probably shot through the roof too though. When it realises just how bad the deal is, the small company simultaneously breathes a “sort of” sigh of relief when it finds what it judges to be grounds for a breach of contract exit. The big company is in no mood to lose its supplier for a critical component of a critical product, so ends up playing ball and in so doing secures the future supply. The small company, now financially relieved by the settlement, relaxes just long enough to make sure it can clear the decks by ridding itself of that part of the business completely and get on with using its proprietary technology in what it hopes will be a more profitable way. For AorTech that means a foray into transcatheter aortic valves. Hope the pockets are deep enough because that sounds expensive.

Source: AorTech International plc, St.Jude Medical, Inc.