Urohealth Has Acquisition No. 13 in Sights

NEWPORT BEACH —  Urohealth Systems Inc. said Monday that it has agreed to buy Laguna Niguel-based Imagyn Medical Inc. in a stock deal valued at $64 million, capping a whirlwind series of 13 acquisitions.

Analysts applauded Charles A. Laverty, Urohealth’s chairman and chief executive, for striking a deal to snatch the medical products company for a bargain $7.50 a share--half the price of Imagyn’s initial public stock offering less than a year ago.

The proposed deal left Imagyn shareholders angry and Urohealth shareholders confused, however, analysts said. Imagyn stock plummeted $1.675 a share to $7.50, a decline of more than 18%, in Nasdaq trading Monday, while Urohealth slipped 25 cents to close at $8.

“We are clearly disappointed in the price that Imagyn went out at,” said Eva S. Snitkin, a Montgomery Securities Inc. analyst who took numerous calls Monday from unhappy investors.

In the proposed deal, Imagyn shareholders would receive 1.04 shares of Urohealth stock for each Imagyn share. Imagyn’s line of products for treating gynecological problems would extend Urohealth’s rapidly growing lineup of items to treat a range of urological and related troubles.

Laverty, on the prowl for acquisition targets since he joined Urohealth in 1994, says shareholders still don’t understand his strategy of assembling a vast array of products through acquisitions. Urohealth shares trade at a much lower level, when compared with earnings, than do similar stocks in its industry, analysts say.

“Of course we’d like to have a higher stock price--and are working towards that,” Laverty says. Though some Wall Street analysts are expecting Urohealth to earn about 80 cents a share from continuing operations for its year ending next March 31, Laverty advised them Monday to cut their estimate by a nickel a share because of the effects of the Imagyn acquisition. Urohealth has not released its earnings for the year ended March 31, but analysts estimate the company earned 44 to 47 cents a share from continuing operations.

Laverty said Imagyn should add to earnings in the following year. He also promised analysts in a phone conference Monday that this acquisition, by far the largest for Newport Beach-based Urohealth, will be its last for at least a year.

Meantime, he said, he’ll focus on building the company’s sales and profits. Officials said the combined companies expect to save about $10 million by eliminating overlapping positions in general administration and cutting other costs.

Franklin D. Brown, Imagyn’s chairman and chief executive, said he also fielded calls Monday from investors, some angry with the deal, others pleased. He said he advised them not to focus on the dollar value of the merger but to look instead at Urohealth’s growth prospects.

Snitkin of Montgomery Securities noted, however, that institutional investors told her Monday that they preferred to own Imagyn, rather than trading it for Urohealth.

Imagyn ran into trouble after going public last May, when it attempted to start selling its products directly to physicians, instead of through a large distributor, Brown said.

Brown said the company couldn’t get the ear of physicians and insurance companies, even though its products, such as a laproscopic device that treats acute and chronic pelvic pain, can reduce costs--an attribute typically championed by the managed-care industry.

Frustrated in its sales effort, the company then sifted through various options for its future.

“I had to set my own personal ego aside,” added Brown, who won’t remain as an executive if the deal goes through. Brown would become a consultant for Urohealth. The companies said the deal, which must be approved by shareholders, should be wrapped up in June.

Brown said he has about 325,000 Imagyn shares, purchased at an average price of about 22 cents a share. If the deal closed at Imagyn’s current $7.50 stock price, Brown would realize paper profits of about $2.4 million. Though insiders generally can sell their stock within months after a merger closes, Brown said he doesn’t plan to sell the Urohealth shares he would receive any time soon.

Urohealth employs 1,100, including about 200 in Orange County, while Imagyn employs 80, with 65 in the county. Laverty says he plans to keep Imagyn’s Laguna Niguel plant open and would shift Urohealth’s research and development department there.

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Buying Binge

Urohealth’s proposed purchase of Imagyn Medical is its third acquisition for 1997 and the largest of 13 recent purchases. Details on the two firms and other acquisitions:

IMAGYN MEDICAL AT A GLANCE

* Founded: 1989

* Business: Designs and develops devices for diagnosis and treatment of gynecological and reproductive disorders

* Chairman/President/CEO: Franklin D. Brown

* 1996 net sales: $9.4 million* 1996 net loss: $4.4 million

* Initial public offering: May 1996. Traded on Nasdaq

* Purchase price: $73 million in stock

UROHEALTH SYSTEMS AT A GLANCE

* Founded: 1985 as Davstar Industries Ltd.

* Business: Designs and develops products used to diagnose and treat urological and gynecological disorders

* Chairman/CEO: Charles A. Laverty

* 1996 net sales: $39.6 million * 1996 net loss: $18.0 million

* Initial public offering: November 1996. Traded on Nasdaq

PREVIOUS ACQUISITIONS

Before Imagyn, Urohealth had already acquired 12 firms, including these purchased for $12 million or more:

1997

* MICROSURGE INC.*

Product: Microsurgical instruments. Price: $29 million in stock; $9-million debt assumption

* X-CARDIA CORP.

Product: Cardiac and blood gas monitoring equipment. Price: $16.5 million in stock, $16.5 million cash

1996

* RICHARD-ALLAN MEDICAL INDUSTRIES

Product: Microsurgical instruments. Price: $29 million in stock; $28 million cash; $3-million debt assumption

1995

* ADVANCED SURGICAL INC.

Product: Microsurgical instruments. Price: $12 million in stock

* OSBON MEDICAL SYSTEMS

Product: Impotence diagnostic and treatment devices. Price: $47 million in stock

* DACOMED CORP.

Product: Urological diagnostic, treatment and management products. Price: $16.1 million in stock

* Stockholders expected to approve this month

Source: Bloomberg News, Urohealth Systems, Jefferies & Co.; Researched by JANICE L. JONES / Los Angeles Times