MEMORANDUMTO: Democratic Members of the House Oversight and Ethics Committee
FROM: David Oppliger (3-4827); House Majority Counsel
DATE: September 23, 1998
RE: September 24, 1998 hearing on the sale of MBPI
The following is a summary of the facts concerning the sale of MBPI on September 4, 1998.
- The Michigan Biologic Products Institute (MBPI) was sold to a private entity, BioPort, on September 4, 1998. The price for the lab was approximately $24 million. (With a net present value of $17 million). Most of the BioPort bid represents promissory notes and floating receivables owed to the state. Much of the debt carries 0% interest.
- The Director of MBPI, Bob Myers, and his assistant, Rob van Ravenswaay – who was assigned to MBPI to facilitate its sale – formed a corporation called MBP, Inc. and formed a partnership with BioPort. MBP, Inc. owns a 32% interest in BioPort. They are hereafter referred to as "the insiders."
- A cash bid made by another firm was worth approximately $16.7 million.
- The insiders’ bid was rejected twice before they partnered with BioPort.
- In November of 1997 the insiders participated in an appraisal of MBPI which valued it at "nominal to $10.5 million."
- One of the most highly valued and highly publicized assets of the Institute was a Department of Defense contract for the anthrax vaccine. DCH estimated the contract with the Defense Department to be $130 million. The employees knew of this contract since at least October 2, 1996.
- On November 30, 1996, Director Robert Myers told the Lansing State Journal, that he was not involved in trying to buy the Institute. "I am a state employee and this would be a conflict of interest."
- In negotiating to buy the lab did the employees who were part of MBP, Inc. violate state ethics laws by using insider information for personal gain? The committee obtained a correspondence from Dr. Myer to an undisclosed losing bidder. The letter establishes that he was familiar with the terms of at least two bids, information not available to other bidders. The letter states in part:
I would have liked to have reached an agreement in principle before your bid was finalized; I accept the fact that we did not. I believed that you and [redacted] had determined the maximum amount of your offer based on your analysis of the business, and that you would go no higher. My judgement was that the state would get a better offer, so I had to also participate in a better offer. This has proven to be the case.
MBP, Inc. will not – given the totality of what I state in this letter – assert that you have violated the non-circumvention clause with your apparent bid. However, should you choose to substantially alter your bid, without providing me with an opportunity to discuss it with you, in an effort to win at any price, I will assert you have violated the agreement.
A complete copy of the letter will be distributed at the hearing.
- The letter unequivocally demonstrates that Myers and van Ravenswaay knew the identities of at least two bidders and the substance of their bids, information not made available to the general public. The employees also solicited financing from at least one other bidder. It appears they used information not available to others to enhance their financial position relative to the other bidders, a clear violation of the act.
- Mr. van Ravenswaay signed a confidentiality agreement between MBP, Inc. and the Commission. The agreement provides in part:
No Disclosure of Negotiations. Neither you nor your Representatives will disclose to any person that the State is considering a possible transaction involving the Institute, that the Evaluation Material has been furnished to you, the fact that discussions or negotiations involving the Institute are taking place or any of the terms, conditions or other facts with respect to any such possible transactions including the status thereof.
The above contractual provision was apparently violated considering the letter referenced in paragraph A, above.
- There was no documented oversight or control by the MBP Commission over the insiders to insure that state ethics laws were not violated. No records exist regarding the formation of MBP, Inc. or the nature of the agreement with BioPort. A Michigan law firm is identified as part of MBP, Inc. but the name of the law firm was not disclosed. The name of the law firm was not even disclosed to the State Administrative Board when they voted to approve the transaction.
- The use of the name Michigan Biologic Products, Inc. established by the insiders may be a violation of federal trademark law, specifically 25 USC 1007, in that it causes confusion as to whether MBP, Inc. is in any way associated with the State.
- Administration officials admitted that the employees’ involvement would constitute a conflict of interest. On November 10, 1997, the House Oversight and Ethics Committee met to consider the progress of the sale of the Institute. At the hearing Carol Isaacs, an attorney and the policy director of DCH, testified that the bid of Messrs Myers and van Ravenswaay had been withdrawn. She stated, "[t]he employees’ purchase is no longer being considered. The Commission is taking their responsibilities very seriously, and….so that conflict of interest does not exist at this time, so that should relieve a lot of concerns (sic)."
HOUSE OVERSIGHT AND ETHICS COMMITTEE
HEARING ON THE SALE OF THE MICHIGAN BIOLOGICE PRODUCTS INSTITUTE
FINANCIAL TERMSBuyer: BioPort, Inc.
President and CEO – Mr. Fuad El-Hibri
As of 4/30/98, 32% of BioPort was owned by MBP, Inc., a company formed by the present director of the lab, Robert Myers and his assistant Rob van Ravenswaay.Terms of the Deal
Sales Price Approximately $17 million (Total value of $24 million after all loans repaid in 5 years). The deal rests on a series of loans from the state to the buyers which amount to $13,600,000 (Net present value approximately $11 million). The balance of the consideration will be paid to the state in the form of donated products, royalties, rent, etc.At closing the purchaser is required to pay the state $2.25 million.
Terms of the Loans to BioPort
$1,000,000 Due when at least $2 million of the $4.5 million assigned account receivable presently owed to the state is paid. No interest accrues.$4.5 million 8% 5 years
$3.15 million 8% one year from closing
$4.5 million Receivables owed to state are assigned to BioPort for one year to be repaid with no interest.Second Highest Bid
Bidder: Gruppo Marcucci, a firm also endorsed by the Department of Defense, but not partnered with the managers of the Institute.Price: $16.6 million
Terms of the Gruppo Marcucci Bid
Cash $6.7 million, including $2.7 million in products purchased by the bidder from the state.No debt is involved in the Gruppo Marcucci bid. The balance of the payment would be in the form of royalties, rent and donated products.
HOUSE OVERSIGHT AND ETHICS COMMITTEE HEARING
SEPTEMBER 24, 1998
CHRONOLOGY OF SIGNIFICANT FINDINGS
At the start of the Gulf War, Fuad El-Hibri, the CEO of BioPort and the new owner of the Michigan Biologic Products Institute (MBPI), facilitates the purchase of anthrax vaccine for Saudi Arabia who had not been able to obtain it from the US government.
June, 1996: Fuad El-Hibri contacts Dr. Robert Myers regarding the anthrax vaccine.
October 2, 1996: Department of Defense contract with MBPI to vaccinate troops is publicized. The contract is ultimately worth approximately $130 million.
November 12, 1996: KPMG Peat Marwick Preliminary Determination of Fair Market Value, released. The report states that the lab’s value is nominal to $10.5 million.
November 30, 1996: Lansing State Journal article reports that Dr. Robert Myers lacks interest or involvement in purchase of MBPI because he says, "I am a state employee…this would be a conflict of interest."
January 7, 1997: Dr. Robert Myers and Robert van Ravenswaay file Articles of Incorporation under the name of Michigan Biologic Products, Inc. (MBP, Inc.) indicating 60,000 shares.
January 14, 1997: P.A. 522 which authorizes the sale of the lab takes effect.
June 10, 1997: Myers-van Ravenswaay Articles of Incorporation #441-359 amended to increase shares from 60,000 to 1,000,000.
June 16, 1997: Representative Pat Gagliardi appoints Representative Lingg Brewer as chair of the House Oversight and Ethics Subcommittee to study the sale of MBPI.
August 21, 1997: Dennis Schornack testifies before the House Oversight and Ethics Subcommittee and first confirms that there is an insiders’ bid.
September 2, 1997: Employee Petition circulated, on state paper and on state time, and recirculated by Bill Nummy, assistant to the director Robert Myers, offering MBPI employees another opportunity to consider signing it, and requesting more signatures before Representative Lingg Brewer has another Subcommittee meeting.
October, 1997: MBP, Inc. submits its first bid for the Institute.
November, 1997: MBP, Inc. is instructed by the Commission to redo its bid to provide up-front cash. In conjunction with Intervac and Neogen, MBP, Inc. resubmits its bid.
November 10, 1997: House Oversight and Ethics votes to pass HB 5300 which, among other things, strengthens legislative oversight role. MBPI representative Carol Isaacs attends hearing on behalf of the MBPI Commission, and announces that Myers/van Ravenswaay’s purchase offer had been withdrawn, thereby ending the "conflict of interest."
November 10, 1997: The Commission rejects the MBP, Inc. bid for the second time.
December 16, 1997: U.S. Army announcement that it will require more anthrax vaccine and MBPI announced that it’s ready to supply. Plans to speed up vaccination schedule and inoculate all 2.4 million military personnel, at a cost of $130 million, prompted by problems with Iraq over weapons inspections were announced.
January 3, 1998: Administration announces that bidding will be re-opened. HB 5300 to be amended and re-introduced to reflect changes and need for additional appropriations to support Lab through extended bidding.
March, 1998: Insiders negotiate with at least two bidders to assist them in purchasing the lab in possible violation of state ethics laws and non-disclosure agreement.
June 2, 1998: MBP Commission announces top bidder, BioPort, at $25 million. The cash bid of Gruppo Marcucci is rejected.
June 17, 1998: Representative Lingg Brewer files a lawsuit under the Freedom of Information Act (FOIA) to compel production of documents concerning the insiders’ bid.
July 1, 1998: Judge Giddings grants plaintive Lingg Brewer’s motion to produce documents. Through the FOIA, Representative Lingg Brewer learns of the insiders’ 32% interest in BioPort.
July 7, 1998: State Administrative Board approves BioPort bid.
August 14, 1998: The State of Michigan Ethics Board orders further investigation at its September meeting in the ethics complaint filed by Representative Lingg Brewer against Messrs. Myers and van Ravenswaay for violating the state ethics laws.
September 4, 1998: The deal with BioPort is closed for approximately $25 million with a net present value of approximately $17.4 million.
To: Representative Pat Gagliardi, Chair
House Oversight and Ethics Committee
From: Representative Lingg Brewer, Chair
Michigan Biologic Products Institute (MBPI) Subcommittee
Re: Final Report
Date: September 25, 1997
The investigation into the sale of MBPI, conducted by my subcommittee, has been completed. The summary findings, as documented, are as follows:
- On November 12, 1996, KPMG Peat Marwick prepared a Preliminary Determination of the Fair Market Value of the MBPI. The report concluded that the value of the Institute ranged from nominal to $10.5 million. Only three people provided data on the Institute’s value to Peat Marwick: Robert C. Myers, Director, Rob van Ravenswaay, Deputy Director, and Dennis Schornack, Chairman. According to the report, Peat Marwick relied on information provided without audit or verification.
- January 7, 1997, Myers and van Ravenswaay formed a corporation called Michigan Biologic Products, Inc. for the purpose of buying the Institute. P.A. 522, the Act authorizing the sale of the Institute took effect on January 13, 1997. Myers and van Ravenswaay informed the MBPI board of their intent to purchase on January 14, 1997.
- On August 21, 1997 Dennis Schornack testified before the committee but he refused to answer questions about the value Peat Marwick placed on the Institute.
- The Institute produces vaccines in full compliance with FDA regulations and under FDA licensure. In the 1980’s, an expenditure of $270 million was found to be the industry-wide average cost to develop a new drug and receive FDA approval for its use. If the Institute is transferred to the private sector for the amount indicated in the Peat Marwick study, the public will, in effect, be giving away at least $270 million in good faith investments made to obtain FDA license for the products it produces. MBPI holds ten U.S. FDA product licenses.
- The Institute has an exclusive agreement for anthrax vaccine. In 1993, the revenue projection under this contract exceeded $15 million. It is expected that additional production agreements, spanning the next three to seven years, will be forthcoming but the amount and type of product is yet to be determined. It should be noted that MBPI is the only facility in the world licensed by the FDA to produce the anthrax vaccine. Further, the U.S. Army will require 25 million doses over the next five years. The price per dose has been estimated from $3.25-$7.00.
- The Army is funding the licensure process for MBPI to manufacture pentavalent botulinum toxoid (PBT). If successful, MBPI would be the sole license holder for this vaccine. Once licensed, the Army has indicated it would administer a series of up to three vaccinations to 600,000 troops, which equates to roughly $18 million in revenue annually. It is anticipated that contracts with SmithKline for the diphtheria and tetanus vaccines produced at the institute will yield at least $7 million. Contracts with SmithKline for the rabies vaccine may be worth $2 million. MBPI is one of four subcontractors in a proposed consortium with Battelle Labs and the U.S. Army. The value of this agreement is approximately $8 million annually. There are other agreements between the Institute and private concerns that have value which have not been fully quantified.
- After Dr. Burgoyne testified, he received letters from the Office of the Attorney General demanding that certain documents be returned. I view these communications as being related to Dr. Burgoyne’s testimony. I raised my concern over these communications with the Attorney General.
- The issue of royalty payments to the Institute by the transferee is being ignored. In 1994 Morgan Stanley estimated that the total value of certain pediatric vaccines alone was $4.1 million.
- Revenue from agreements with the Michigan and national branches of the Red Cross for fractionation of human plasma is approximately $2 million annually.
- MBPI consists of 28 buildings containing 245,606 square feet of laboratory, plus real property and equipment, with an estimated value of over $12 million. Additional public dollar investments are being made in infrastructure replacement.
- Total projected revenue from the sales of biologic products for FY’97 is $19.7 million.
- State resources have been expended to coerce MBPI employees into supporting the insiders’ purchase of the Institute. This is contrary to both the state conflict of interest and ethics laws.
- Present employees have been excluded from obtaining other employment in state government. It is my belief that denial of employment opportunities is designed to maintain the experienced, scientific workforce for the privatized MBPI.
- Dr. Robert Myers, Robert van Ravenswaay and the authors of the Peat Marwick report were invited to testify before the committee. They all declined.
- According to the House Fiscal Agency, as of November 21, 1996, GF/GP contributions to the MBPI totaled $58 million, since FY ’77.
- The insiders continue to direct the operations of the Institute, negotiate contracts, hire personnel, and otherwise influence the value of the Institute. This gives the appearance that would suggest that they may be using their official position and/or confidential information for personal profit or financial benefit.
The role of the insiders in the Peat Marwick report is particularly disturbing, if they are able to buy the Institute for a "nominal amount." They will be able to use the Peat Marwick report, which they, in essence wrote, to justify their low purchase price. Further there are no institutional safeguards in place to prevent public employees who intend to buy the institute from potentially using insider information to gain an advantage over other potential bidders. Without proper safeguards in place the involvement of insiders will distort the market for the facility and the highest possible price will not be paid.
I recommend the full House Oversight and Ethics Committee continue to investigate this issue. I also recommend that Dennis Schornack, Robert Myers, and Robert van Ravenswaay be invited to testify and answer some of the questions that were raised but not answered. I believe that the authors of the Peat Marwick study should be called to explain the basis for their conclusion that the Institute has a nominal value.
Thank you for the opportunity to chair this subcommittee. Also, I thank Representative Wojno and DeVuyst for their contributions to the work of the committee.