A merger of money losers just might work out

Our region still has its fair share of public companies too small to generate any enthusiasm among investors.

If you push a CEO for an explanation of how the shareholders ever get out, you'll likely hear, "Well, we can always sell the company."

Well, maybe — except when the bidders fail to show up. That's what happened to the medical device company Uroplasty last year.

What's interesting about Uroplasty, however, is that it didn't resign itself to a future as a company no one cared about. It has turned itself into a little case study in how to grow out of that lowly status.

The company is not called Uroplasty anymore, having just merged with another small company to become Cogentix Medical. The CEO, Rob Kill, also had that job since the middle of 2013 at Uroplasty. Earlier this week he played down the significance of failing to find any bidders, saying it may have been due to timing and other factors among the most likely buyers.

While he may have a point, the fact remains that the board saw no bids.

The securities filing describing what happened doesn't name any names, but it's safe to conclude that the parties who got pitched the deal were devicemakers interested in urology. At Uroplasty most of the promise over the past 10 years has been around a product platform called Urgent PC, used mostly to treat overactive bladders.

So it wasn't surprising that the board explored whether a buyer could be found. It didn't take long, though, for the board members to hear, as it was put in the flat language of a securities filing, that "no indications of interest were received or were expected."

With the sale process wound up, Kill and his team still met with people to hear their ideas. One was an investment banker from Leerink Partners, which happened to be the investment banker for a little company called Vision-Sciences. Leerink's Jed Cohen came to Uroplasty's Minnetonka offices with growth ideas that included merging with Vision-Sciences.

Kill said he had only barely heard the name before and "had no idea who they were or what they did until Leerink walked through our door and pitched the idea."

Vision-Sciences turned out to be an even less attractive public company than Uroplasty. Founded in 1987, Vision-Sciences had $17.8 million in revenue for the 12 months ended in December. It, too, has consistently lost money, relying on funding from its chairman to stay alive.

Its key product is called the EndoSheath, a sterile barrier for endoscopes, the long thin tubes with a light at the end used to look inside the human body. And these EndoSheaths were being sold to urology practices.

The average sales territory produced less than half the $1 million or so Kill thinks is the minimum sales per rep for a company in his industry. And no one at Uroplasty saw any way to quickly get to that sales level, at least not with the products that the salespeople were then being asked to sell.

Adding the Vision-Sciences products would help a lot. And maybe Uroplasty's reps could sell a lot more EndoSheaths in a quarter than little Vision-Sciences ever could.

"Intuitively, it made a lot of sense," Kill said. "But the question you had to ask yourself is, 'It's been out there for 20 years, so why hasn't it gotten any traction?' "

As he and his team looked into it, he said, they saw an opportunity. Among other things they learned that too few urologists even seemed to know about the EndoSheath. Cleaning an endoscope is expensive, and urologists are eager for ideas to make their practices more efficient. Here in the Twin Cities, a prominent urology practice reported that no one from Vision-Sciences had ever even called.

As for merging, it's certainly cheaper to run one company than two. Plus the deal would change the story for investors back to one of growth.

Senior analyst Brooks O'Neil of Dougherty & Co. in Minneapolis agreed, calling the new Cogentix Medical "a first-inning kind of play." His case for optimism, however, rests not on the products acquired in the merger but the abilities of Kill and his executive team, who were put in charge of the new Cogentix Medical.

Even before the merger, Kill had established a goal of getting to $100 million in revenue in three years. With one year down, he's looking ahead to a fiscal year of about $50 million in revenue.

Reaching $100 million in two years is well beyond the potential of the current product portfolio, and O'Neil said he assumes Cogentix is well down the path toward acquiring other products, perhaps by licensing rather than a merger or acquisition.

At even $100 million, "it would still be a relatively small amount for being a successful public company," O'Neil said. "But if they can get there, they'll be on the radar screen of some people. And my guess is they then go through the same thought process they just went through, which is, 'Do we sell it now or keep building it?' "

And at four times larger than the last time the directors tried, odds would certainly favor that this time genuine buyers would turn up.