Roche back in court as partner looks to sell to competitor

January 12, 2011

Things got even testier Tuesday in the court fight between Roche Diagnostics Corp. and the Virginia company it is trying to acquire.

Attorneys for Roche requested a temporary restraining order against Medical Automation Systems Inc. Tuesday afternoon after receiving word that the company is speeding up plans to sell itself to a Roche competitor, Massachusetts-based Alere Inc.

The word came in a letter from Medical Automation attorney John Cambria hinting at “changed circumstances” to U.S. District Magistrate Judge Debra McVicker Lynch.

Medical Automation’s board “determined that its timing for consideration of offers for the company should be accelerated,” Cambria wrote, one week after Roche attorneys say Cambria told the judge that no sale was imminent. Cambria added that there have been “additional developments since the board made its determination,” but he did not say what they were.

Roche attorneys say they didn’t see the letter until 12:45 p.m. Tuesday, after which they rushed to court to ask for a restraining order to temporarily halt any impending sale.

Roche and Medical Automation agreed to a sale in October, but Medical Automation, or MAS, rejected the deal after Alere made a higher offer. Roche contends MAS breached its commitments to Roche, and has asked the federal courts to intervene to stop any sale and force MAS into arbitraiton proceedings.

“It is not hard to discern what is happening here,” wrote Michael Rosiello and Joseph Wendt, attorneys at the Indianapolis law firm Barnes & Thornburg LLP. “Precisely as Roche predicted—a prediction that Mr. Cambria scoffed at on January 4—MAS is seeking to sell itself to Alere immediately, before the completion of the dispute resolution process ….”

Messages seeking comment from Rosiello, Wendt and Cambria were not immediately returned Wednesday morning.

Roche Diagnostics, which operates its North American business out of Indianapolis, has worked with Medical Automation for 15 years to develop software to accompany blood-glucose monitors Roche sells to 2,000 U.S. hospitals and health care providers.

Roche and Medical Automation began working together in the mid-1990s, according to Roche’s lawsuit. To help develop the software, Roche loaned the company more than $10 million over that time, in addition to paying license fees.

The companies first discussed a merger in early 2008, but talks broke down that summer because Medical Automation’s owners, Gregory Menke and Kurt Wassenaar, wanted more than Roche was willing to offer.

Talks resumed in 2009 and the companies eventually struck a deal on Oct. 12, with Roche agreeing to pay $38 million, technically to acquire Medical Automation’s software, and also agreed to forgive $1.9 million in debt.

However, within 10 days, Medical Automation received letters from Alere offering $40 million. In November, Medical Automation shareholders—who are mainly the same executives who struck the deal with Roche—voted to reject Roche’s purchase agreement.

Roche fought back in two ways. It moved to launch an arbitration hearing and also matched Alere’s offer, saying it was exercising a right of first refusal that had been part of a 2006 contract between Roche and Medical Automation.

That contract, which guarantees Roche’s exclusive right to Medical Automation’s software, expired on Dec. 31.

However, in letters sent to Roche, Medical Automation officials argue that Alere’s letters merely expressed interest, and did not constitute a pending offer. Therefore, Alere’s interest did not trigger the right-of-first-refusal clause in the 2006 agreement.

And now that agreement has expired. So Medical Automation told Roche it was free to make a new bid to acquire the company, but that Roche’s October purchase agreement and 2006 right of first refusal are no longer in force.

“We are pleased with your continued interest in acquiring MAS,” wrote Medical Automation CEO Kurt Wassenaur in a Dec. 23 letter to Roche Diagnostics CEO Jack Phillips. “Therefore,” he added, “on or about January 3, 2011, we intend to distribute a draft stock purchase agreement to both Roche and Alere … and we will select the party that appears to offer the most favorable transaction.”

Instead of entering the bidding war, Roche responded five days later by filing two federal lawsuits in New York and Indianapolis, the second of which seeks a preliminary injunction to stop Medical Automation from soliciting competing bids.

Medical Automation’s software, known as RALS, is used in Roche’s Accu-Chek and CoaguChek blood monitors. The software allows blood test results from several patients at once to flow easily into a hospital’s electronic medical record system.

But Roche now worries it would suffer "irreparable harm" if MAS sells to Alere, including Alere's access to Roche's customer information.

"If it is announced that Alere—a competitor of Roche—has entered into a contract to purchase MAS, that could have a disruptive and highly damaging effect on Roche's relations with its customers," Roche's attorneys wrote Tuesday.


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