|Shares Out. (in M):||31||P/E||NA||NA|
|Market Cap (in $M):||146||P/FCF||NA||NA|
|Net Debt (in $M):||-18||EBIT||0||0|
We're long Retractable Technologies (RVP), with a thesis contingent on an imminent legal settlement with Becton Dickinson (BDX) over “safety syringe” anti-trust claims. A September 2013 jury verdict awarded RVP $113.5m in damages for anti-trust and unfair competition – and trebling of damages is mandatory for such cases (Sherman Act), potentially resulting in a $341m award for RVP. Consistent with this interpretation, BDX recorded a pre-tax charge of $341m in their 2013 10-K. As of Friday’s $4.70 close, RVP trades with a fully diluted market capitalization of $145m with $18m of net cash. Using a 35% haircut to the full, trebled award - our estimate of taxes, potential contingent legal expenses, and settlement compromise - would result in RVP holding cash of $7.80/share, roughly 65% above the current share price. This potential upside is paired with illiquidity, given that RVP trades with a 6-month ADV of $120k and a 20-day ADV of $300k.
While Becton Dickinson publicly states their intention to appeal the trial – a process that could delay final judgment by c.2 years – a November 11th post-trial Order now makes an imminent settlement more likely. This Order on Post-Trial Motions from plaintiff-friendly Judge Davis requires the parties to attend mediation prior to an Injunctive Relief Order beginning on January 15th, 2015. This Injunction seems extremely onerous to Becton Dickinson, who should be wary of disturbing customers in its $4.5bn medical products business: i) “BD shall notify all customers who purchased BD syringe products from July 2, 2004 to the date of this Order that BD wrongfully claimed that its syringe needles were sharper than competitors’”; ii) “BD shall notify all of its employees, customers, distributors, Group Purchasing Organizations, and government agencies that its web site, cost calculator, printed materials and oral representations alleging that BD’s syringes save medication as compared to Retractable’s VanishPoint syringe were based on false and inaccurate measurements”; and iii) “BD shall not advertise or otherwise state in its marketing activities that BD safety syringes have the “World’s Sharpest Needle” or any similar assertion of superiority,” amongst other injunctions.
We think Becton could avoid these injunctions by settling the case before January 15th, 2015, and allowing Retractable Technologies to withdraw the suit. Becton’s calculus is straight-forward: is a <$341m cash write-off worth paying to avoid disturbing customers in its $4.5bn medical products business?
We are not legal experts. Our interpretation of this injunction may be mistaken, and we remain open to criticisms from the VIC group - itself well-versed in legalese.
I. Background (January 2004 – January 2013)
On paper, RVP’s operates a somewhat hopeless business. Founded over 20 years ago to manufacture safety syringes for the healthcare industry, Retractable now sells just $30m worth of syringes per year at a 33% gross margin. It has managed to cling to existence with a few core customers, but has yet to break into large Group Purchasing Organizations (“GPOs”) or hospital franchises. RVP’s namesake is a retractable needle, or “safety” syringe, that retracts the syringe into its barrel after use – a technologically simple innovation that purports to prevent needlesticks.
RVP’s sub-scale $30m revenue stream results in annual cash burn of $5m/year and negative earnings. Unfortunately for this marginalized upstart, Retractable Technologies competes with the manufacturing, marketing, and brand prowess of Becton Dickinson, a $25bn market cap behemoth with upwards of 70% market share in syringes. This favorable 2010 article (http://www.washingtonmonthly.com/features/2010/1007.blake.html) describes RVP and its Founder/CEO Thomas Shaw as an underdog stymied by GPOs, hospital bureaucracy, and unfair market practices by Becton Dickinson. Judge Davis and the Eastern District of Texas jury certainly agreed with these claims. But our analysis will focus on the antitrust suit itself, since BDX’s scale and R&D budget probably prevents RVP from ever becoming a meaningfully profitable business.
Business challenges notwithstanding, RVP has seen success as a litigator. Retractable initially sued BDX over unfair competition and antitrust claims in 2001. BDX chose to settle these claims in 2004 for $100m, of which RVP collected $65m after lawyer fees and a $3.4m payment to CEO Thomas Shaw (under a covenant not to sue) (2006 10-K). Still finding itself unable to compete with Becton Dickinson, RVP filed a second suit against BDX on June 15th, 2007 “alleging patent infringement, antitrust violations, false advertising, and unfair competition”. The non-patent portions of the second lawsuit were bifurcated in January 2008 – and this antitrust case is where we’ll concentrate. (Separately, a jury found BDX liable for patent infringement on November 9th, 2009 and awarded RVP with $5m in damages. The Federal Appeals court upheld Judge Davis’ infringement award on July 7th, 2014).
The antitrust case rattled through the court system for several years. Then at long last, a jury was empaneled in September 2013 to hear the case (#08-00016 in the Eastern District of Texas). As summarized in the court dockets, the eight-day trial concluded with the jury being asked “a series of antitrust questions: whether BD monopolized the safety syringe, conventional syringe, or safety IV catheters markets; whether BD attempted to monopolize any of those markets; whether BD entered into contracts that unreasonably restrained trade in any of those markets; and whether BD entered into competition restricting contracts that decreased or restricted competition within any of those markets“ (sourced from September 30th, 2014 JMOL ruling). The jury ruled for RVP, “finding that BD illegally engaged in anticompetitive conduct with the intent to acquire or maintain monopoly power in the safety syringe market” (RVP Q3 2013). Damages were calculated at $113.5m for the antirust claim, which would be subject to statutory trebling. The jury also found that BDX had engaged in false advertising with regard to its waste space and “World’s Sharpest Needle” claims, though no relief was awarded for these judgments.
A trebling of damages results in a $340.5m award to Retractable Technologies under the Sherman and Clayton Acts. While we haven’t found disclosure on specific contingent fees for attorneys – and in fact, we know that counsel has been paid a rich hourly rate based on recent disclosure - we’re deducting 35% from this lump sum to account for taxes and additive legal fees. This results in a $220m net cash payment, for $7.20 per RVP share in addition to the $0.60/share of net cash on the balance sheet today.
Given the time-value of money, the appeals risk after an initial jury award, and its lack of liquidity, RVP shares traded to just $3.00 following this initial ruling.
II. The Denial of Becton Dickinson’s JMOL (January 2013 – September 2013)
Post-Trial motions were heard on January 13th, 2014, with Becton proposing a Judgment as a Matter of Law (JMOL), contending that its attempted monopolization failed, and that the Court couldn’t find that there was “a substantial and real likelihood that BDX would ultimately acquire monopoly power.” In response, Retractable argued that “attempted” monopolization is distinguished from “actual” monopolization – that is, Becton’s attempted monopolization harmed the market without achieving an actual monopoly.
Over half a year passed with few material events, while RVP shares slowly sold off on the threat of an unfavorable JMOL, which could have voided the jury verdict. Favorable news finally arrived to RVP on September 30th, 2014. Judge Davis issued a full denial of Becton’s JMOL, as quoted below:
"For the reasons set forth above, the Court finds that the jury’s verdict in this case was reasonable and supported by substantial evidence. Judgment as a matter of law is inappropriate because BD has failed to show that a reasonable jury would not have a legally sufficient evidentiary basis to find for [RVP] on the issues set forth above. A new trial is inappropriate because BD has failed to show that the jury’s verdict was against the weight of the evidence, the damages awarded were excessive, or that the trial was unfair or prejudicial error was committed in its course. Finally, remittitur is inappropriate because BD has failed to show that the damages award in this case exceeds the bounds of a reasonable recovery.”
RVP shares popped to $3.50/share on this news. While unsurprising given his history as plaintiff-friendly in similar situations, Judge Davis had little sympathy for Becton’s case. His affirmation of the jury ruling boded well for future Orders on the Post-Trial Motions.
III. The Injunctive Relief Order (October 2013 – November 2013)
November 10th was an important date for the case. Three Post-Trial Motions were ordered, two of which are summarized later in this writeup. But the most important ruling, in our view, was the series of seemingly burdensome injunctive relief Judge Davis has ordered. Judge Davis’s injunctive ruling requires Becton Dickinson to take certain action in addition to paying monetary compensation to Retractable. Judge Davis also ruled that BD would be required to comply with its injunctive order by January 15th, 2015, should the parties not settle before. Taken verbatim from the Order:
“BD shall not advertise or otherwise state in its marketing activities that BD safety syringes have the “World’s Sharpest Needle” or any similar assertion of superiority in sharpness, or reduced patient pain as a result of needle sharpness, for a period of five years from this Order.
BD shall notify all customers who purchased BD syringe products from July 2, 2004 to the date of this Order that BD wrongfully claimed that its syringe needles were sharper than competitors’, including RTI’s, and that its statement that it had “data on file” proving the sharpness claim was false and misleading.
BD shall notify all employees, customers, distributors, Group Purchasing Organizations, and government agencies that: (1) the dead space of the VanishPoint syringe has been within the ISO standard of 0.07 mL dating back to at least July of 2004; (2) that BD overstated the dead space of the VanishPoint syringe to represent that it was higher than BD’s conventional syringe, Safety-Lok, SafetyGlide, and Eclipse products when it was actually less than all of those products and (3) that BD’s statement that data on file was false and misleading. In addition, BD shall post the notice on its web site where information regarding syringes is presented and shall maintain such notice on its web site for a period of 3 years.
BD shall not advertise or otherwise allege in its marketing activities that its syringe products save medication as compared to Retractable’s VanishPoint syringes for a period of 3 years. BD shall destroy all marketing, training, and sales materials that currently include such allegations.
BD shall notify all of its employees, customers, distributors, Group Purchasing Organizations, and government agencies that its web site, cost calculator, printed materials and oral representations alleging that BD’s syringes save medication as compared to Retractable’s VanishPoint syringe were based on false and inaccurate measurements of Retractable’s VanishPoint. In addition, BD shall post this notice on its web site where information regarding syringes is presented and shall maintain such notice on its web site for a period of 3 years.
BD shall implement a comprehensive training program for its employees and distributors that specifically instructs employees and distributors not to use old marketing materials and not to make false representations regarding Retractable’s VanishPoint syringes.”
BDX operates a $4.5bn revenue medical products business, and syringes are a marquee product. This is a massive business that touches all corners of the domestic healthcare industry, and informing all of its customers of the breaches seems like an enormously disruptive task.
On the same day as the Injunctive Relief Order, Judge Davis encouraged the parties to come to terms with one another, “The Court is of the opinion that the Parties would benefit from further mediation.” We believe that Becton Dickinson could avoid the tedious tasks above if it settled with RVP, in exchange for RVP dropping the suit.
The parties may be heeding the judge’s advice. In a November 20th Motion from BDX, Becton requested a 60-day extension from the January 15th Injunction date, ostensibly to give it more time to reach a settlement. That, or BDX may simply want further time to prepare materials and strategy for compliance. Right now it’s tough to tell with RVP's response sealed. BDX discusses both possibilities in its request, “…to comply with the Court’s order to notify customers, distributors, Group Purchasing Organizations, and/or government agencies that certain of its claims were “false and misleading,” “overstated,” and “false and inaccurate” and to implement the training program by January 15, 2015, as presently ordered, BD must actually begin the required notification process and the training before that date…Although there are no assurances that mediation will succeed this time, BD is prepared to participate in good faith in the hope of finding a compromise. However, requiring BD to fully implement the injunction during the mediation process will limit the possibilities for a negotiated resolution and impair the parties’ ability to resolve their disputes with a confidential settlement.”
Emergency MOTION For an Extension of Sixty Days to Comply With Injunction Terms In Order to Facilitate Court-Ordered Mediation by Becton Dickinson and Company. (Attachments: # 1 Text of Proposed Order)(Baxter, Samuel) (Entered: 11/20/2014)
Source: Pacer dockets
Retractable later filed a response to Becton’s Motion, and unfortunately, this response was sealed. That prevents us from reading further into whether a settlement is progressing. We also can’t know whether RVP views Becton’s participation in the Mediation process as insincere. Either way, the presence of this activity in the docket does suggest that Judge Davis’ Injunctions are material, and that the parties may presently be drawing up terms for a compromise.
SEALED RESPONSE - Plaintiffs' Response to Defendant's Emergency Motion For an Extension of Sixty Days to Comply With Injunction Terms re 654 filed by Retractable Technologies, Inc., Thomas J Shaw. (Attachments: # 1 Text of Proposed Order)(Hardin, Roy) (Entered: 11/24/2014)
IV. Other Post-Trial Rulings (October 2013 – November 2013)
In addition to the RVP’s Motion for Injunctive Relief, Judge Davis ruled on two additional Post-Trial Motions in his November 10th 2014 Order: ii) RVP’s Sealed Motion to Recover Defendant’s Profits; iii) RVP’s Sealed Motion for Attorneys’ Fees. Neither is as meaningful to our long thesis, but they merit discussion for context.
On RVP’s request for lost profit, Judge Davis denied RVP’s request for an additional $260.7m in the form of wrongful profits earned by BD through false advertising. But he did so because he believed that the trebled antitrust award was a sufficient monetary sanction to BD, even though he agreed with RVP that BD’s conduct warranted disgorgement of its profits: “Here, the principles of equity require BD to forfeit a portion of its profits. However, BD has already done so by paying the trebled amount of its antitrust damages. The $340,524,042 BD must pay is a sufficient monetary sanction in this case.” Judge Davis’ confirmation of the trebling of damages should be interpreted positively, clarifying that trebling is mandatory for the $113m jury award, “RTI’s relief—trebled damages and an injunction—is adequate for its injury,” and that RVP deserves meaningful monetary relief for its claims.
Next, Judge Davis addressed RVP’s request for reimbursement of attorneys’ fees, for which RVP requested $36.5m (yikes!) on legal work going back to 2007. The Clayton Antitrust Act asserts that “any person who shall be injured in his business or property by reason of anything forbidden in the antitrust laws may sue therefor . . . and shall recover threefold the damages by him sustained, and the cost of suit, including a reasonable attorney’s fee” (emphasis added). Judge Davis went further to say, “Reasonable attorneys’ fees are mandatory, and the only function of the court is to determine the amount.” RVP’s request represented billed expenses from 2007 through the present. Becton Dickinson countered that RVP cannot recover fees occurred in 2007 – 2009 because RVP did not filed its Amended Complaint, the one pertinent to this antitrust case, until July 23rd, 2010. Judge Davis accepted BDX’s chronicle logic and agreed to split the difference. He awarded RVP 50% of the requested attorney fees on time spent on its antitrust claims from 2007 through the post-trial judgment.
Judge Davis has yet to rule on two additional Post-Trial Motions: iv) RVP’s Sealed Motion for JMOL on its Claim for Monopolization of the Safety Syringe Market; and v) RVP’s Sealed Motion for Judgment.
V. Valuation and Final Considerations (November 2013 – present)
We’ve historically made more money shorting patent trolls, lifelong litigators, and perpetual share issuers than speculating on the long side. But this situation is unique in that the defendant may be encouraged to settle – typically, we’d be wary of relying on judgments going into a less plaintiff-friendly Federal Court of Appeals. However, the lack of liquidity in RVP, combined with the high degree of uncertainty, probably warrants conservative position sizing. But for those willing to consider a highly asymmetric, near-term event, one that’s gone undiscussed on the VIC Board thus far, we encourage others to consider Retractable Technologies.
Settlement between Becton Dickinson and RVP. Greater market awareness of potential net proceeds from litigation.