December 12, 2008

LCA Surgeons Revolt

Business Courier

A physician revolt at LCA-Vision Inc. was the impetus for Dr. Stephen Joffe’s return to the company he founded.

In an exclusive interview with the Business Courier, Joffe said he decided to become an activist investor in LCA-Vision after doctors expressed concerns that the company was losing market share and cutting costs in ways that could impact patient care.

“There’s no room for error in this surgical procedure. It’s surgery on your eyes,” Joffe said. “They were really concerned that unless the company recognized that this was a very sophisticated surgical procedure being done and not just the flipping of a hamburger, patients were going to run into problems.”

Joffe said he knows of no adverse outcomes for LCA-Vision patients as a result of cost-cutting. An LCA-Vision surgeon, who asked not to be identified, also reported no problems but confirmed that doctors are worried about the loss of experienced optometrists and technicians.

Company officials did not return calls seeking comment.

Joffe leads an investment group that acquired an 11 percent stake in the company this fall. The group includes Joffe and his son, Craig, who spent five years on the LCA management team. Alan Buckey, LCA’s former CFO, is also involved. Initially, the Joffe group said it was acquiring shares strictly for investment purposes. More recently, it asked for board seats and management positions. And it asked the company to hold a special meeting of shareholders to vote on a “shareholder rights plan” enacted by LCA’s board Nov. 24. The company rejected that idea Dec. 10.

Dismayed by what he was hearing

In a Dec. 8 interview at the Queen City Club, Joffe said physicians asked for his help in May during their three-day annual meeting with company officials at the Great Wolf Lodge in Mason. Joffe said several physicians were fired by LCA-Vision after complaining about business strategies and cost reductions. He said he was dismayed by what he heard and urged physicians to take their concerns to directors.

That led to a June 10 letter, in which 40 doctors told LCA’s board they had “no confidence in the ability of Mr. Steve Straus to right the direction” of the company. On June 25, Board Chairman Anthony Woods commented in a company press release that the board “strongly supports the executive management team.” On June 26, the board signed new employment contracts with five top managers. And in July, it announced the company had signed new indemnity contracts to protect directors against lawsuits.

To Joffe, these were signs that directors were not going to address physician concerns.

But Joffe didn’t start buying shares until early October, when LCA-Vision announced that its third-quarter procedure volumes would be down 52 percent from the same period in 2007. On Oct. 28, LCA announced a $4.7 million net loss for the quarter on revenue of $37.4 million.

The quarterly results were “abysmal, and much worse than any of us individually had expected,” Craig Joffe said. “We decided we had to work together to try to rescue this company before it imploded.”

Analysts and company officials have said the weak economy is the biggest problem facing LCA-Vision, but former CFO Buckey said declining market share is the real culprit.

“In the fourth quarter of 2006, which is when Straus started, the company was just under 15 percent of the total U.S. (market). And in the most recent quarter, they reported they were down to just over 10 percent. They’re underperforming the category,” Buckey said. “(The Joffe group) went through the last recession in 2001-2002, and we figured out how to start growing this company even while the category was still negative.

“With good execution, you can manage to take share away from your competition.”

Some improvement cited

One LCA-Vision doctor, who asked not to be identified because he fears being fired, said the Joffe group’s investment was a welcome surprise to physicians. He added, however, that conditions have improved within the company. He cited the July firing of LCA’s chief marketing officer as a positive development, along with recent attempts to address physician concerns by Dave Thomas, a former McDonald’s Corp. executive hired in April as LCA’s senior vice president of operations.

To Joffe, however, such overtures are too little and too late. He thinks his management team would be better for physicians.

“They’re the most important asset of the company. They provide all the revenue of the company,” Joffe said. “We saw it as a medical service company, whereas the current management and board see it as a retail-type company. That’s why they’ve hired people out of retail, such as McDonald’s, and have people not represented on the board as physicians.

“They decline all interference or participation by the physicians.”

Road to Rebellion

  • Stephen Joffe started talking to LCA-Vision physicians in early May but didn’t buy shares until October.
  •  June 10: Doctors send note to board: “This letter alphabetically lists 40 LasikPlus surgeons who have entered a vote of “No Confidence” in the ability of Mr. Steve Straus to right the direction of LCAV/LasikPlus.”
  •  June 25: Board Chairman Anthony Woods blames high gas prices and a softening economy – not management problems – for LCA’s troubles. “The LCA-Vision board of directors strongly supports the executive management team in affirming the strategic direction of the company.”
  • June 26: Company signs new employment agreements with five top managers, guaranteeing one year’s base pay and benefits in the event of termination and full vesting of performance-related shares upon a change in control. 
  • July 18: Company signs agreements to “indemnify, defend and hold harmless” four directors in claims made against it in lawsuits. A July 24 news release said the indemnity contracts protect directors “to the fullest extent permitted” under Delaware law.
  • July 29: LCA-Vision suspends its dividend while announcing a second-quarter loss of $573,000 on lower than expected revenue of $54.2 million.
  • Oct. 2: A press release on “Third Quarter Business Metrics” indicates procedure volume declined 52 percent compared to third-quarter 2007. Joffe’s group starts buying shares four days later.
  • Oct. 28: LCA-Vision announces a third-quarter loss of $4.7 million on revenues of $37.4 million, lower than analyst expectations.
  • Nov. 5: Joffe group discloses its purchase of LCA-Vision shares, giving it an 11 percent stake.
  • Nov. 13: Joffe group meets with Woods and Director William Bahl to outline their concerns.
  • Nov. 14: Joffe tells the Business Courier that his former company is “broken” and “change is needed.”
  • Nov. 24: LCA-Vision announces a “stockholder rights plan” that makes it harder to gain control of the company.
  • Dec. 4: Joffe group requests board seats and management positions. “The company’s condition today is dire, its prognosis going forward poor,” Joffe said in a press release.
  • Dec. 9: Joffe calls on LCA-Vision board to hold special shareholder meeting to vote on the stockholder rights plan.
  • Dec. 10: The company rejects the idea for a special vote.
Posted by Admin at December 12, 2008 07:34 PM