Espicom View: CryoLife's relatively modest investment in Medafor has yielded a high return. As CryoLife plans to spend the extra cash on growth, including the regulatory pathway for its PerClot product, CR Bard will have to live with the knowledge that it indirectly funded the development of a haemostat product that, if approved, will directly compete with Medafor's offering. We believe that the turbulent relationship between CryoLife and Medafor is not over yet; a further licensing deal may crop up between the two in the future, if another lawsuit does not occur first.
CryoLife expects to receive an initial payment of approximately US$15.1mn for its shares of Medafor common stock, due to CR Bard's acquisition of Medafor, which has been completed. CryoLife purchased 2.4mn shares of Medafor common stock in 2009 and 2010, following a distribution agreement entered into by the two companies in 2008. CryoLife distributed Medafor's microporous polysaccharide haemostatic agent for use in cardiac and vascular surgery in the US, and for cardiac, vascular and general surgery, other than orthopaedic and ENT surgery, internationally, under the private label name, Hemostase. This agreement was terminated in 2012.
As well as the initial US$15.1mn payment, CryoLife could receive additional payments of up to US$8.4mn upon the release of funds held in escrow and the satisfaction of certain contingent milestones. CryoLife has stated that as of the end of Q213, it believed its 2.4mn shares of Medafor common stock carried a value of around US$2.6mn.
CryoLife and Medafor have a colourful history; aside from licensing deals, CryoLife attempted to acquire Medafor itself back in 2010, stating that its was concerned, as one of Medafor's largest investors, that the company was mismanaged. Later in 2010, CryoLife filed a lawsuit against Medafor, in a bid to block the latter's attempts to terminate the parties' distribution agreement. This case was settled in 2012, when Medafor agreed to pay CryoLife US$3.5mn, and led to the termination of the distribution deal.
The proceeds from the latest transaction and the resulting gain to CryoLife of US$12.5mn will be recorded in Q413, and will contribute to the continued execution of CryoLife's growth strategy and shareholder dividend. CryoLife believes that the Medafor acquisition by Bard provides validation of the significant market opportunity for its own absorbable powdered haemostat, PerClot, which CryoLife claims has significant clinical advantages over the Medafor product.
PerClot is currently approved in Europe and other select international markets. In the US and Japan, CryoLife is moving forward on the regulatory pathway, with FDA approval to initiate a PerClot US clinical trial expected before the end of 2013.