RTI Surgical — Proxy Contest (May 2016)
50 slides from RTI Surgical's proxy contest presentation, May 4, 2016
Slide 1: "A Higher Standard" of Shareholder Disappointment
RTI Surgical “A Higher Standard” of Shareholder Disappointment May 2016
Slide 2: Important Disclosures
Important Disclosures This presentation is for discussion and general informational purposes only. It does not have regard to the specific investment objective, financial situation, suitability, or the particular need of any specific person who may receive this presentation, and should not be taken
Slide 3: Table of Contents
Table of Contents I. Executive Summary II. Krensavage Asset Management LLC III. Our View of RTI Surgical, Inc. * Missed Opportunity * History of Poor Stock Performance * Bad Management Yields Poor Results * Board Structure Raises Concerns * Bungled Acquisitions IV. Krensavage Plan for Success CONFID
Slide 4: Executive Summary
Executive Summary CONFIDENTIAL | Page 4
Slide 5: Summary
Summary We believe RTI’s board has failed to act in the best interests of shareholders. We fear further value destruction unless shareholders act. RTI’s major areas of concern are: • Failure to launch, market and expand the commercial potential for a set of otherwise valuable products • Declining st
Slide 6: Krensavage Asset Management LLC
Krensavage Asset Management LLC CONFIDENTIAL | Page 6
Slide 7: Introduction to Krensavage Asset Management LLC
Introduction to Krensavage Asset Management LLC • Equity hedge fund managing $274* million in pharmaceutical, medical Krensavage Asset device and biotechnology investments Management LLC • Founded by Michael P. Krensavage in 2008 • Long-biased, concentrated positions • Long-term horizon Investment •
Slide 8: We Are Dissatisfied With Board Initiatives
We Are Dissatisfied With Board Initiatives In a letter to former chairman Dean Bergy on November 9, 2015, we wrote: • “RTI’s latest [earnings] warning provides another signal its board has failed to install management that understands its business” Since this initial correspondence and our assumptio
Slide 9: Our View of RTI Surgical, Inc. Missed Opportunity
Our View of RTI Surgical, Inc. Missed Opportunity CONFIDENTIAL | Page 9
Slide 10: A Valuable Business Plagued by Poor Management
A Valuable Business Plagued by Poor Management RTI boasts growing product lines in most business segments: • Yet, RTI remains cash flow negative as spending outpaces revenue growth • Stock price remains depressed • Board members lack sufficient financial commitment to the company 90 80 Ortho fixatio
Slide 11: RTI Requires Sweeping Reform
RTI Requires Sweeping Reform With a reconstituted board including our four nominees, RTI Surgical could escape its malaise and focus on its core business of tissue-sterilization and implant products. The addition of our highly-qualified, independent nominees will, in our view, drive RTI Surgical’ s
Slide 12: Our Highly-Qualified, Independent Slate
Our Highly-Qualified, Independent Slate We propose four highly-qualified independent directors. We are not trying to elect ourselves to the board nor are we trying to elect our friends. We carefully selected our nominees because we believe they have the requisite experience and skill sets to improve
Slide 13: History of Poor Stock Performance
History of Poor Stock Performance CONFIDENTIAL | Page 13
Slide 14: RTI Shares Have Underperformed
RTI Shares Have Underperformed $14.00 Historical Prices Ended 3/31/2016* $12.00 $10.00 $8.00 $6.00 $4.00 $2.00 $- 3/31/2006 3/31/2007 3/31/2008 3/31/2009 3/31/2010 3/31/2011 3/31/2012 3/31/2013 3/31/2014 3/31/2015 3/31/2016 RTI has dropped about 70% since its initial public offering at $14 a share a
Slide 15: RTI's Peers Have Left It Behind
RTI’s Peers Have Left It Behind RTIX Value of Initial $100 Investment Over 3 Years Ended 2/29/2016* WMGI $350 NUVA IART $300 EXAC $250 $200 $150 $100 $50 $0 3/1/2013 6/1/2013 9/1/2013 12/1/2013 3/1/2014 6/1/2014 9/1/2014 12/1/2014 3/1/2015 6/1/2015 9/1/2015 12/1/2015 RTI shares continues to underper
Slide 16: Bad Management Yields Poor Results
Bad Management Yields Poor Results CONFIDENTIAL | Page 16
Slide 17: Unsustainable Cash Flows
Unsustainable Cash Flows 2000-2015 Cumulative Financials Net loss to common shareholders -$235.6 million Net cash from operating activities $71.8 million Purchases of property, plant, and equipment $139.8 million Free cash flow -$68 million RTI’s cash burn alarms us. RTI Free Cash Flow Progression M
Slide 18: Cumulative Free Cash Flow
Cumulative Free Cash Flow RTI has only achieved positive free cash flow in four of its sixteen years as a public company. RTI Free Cash Flow, $ Millions Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Cumulative Net Cash Provided by -9.2 -4.4 6.5 -1.9 -2.9 -1.7 -
Slide 19: Bloated Expenses Hurt Cash Flow
Bloated Expenses Hurt Cash Flow Growth Since 2000 Operating Expenses as % of Revenue 600% 60% 500% 50% 400% 40% 300% 30% 200% 20% 100% 10% 0% 0% 2011 2012 2013 2014 2015 MG&A as % of Revenue R&D as % of Revenue Revenue Growth Marketing, General & Administrative Growth R&D Growth Management is appare
Slide 20: Costs Continue to Rise
Costs Continue to Rise RTI's Growing Expenses 140 $ Millions 120 100 80 60 40 20 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Marketing, General & Administrative R&D CONFIDENTIAL | Page 20
Slide 21: Cash Is Dwindling
Cash Is Dwindling Cash & Cash Equivalents at Year End 60 $Millions 50 40 30 20 10 0 2012 2013 2014 2015 In the three years ended December 31, RTI burned $37.1 million, depleting its cash position to $12.6 million from $49.7 million. CONFIDENTIAL | Page 21
Slide 22: Management Fails to Achieve Performance Targets
Management Fails to Achieve Performance Targets 2015 Performance Targets, $ millions Performance Target Achieved Result Category Base Revenue 270.9 262.4 Focused Product 29.1 19.9 Revenue Non-GAAP Operating Income 10.0% 9.6% Percentage Operating Cash 27.1 9.0 Flow CONFIDENTIAL | Page 22
Slide 23: Management Fails to Achieve Performance Targets
Management Fails to Achieve Performance Targets 2014 Compensation Targets, $ millions Performance Target Achieved Result Category Revenue 264.9 262.8 Non-GAAP 18.0 16.3 Operating Income Operating Cash 26.0 6.9 Flow 2013 Compensation Targets, $ millions Performance Target Achieved Result Category Rev
Slide 24: Board Structure Raises Concerns
Board Structure Raises Concerns CONFIDENTIAL | Page 24
Slide 25: Board Composition
Board Composition We believe the board is self-serving and shareholder unfriendly Krensavage’s involvement has appeared to prompt change. Since our activism began, three legacy directors have announced their resignations, including the former chairman. A tenure of more than nine years potentially co
Slide 26: Board Composition
Board Composition We believe the board is self-serving and shareholder unfriendly We question the entrenchment of the company's longest-serving director, Dr. Peter F. Gearen, a retired orthopedic surgeon who joined RTI's board in 1998. Since the company went public at $14 a share in August, 2000, it
Slide 27: Board Composition
Board Composition We believe the board is self-serving and shareholder unfriendly Restrictive governance provisions limit the ability of shareholders to seek change: • Special meetings require a vote of at least 50.01% of outstanding shares • Shareholders cannot act by written consent • Amendments t
Slide 28: Board Composition – A Flawed Selection Process
Board Composition – A Flawed Selection Process The board appears to nominate its buddies We believe RTI’s search for three new board members--led by nominating and governance committee members Dean H. Bergy, Peter F. Gearen, and Curtis M. Selquist--lacked independence. • Dean H. Bergy, former chairm
Slide 29: Board Composition
Board Composition While Water Street’s 18.6% ownership interest in RTI aligns it with other shareholders’, we believe it needs the help of Krensavage’s independent nominees who have the requisite skill sets to help Water Street improve performance and instill the accountability that we believe is se
Slide 30: Underperformance-based Compensation
Underperformance-based Compensation RTI’s median 2015 director compensation exceeded $111,000. In 2015, two of the three highest paid directors after former board chair Dean Bergy, were members of the compensation committee. $5 Historical Annual Compensation Rising compensation, particularly for Mil
Slide 31: Underperformance-based Compensation
Underperformance-based Compensation We believe loose performance metrics incentivize mediocrity RTI management has profited while destroying value at the expense of RTI shareholders • In the last 10 years, executives and directors have earned more than $40 million • In 2014, chief executive Hutchiso
Slide 32: Underperformance-based Compensation
Underperformance-based Compensation We believe loose performance metrics incentivize mediocrity 2008: Management awarded bonuses after Tutogen merger while 2014: After withholding board ignores executive bonuses for impairment charges. 2012: The board awarded 2013, the board awarded RTIX Price 12 Sh
Slide 33: Management's Commitment Issues
Management’s Commitment Issues Thirteen executive and directors own only 5.2%* of RTI stock. Since December 2013, RTI executives and directors failed to buy any shares on the open market*. 2015 Exactech Wright Medical Integra Life Sciences Nuvasive RTI 0 5 10 15 20 25 30 35 % ownership of executives
Slide 34: Bungled Acquisitions
Bungled Acquisitions CONFIDENTIAL | Page 34
Slide 35: Value Evaporates After Tutogen Purchase
Value Evaporates After Tutogen Purchase In November, 2007, when RTI’s market value was $315 million*, it agreed to purchase Tutogen Medical Inc. for $266 million of stock*. RTI paid roughly 5 times revenue and 74 times operating income*. A year later, the combined company had a market cap of $126 mi
Slide 36: History Repeats With Pioneer
History Repeats With Pioneer RTI partnered with Water Street in July, 2013, to buy Pioneer Surgical for $130 million. Pro forma revenue, RTI claimed during a conference call to discuss the purchase, amounted to $263 million in the year ended March, 2013. RTI management indicated it hoped to grow Pio
Slide 37: History Repeats With Pioneer
History Repeats With Pioneer Results fell short of Hutchison’s forecast. Revenue during the first four quarters as a combined company amounted to $252.4 million, well below the pro forma $263 million. Surgeons who owned stock in privately-held Pioneer, disappointed with its sales price, reduced orde
Slide 38: Krensavage Plan for Success
Krensavage Plan for Success CONFIDENTIAL | Page 38
Slide 39: A Starting Point for RTI's Success
A Starting Point for RTI’s Success We suggest the following: 1. Remove long-tenured incumbent directors and new RTI nominees with questionable ties and replace with Krensavage’s independent nominees: Brian K. Hutchison Peter F. Gearen Nicholas J. Valeriani Paul G. Thomas Escapes accountability Joine
Slide 40: A Starting Point for RTI's Success
A Starting Point for RTI’s Success The experience of our nominees suggests thoughtful analysis, independence, and results beneficial to shareholders. We believe each would: • Provide extensive knowledge of medical devices and instill accountability • Buy stock on the open market • Approach RTI with
Slide 41: A Starting Point for RTI's Success
A Starting Point for RTI’s Success 2. Adopt strict compensation metrics to align management with shareholders • The 2016 compensation plan allows the board to increase bonuses even if management misses performance criteria • Adhere to compensation structure to prevent paying for poor performance 3.
Slide 42: RTI Owns Valuable Inventory
RTI Owns Valuable Inventory 4. Cut spending • Reevaluate expenditures in order to restore positive cash flow • Consider divestment of orphan assets • Focus on improved sales in most-profitable franchises 5. Consider sale of company • RTI on December 31 held inventory worth $4.38 a share* $352.8 mill
Slide 43: Value in a Sale
Value in a Sale Based on our analysis, RTI is worth $12.18 a share at the average gross profit of multiple 5.8 or $9.95 at the median multiple of 4.8. Peer Transactions* Average Date announced 8/17/2010 5/3/2012 12/8/2014 4/7/2008 5/16/2011 - Seller Osteotech Inc Kensey Nash Corp ArthoCare Corp Life
Slide 44: Vote GREEN
Vote GREEN Protect your investment and position RTI for growth by voting on the GREEN proxy card today. Krensavage proposes highly qualified independent nominees who will act on behalf of all shareholders. Vote GREEN today to empower the shareholder. CONFIDENTIAL | Page 44
Slide 45: Appendix
Krensavage Asset Management LLC
Slide 46: Our Nominees
Our Nominees Jeffrey D. Goldberg Darren P. Lehrich Mark D. Stolper Frank R. Williams Jr. *Source: Bloomberg.
Slide 47: Jeffrey D. Goldberg
Jeffrey D. Goldberg Jeffrey D. Goldberg, age 50, has served as Chair of the Board of Directors of MModal IP LLC, a provider of service-based and technology-based transcription, coding, and clinical documentation-improvement services to health care systems, since August 2014, and as Co-Chair of Surgi
Slide 48: Darren P. Lehrich
Darren P. Lehrich Darren P. Lehrich, age 44, has served as Senior Vice President, Strategy & Investor Relations of American Renal Associates, Inc. (“ARA”), a national provider of dialysis services, since July 2015. Prior to ARA, Mr. Lehrich served as Managing Director in the Health Care Providers Eq
Slide 49: Mark D. Stolper
Mark D. Stolper Mark D. Stolper, age 44, has served as Executive Vice President and Chief Financial Officer of RadNet, Inc. (NYSE:RDNT), a national provider of freestanding, fixed-site outpatient diagnostic imaging services in the U.S. based on number of locations and annual imaging revenue (“RadNet
Slide 50: Frank R. Williams Jr.
Frank R. Williams Jr. Frank R. Williams Jr., age 46, has served as Senior Vice President and Senior Managing Director of Acquisitions for Medical Properties Trust, Inc. (NYSE:MPW), a real estate investment trust focusing exclusively on providing capital to acute care facilities, since September 2011