Highlights Current Merger
Consideration, Which Assigns No Value and No Premium to SomaLogic’s
Desirable Assets, Represents a Material Discount to Company’s
Cash
Reiterates Combined Entity’s Proforma Capital
Structure and Corporate Governance Would Subordinate SomaLogic’s
Existing Shareholders to Conflicted Insiders, Including Hedge Fund
Manager Eli Casdin (a Director of Both Companies)
Underscores SomaLogic has Clearly Identified
Value Catalysts and $450+ Million in Cash, Mitigating the Need for
a Conflict-Ridden and Rushed Merger That Harms the Company’s Common
Shareholders
Madryn Asset Management, LP (collectively with its affiliates,
“Madryn” or “we”), a holder of approximately 4.2% of the
outstanding common stock of SomaLogic, Inc. (“SomaLogic” or the
“Company”) (Nasdaq: SLGC), today issued the following letter to
Institutional Shareholder Services, Inc. (“ISS”) following ISS’
publication of a report that recommends “cautionary support” for
the Company’s proposed merger (the “Proposed Merger”) with Standard
BioTools Inc. (“Standard BioTools”) (Nasdaq: LAB).
***
December 24, 2023
Institutional Shareholder Services, Inc. 702 King Farm
Boulevard, Suite 400 Rockville, Maryland 20850 Attn: Cristiano
Guerra, Head of Special Situations Research
Dear Mr. Guerra,
On behalf of Madryn, I want to thank you and your colleagues for
speaking with us earlier in the month about the Proposed Merger
between SomaLogic and Standard BioTools. We recognize that your
team has to evaluate scores of contested situations and
transactions each year. We also understand that, in the context of
carrying out an evaluation, your team is required to quickly assess
a significant amount of data, facts, and opinions from two sides
that are ardently opposed to one another.
I am writing to you to respectfully request that ISS change its
recommendation of “cautionary support” for the Proposed Merger
after taking into account new information and our summarized
response to Friday’s report. Although we are not an activist
investment firm and do not subscribe to any ISS services, we feel
compelled to contact you over this holiday weekend due to the very
limited time until SomaLogic’s special meeting and in light of the
recommendation’s potentially adverse impact on Madryn, the partners
to whom we serve as fiduciaries, and all other SomaLogic
shareholders. We believe that the report:
- Contains inaccurate and/or non-public information pertaining
to the SomaLogic Board of Directors’ (the “Board”) pre-merger
search process for the Chief Executive Officer role – of note, the
Company had not disclosed any attempt to recruit a permanent Chief
Executive Officer that could have led the organization on a
standalone basis going forward;
- Minimizes SomaLogic’s available alternatives and pending
value catalysts, which we believe were also under emphasized by the
Company, including approximately $27 million in identified run-rate
annual cost savings, an upcoming kit launch with Illumina, Inc.
(“Illumina”), and the rollout of its 11K assay;
- Omits material context and disclosures pertaining to the
combined entity’s problematic pro forma capital structure and
corporate governance, which stand to benefit conflicted insiders at
the expense of SomaLogic’s existing shareholders;
- Understates the shareholder opposition to the deal, which
now includes Tikvah Management (a sizable shareholder) and total
public opposition from nearly 15% of SomaLogic’s shares, in
addition to four Section 220 demand letters, and two lawsuits (one
of which was filed by the Company’s founder and Chief Technology
Officer), and;
- Overlooks the fact that the Proposed Merger is an
irrefutable take-under that values the Company at materially less
than its most recent disclosed cash balance.
These reasons, among others, compel us to urge ISS to reconsider
its recommendation that shareholders accept (i.) an unnecessarily
low valuation, (ii.) the fourth ranking security in the pro forma
capital structure, (iii.) a significantly limited set of governance
rights relative to the preferred equity holders, and (iv.) a
process that was spearheaded by clearly conflicted directors with
material business connections to Casdin Capital, LLC (“Casdin
Capital) that are now further disclosed. In light of these points,
particularly the merger consideration representing a discount to
cash, we firmly disagree that “the proposed merger appears to be
the best available alternative at this juncture.”
Despite the Company’s claims and ISS’ conclusion, SomaLogic has
strong alternatives as a standalone entity that possesses valuable
assets and hundreds of millions of dollars in cash that could
underpin years of operations if an unconflicted Board felt that was
the ideal path. If this is not clear, we encourage ISS and all
shareholders to review our publicly disclosed recommendations on
next steps for SomaLogic if the Proposed Merger is voted down.
While we would normally seek a private audience with you right
away, we recognize that, with the limited voting timeline
constructed by the Board, all interested stakeholders need to be
made aware of these material omissions and apparent oversights
immediately. Given the ongoing litigation acknowledged in Friday’s
report, we hope ISS will view the disclosure of any other new
information as its opportunity to revise its recommendation and
remedy issues that may have been caused by the Company’s one-sided
presentation and/or limited disclosures.
Please note that we expand upon our points in the appendix to
this letter. We welcome the opportunity to speak with you and your
team about these follow-up clarifications at any time. Thank you in
advance for your consideration.
Sincerely,
Avinash Amin, MD Managing Partner, Madryn Asset Management,
LP
***
APPENDIX – DETAILED RECORD OF ERRORS AND
OMISSIONS IN REPORT
Valuation:
Error
Correction
ISS reports that the Proposed Merger
values SomaLogic at a premium
ISS’ report cites the value of the
Proposed Merger at announcement and notes that Standard BioTools
shares have declined 28.5% since announcement, but fails to inform
shareholders that the deal is a take-under when compared with
either the Company’s cash or value on the unaffected date.
“all-stock structure of the transaction
provides shareholders with an opportunity to benefit from the
potential upside if the company is able to get to a trading
valuation based on the revenue multiple”1
If the proposed merger is completed,
SomaLogic shareholders will be subordinated to over $66 million of
debt and $250 million in Standard BioTools preferred instruments
that must be paid off before common shareholders receive anything
in any subsequent takeout – the effect of the debt and preferred
shares will be to reduce the value delivered to common
shareholders.
ISS fails to mention that, given the pro
forma capital structure, SomaLogic shareholders will not receive
any value unless the total value provided in that change-of-control
exceeds approximately $315mm; i.e., the downside risk assumed by
SomaLogic shareholders is greatly increased by assuming Standard
BioTools’ messy capital structure as a result of this
transaction.
Additionally, as equity holders of
SomaLogic, shareholders already have an opportunity to benefit from
any upside generated by a valuation reset resulting from a revenue
multiple change. ISS implies that the merger improves the
probability of getting to a valuation based on a revenue multiple,
but we firmly disagree with that stance.
The most reliable evidence that this is a
flawed assumption is the trading in Standard BioTools shares since
the transaction was announced. While the S&P 600 Life Sciences
Tools & Services Index rallied 24%, Standard BioTools shares
underperformed the benchmark index by 52.5%. The market is
incontrovertibly stating its belief that the combined company will
be worth less than SomaLogic and Standard BioTools were worth as
separate entities. This pattern may be related to the additional
attention that the proposed merger has drawn to Standard BioTools’
capital structure and the implications that the capital structure
has for the value of Standard BioTools’ common shares.
“the merger will reduce the risks and
challenges of being a sub-scale company”
Historically, companies with debt and
preferred instruments similar to those expected for the pro forma
company struggle to raise equity financing on manageable terms. The
Proposed Merger definitively increases SomaLogic
shareholders’ exposure to financing risk because the combined
company will have fewer financing alternatives than standalone
SomaLogic.
Additionally, SomaLogic has multiple
pending value catalysts ($27 million in identified cost savings,
Illumina partnership, rollout of the 11K assay) that are on the
cusp of delivering substantial value for shareholders. These
catalysts, which do not result from the Proposed Merger, will do
exponentially more to reduce the challenges of being a sub-scale
company than the Proposed Merger could.
At its present valuation, we believe there
is no downside risk associated with rejecting the Proposed Merger.
There is a solid rationale for believing that SomaLogic shares
would respond positively to termination of the merger. The risks
and challenges referenced by ISS are highly unlikely to destroy
shareholder value in a company that is presently valued at cash on
hand.
_________________________ 1 Permission to quote from the ISS
report was neither sought nor obtained.
Strategic Rationale:
Error
Correction
ISS’ analysis of the Proposed Merger’s
strategic rationale ignores relevant evidence and facts that
contradict the Company’s presentation.
As disclosed in the complaint filed by
Larry Gold, which ISS cites:
“The acquisition [of Olink by TMO] would
likely mean another major hit to Standard's revenues, as Olink's
new parent offers products that could replace those that Olink
currently purchases from Standard. The Olink acquisition also meant
that the long-range model used to set the relative valuations of
Standard and SomaLogic in the merger overvalued Standard.”
In light of the ongoing court process
related to Mr. Gold’s lawsuit, we expect that additional
information identifying flaws in the proposed merger’s strategic
rationale will come to light in the near term that we believe must
be considered by shareholders and ISS.
ISS presents subscribers a lopsided
assessment of risk, expressing concern that standalone SomaLogic
projections "involve execution risks," while failing to caveat that
the pro forma revenue, synergy, and cash balance projections for
the combined company are subject to very similar execution
risks.
In addition, the section of ISS’ report
dedicated to analyzing the transaction’s strategic rationale
reiterates the Board’s response to Madryn’s critique without
independently assessing the validity of that response. Of
particular note, ISS appears to accept at face value the Board’s
expectation of “an improvement in investor sentiment due to better
scale, diversification, and shortened timeline to
profitability.”
It is unclear why ISS chooses to include
the Board’s expectation of an improvement in investor sentiment as
a basis for supporting the transaction, given that 1) the Board
failed to anticipate the market reaction to the deal and 2) the
52.5% underperformance of Standard BioTools shares since the
transaction announcement indicates that an improvement in investor
sentiment is highly unlikely.
Reduction of risks from the merger are
worth giving up 43% of SomaLogic
ISS identifies business characteristics
including lack of product diversification, building out
infrastructure, and reliance on Illumina as operating risks for
standalone SomaLogic that would be mitigated by completing the
merger. These are highly customary risks in this market environment
for growth stage companies. These risks are not isolated to
SomaLogic.
Illumina is expected to generate $4.4
billion in revenue in 2023. Standard BioTools’ commercial heft
pales in comparison to Illumina’s commercial strength. Illumina,
which is one of the preeminent commercial partners available to
life sciences tools companies, has been a reliable partner for many
emerging companies. The partnership between SomaLogic and Illumina
is a potential source of tremendous value for the Company’s
shareholders. The apparent conclusion that customary risks and an
opportunity to partner with Illumina are supportive of a decision
to exchange 43% of SomaLogic for Standard BioTools shares worth
less than the Company’s cash is, we believe, based on an erroneous
interpretation of the facts.
ISS concludes that filling management gaps
is worth selling the Company at a discount
The risk associated with interim
management was manufactured by a highly conflicted Board that had
the option of running a search or installing the interim CEO as
permanent CEO yet failed to do either.
1) “Adam's in charge of the company effective today as CEO. In
the near term, we're going to focus on onboarding our new Board
members and empowering Adam to execute on our strategy.”- Troy M.
Cox, 3/28/23
2) “On the CEO side, I am maintaining the interim title for the
time being. The company is not conducting a
CEO search.”- Adam Taich, 8/14/23
Madryn concurs with ISS’ implied
conclusion that SomaLogic would benefit from having permanent
management. It is impossible to make the next logical leap,
however, that the best way to obtain qualified executives is by
giving up 43% of SomaLogic. In 2022, SomaLogic paid its CEO total
compensation of $4.7 million. 43% of SomaLogic is worth at least
$195 million. There is no comparison between the value given up in
the proposed merger relative to the probable cost of installing
permanent executive management.
“$80 million in operating cost synergies
by 2026”
The Company’s proxy states: “Standard
BioTools management … [estimated] projected synergies of
approximately $51 million to be realized by the combined company
annually by calendar year 2027 … comprised of (i) approximately $45
million in cost synergies estimated to result from the Merger and
(ii) an additional approximately $6 million of EBITDA (earnings
before interest, taxes, depreciation and amortization) of the
combined company resulting from approximately $12 million of
revenue synergies … [and a]n additional approximately $27 million
in cost reductions by calendar year 2026, resulting from
SomaLogic’s previously announced expense reduction initiatives that
will continue to be implemented by the combined company …”
Madryn is in agreement that there are
potential synergies from the Proposed Merger, however, standalone
SomaLogic is expected to generate $27 million in cost savings on
its own. Therefore, ISS omits:
1) The potential cost synergies from the merger are $45 million,
not $80 million, as laid out in the fine print of the Company’s
definitive proxy statement (the “Merger Proxy); and
2) 57% of $45 million in cost savings is approximately $25.7
million, an insufficient benefit to justify giving up 43% of the
potential value of standalone SomaLogic.
The time needed for standalone SomaLogic to achieve a takeout
valuation similar to that of Olink could be significant
Madryn concurs with ISS that the time
needed for SomaLogic to achieve a takeout valuation similar to that
of its peer, Olink, could be significant. Left unsaid, but implied
in ISS’ report, is that the Proposed Merger somehow reduces the
time needed to achieve that valuation. That is factually erroneous.
Although ISS noted that SomaLogic is projected to generate positive
EBIT in 2028, it is not apparent that ISS contrasted SomaLogic’s
projected revenue CAGRs with those of Standard BioTools.
Revenue CAGR
2024
2025
2026
2027
2028
2029
2030
2031
2032
2033
SLGC
24.7%
29.7%
26.0%
23.5%
21.8%
20.6%
19.5%
18.5%
17.7%
16.9%
LAB
16.4%
19.8%
20.8%
21.2%
22.2%
21.2%
20.2%
19.3%
18.4%
17.5%
Standalone SomaLogic’s revenue is
projected to grow more quickly than Standard BioTools’ for the next
four years and will, generally, keep pace with Standard BioTools’
revenue growth through 2033. The proxy does not include pro forma
projections for the combined company, such that there is not a
factual basis for concluding that the proposed merger accelerates
the time to a successful takeout valuation. However, SomaLogic’s
projected outperformance in revenue growth through 2027 does not
support the conclusion that the combined company will require less
time to succeed.
ISS believes that Madryn is advocating for
pinning the future value of SomaLogic on Illumina
To reiterate, Madryn recommends the
following:
1) Terminate the Proposed Merger to resolve litigation and
shareholder disputes.
2) Refresh the Board in a methodical way with unquestionably
independent directors (as recommended by ISS).
3) Install a commercially focused management team (long-term
investors, such as Madryn, can leverage their own industry networks
to suggest candidates that could be included in the Board’s search
process).
4) Implement operational enhancements that focus on commercial
progress ahead of the distributed kit pilot with Illumina and cost
savings initiatives.
5) Focus on steps 1-4 above and consider strategic alternatives,
if value maximizing.
Conflicts of Interest:
Error
Correction
“Casdin Capital's $125 million investment
into LAB represented approximately 3.8 percent of its AUM as of
Jan. 31, 2021.”
The 2021 AUM metric does not accurately
capture how material Standard BioTools is to Casdin Capital.
According to Institutional Investor, Casdin Capital has suffered
significant losses in 2022 and 2023. If the fund has performed
poorly as of late, the Standard BioTools position is likely more
important to Casdin Capital.
“there is no evidence in the proxy that
other alternatives were not appropriately considered”
Evidence that other alternatives were not
fulsomely considered include:
1. The Board’s decision not to retain permanent management,
contrary to shareholder input and third-party analysts’
recommendations (Madryn notes that the Board seemingly disclosed
material non-public information for the first time in its
engagement with ISS, when it claimed that it ran a CEO search – we
demand that the Company supplement its proxy materials immediately
to include robust, complete, and accurate disclosure of the CEO
search process that was selectively disclosed to ISS);
2. Counterparty G, a potential minority-investment bidder, did
not execute an NDA;
3. The Board concluded prematurely that investment proposals
from Counterparties B and G would be highly dilutive, without first
receiving term sheets; and
4. The sales process’ abbreviated timeline following receipt of
a term sheet from Standard BioTools, especially in comparison to
the timeline associated with the Olink transaction.
“the company had valid reasons for its
management and board refresh in March, the decision to bring on
only directors who have prior connections to Casdin created a board
structure that is clearly suboptimal”
Disclosure in the Merger Proxy indicates
that Carey Advisors (owned by director Tom Carey) was hired to run
a search for the four new independent Board members, a point that
appears not to have been considered by ISS in its review of the
deal process and assessment of the impact of the Transaction
Committee’s conflicts of interest.
Further, ISS fails to mention that the
previous Board, which was non-conflicted, turned the Standard
BioTools deal down several times. It appears that the deal was only
revived once a conflicted Board was installed.
“Finally, Madryn points out that SLGC's
financial advisor discloses that it expects to receive future
business from a company where Casdin Capital is an investor.”
In disclosures that followed the Merger
Proxy, the Company confirmed that its financial advisor has been
officially engaged by a Casdin Capital portfolio company,
solidifying the conflict of interest that calls its fairness
opinion into question.
“the dissident notes that Troy Cox serves
as a director at LetsGetChecked, a company where Casdin Capital is
an investor and Casdin is also on the board, and that Cox
previously made a $1 million investment in Casdin Capital”
In its analysis of the conflicts of
interest of members of the Transaction Committee, ISS failed to
properly weight the significance of Cox’s $1 million investment in
Casdin Capital and the extent to which that investment compromises
the independence of the Transaction Committee. Through his
investment in Casdin Capital, Troy Cox may have direct exposure to
Standard BioTools preferred equity, impairing his ability to
advocate for SomaLogic in this conflicted transaction.
This and other reluctant disclosures from
the Company reveal that the members of the Transaction Committee
are not independent from Eli Casdin. The Transaction Committee was
incapable of serving the purpose for which it was formed, to
“address the potential conflict of interest associated with Eli
Casdin serving as a director on both boards.”
Other Factual Errors:
Error
Correction
We believe ISS understates shareholder
opposition
In addition to public opposition from
Madryn, Skye Fund (owner of approximately 3.4 million SomaLogic
shares), SomaLogic Founder Larry Gold (approximately 5.3%
shareholder), and SomaLogic CTO Jason Cleveland, Tikvah Management
(approximately 3.1% shareholder), and former CEO Roy Smythe have
issued statements in opposition to the transaction.
“Madryn says,” ‘The company had multiple
long-range plans with higher revenue and profitability
projections’
This is not Madryn speculation. Subsequent
disclosures by the Company confirm that there were multiple
long-range plans with higher revenue projections. ISS’
recommendation relied upon the accuracy of the information provided
by the Board, despite a long list of examples of selective or
inaccurate disclosures that the Company has only partially remedied
today.
“the Series B preferred … ranks senior to
common, has governance rights, and a change of control put right,
which could present a risk in a future all-stock transaction”
ISS acknowledges that Standard BioTools’
preferred equity subordinates SomaLogic shareholders’ equity in the
combined company but does not acknowledge the harm caused by moving
from first-in-line to fourth-in-line in any future exit events.
Further, ISS fails to mention that, given
the pro forma capital structure, SomaLogic shareholders will not
receive any value unless the total value provided in that
change-of-control exceeds approximately $315 million; i.e., the
downside risk assumed by SomaLogic shareholders is greatly
increased by assuming Standard BioTools’s messy capital structure
as a result of this transaction.
Finally, ISS neglects to note that legacy
SomaLogic shareholders, through their significantly limited set of
governance rights relative to preferred equity holders, will have a
far lesser ability to influence and guide the pro forma company to
a positive outcome for common equity holders, despite their owning
a “majority” of the pro forma company.
“Though standalone SLGC has enough gas in
the tank to undertake a long road, shareholders may ultimately be
disappointed at the end of that journey.”
The Proposed Merger, if completed, will
unnecessarily crystallize an all-time low valuation. SomaLogic does
not need to transact. The value of the merger consideration
is unattractive relative to SomaLogic’s historical valuation,
potential valuation, and cash on hand. We believe there is no
downside risk associated with rejecting the Proposed Merger – even
if SomaLogic creates no value (which would be shocking given it has
$450 million in cash to spend), investors would be left no worse
off because they would have a company with $0 enterprise value, the
same as the value of the consideration in the Proposed Merger.
On the other hand, we believe the Proposed
Merger provides substantial new risks to SomaLogic shareholders,
due to the combined factors of:
1) Standard BioTools’ potentially deteriorating revenue base due
to Olink’s acquisition by TMO.
2) Standard BioTools’ amortizing debt and senior preferred
equity.
3) Pro forma company’s more limited ability to raise cash.
4) Preferred B Holders outsized governance rights.
About Madryn Asset Management
Madryn Asset Management is a leading alternative asset
management firm that invests in innovative healthcare companies
specializing in unique and transformative products, technologies
and services. The firm draws on its extensive and diverse
experience spanning the investment management and healthcare
industries and employs an independent research process based on
original insights to target attractive economic opportunities that
deliver strong risk-adjusted and absolute returns for its limited
partners while creating long-term value in support of its portfolio
companies.
IMPORTANT ADDITIONAL INFORMATION
Madryn Asset Management, LP, Madryn Health Partners, LP, Madryn
Health Partners (Cayman Master), LP, Madryn Health Advisors, LP,
Madryn Health Advisors GP, LLC, Madryn Select Opportunities, LP,
Madryn Select Advisors, LP, Madryn Select Advisors GP, LLC and
Avinash Amin (collectively, the “Participants”) are participants in
the solicitation of proxies from the stockholders of SomaLogic in
connection with the special meeting of stockholders (the “Special
Meeting”). On December 18, 2023, the Participants filed with the
U.S. Securities and Exchange Commission (the “SEC”) their
definitive proxy statement and accompanying GREEN Proxy Card
in connection with their solicitation of proxies from the
stockholders of SomaLogic for the Special Meeting. MADRYN
STRONGLY ADVISES ALL STOCKHOLDERS OF SOMALOGIC TO READ THE
DEFINITIVE PROXY STATEMENT, THE ACCOMPANYING GREEN PROXY CARD AND OTHER DOCUMENTS RELATED TO
THE SOLICITATION OF PROXIES BY THE PARTICIPANTS, AS THEY WILL
CONTAIN IMPORTANT INFORMATION, INCLUDING ADDITIONAL INFORMATION
RELATED TO THE PARTICIPANTS AND THEIR DIRECT OR INDIRECT INTERESTS
IN SOMALOGIC, BY SECURITY HOLDINGS OR OTHERWISE. The definitive
proxy statement and an accompanying GREEN Proxy Card will be
furnished to some or all SomaLogic stockholders and is, along with
other relevant documents, publicly available at no charge on the
SEC’s website at http://www.sec.gov/. In addition, the Participants
will provide copies of the definitive proxy statement without
charge upon request. Requests for copies should be directed to
Madryn Asset Management, LP.
Disclaimer
This material does not constitute an offer to sell or a
solicitation of an offer to buy any of the securities described
herein in any state to any person. In addition, the discussions and
opinions in this press release are for general information only,
and are not intended to provide investment advice. All statements
contained in this release that are not clearly historical in nature
or that necessarily depend on future events are “forward-looking
statements,” which are not guarantees of future performance or
results, and the words “anticipate,” “believe,” “expect,”
“potential,” “could,” “opportunity,” “estimate,” and similar
expressions are generally intended to identify forward-looking
statements. The projected results and statements contained in this
press release that are not historical facts are based on current
expectations, speak only as of the date of this press release and
involve risks that may cause the actual results to be materially
different. Certain information included in this material is based
on data obtained from sources considered to be reliable. No
representation is made with respect to the accuracy or completeness
of such data, and any analyses provided to assist the recipient of
this presentation in evaluating the matters described herein may be
based on subjective assessments and assumptions and may use one
among alternative methodologies that produce different results.
Accordingly, any analyses should also not be viewed as factual and
also should not be relied upon as an accurate prediction of future
results. All figures are unaudited estimates and subject to
revision without notice. Madryn disclaims any obligation to update
the information herein and reserves the right to change any of its
opinions expressed herein at any time as it deems appropriate. Past
performance is not indicative of future results.
View source
version on businesswire.com: https://www.businesswire.com/news/home/20231224313623/en/
John Ferguson / Joseph Mills Saratoga Proxy Consulting,
212-257-1311 info@saratogaproxy.com
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