UPDATED: UMHS Signs Five-Year $45M Deal With Life Technologies—UMHS CEO Serves On Company’s Board Of Directors
Dr. Pescovitz owns shares in the company worth $385,000 and accumulated additional shares days before the October 2013 Board of Regents meeting at which the contract between UMHS and Life Technologies was granted approval.
IN THE October 2013 University of Michigan Board of Regents meeting minutes, one finds the following four sentence notation: “The agreement is for products, instrumentation, equipment and support services required to support the research community at the University and UMHS. The total estimated expenditures over a five-year period are $45,000,000. Because Dr. Ora Pescovitz, University of Michigan employee, is also on the Board of Directors at Life Technologies, this agreement falls under the State of Michigan Conflict of Interest Statute.”
It was an alert to the college’s Regents that was both straightforward and obtuse. On the surface, the meeting minutes report a five-year $45 million dollar contract with Life Technologies, a publicly-traded company (LIFE) with revenues of $3.8 $13.8 billion dollars and 10,000 employees, located in Carlsbad, California. Because Dr. Pescovitz sits on the Board of Life Technologies, the 1968 State of Michigan Conflict of Interest Statute must be adhered to.
The contract, one of many signed each year by the UMHS, employs Life Technologies to provide “oligonucleotides/custom DNA synthesis, molecular biology and cell culture products for use by authorized university faculty and staff.”
According to the University of Michigan’s procurement department, “Life Technologies is considered a strategic supplier as it provides excellent products, pricing and services.” According to industry experts consulted, this contract raises a variety of red flags. According to one University of Michigan Regent, the group was alerted to the fact that Dr. Pescovitz had a financial interest in Life Technologies by virtue of disclaimer noted in the minutes. However, they were not told the UMHS CEO’s stock holdings increased prior to the contract’s approval by the Board of Regents.
The “Action Request” placed before the Regents and approved by the group on October 18, 2013 ends by noting that, “Dr. Pescovitz has met state law requirements with the disclosure of her pecuniary interest and formal appointment arrangements with the University of Michigan….Dr. Pescovitz was in no way involved in selecting this vendor, negotiating this agreement or in making or approving purchases from this company. It is also noted that Thermo Fisher Scientific, a world leader in these commodities, has announced that it will purchase Life Technologies this year, potentially eliminating this conflict of interest.”
The obvious question, according to a pharmacy industry expert, is whether the $45 million dollar contract was the result of any influence Dr. Pescovitz’s may have exerted in the process of choosing the company that would provide “oligonucleotides/custom DNA synthesis, molecular biology and cell culture products for use by authorized university faculty and staff.”
The 1968 State of Michigan Conflict of Interest Statute, section 4(2) states: “If there is a conflict of interest on the part of a legislator or state officer in respect to a contract with the state or a political subdivision of the state, to be prohibited by this act his or her personal interest must be of such substance as to induce action on his or her part to promote the contract for his or her own personal benefit.”
Section 4(3)i of the Statute does not define as a substantial conflict of interest: “A corporation in which a legislator or state officer is a stockholder owning more than 1% of the total stock outstanding in any class if the stock is not listed on a stock exchange or the stock has a present market value in excess of $25,000.00 if the stock is listed on a stock exchange or a director, officer, or employee.”
The Ann Arbor Independent filed a Freedom of Information Act request for a variety of materials, including a copy of the contract between UMHS and Life Technologies, emails between Dr. Pescovitz and Life Technologies representatives, as well as information concerning the bidding process used by the University of Michigan’s Procurement Department in awarding the contract to Life Technologies.
In the meantime, however, Securities and Exchange Commission records show Dr. Pescovitz owns 5,083 shares of Life Technologies shares worth approximately $385,189.
She was appointed to the Life Technologies Board of Directors in April 2011. In May 2011, Dr. Pescovitz purchased 200 shares of company stock at $55.24 each. In August of 2011, she purchased another 500 shares at $36.16 each. The remaining shares she owns were accumulated by Dr. Pescovitz quarterly between July 2011 and October 2013, in acquisitions known as non open market buys.
Between May 2011 and October 2013, the stock has doubled in value. Since her appointment to the Life Technologies Board, Dr. Pescovitz’s shares in the company have paid out close to $40,000 in earnings.
Not all of the members of the Life Technologies Board of Directors hold stock in the company. In fact, three of the ten directors hold no stock at all in Life Technologies. Half of the ten directors currently hold fewer shares in the company than Dr. Pescovitz.
Life Technolgies Chairman and CEO Gregory Lucier currently owns 59,893 shares in the company, but over the past two years has sold well over 1,000,000 shares in the company. He currently holds 1.251 million vested options valued at over $53.7 million dollars, according to data supplied by the company to the SEC. Dr. Pescovitz owns no vested options.
However, as the “Action Request” put before the Regents on October 18, 2013 noted, Thermo Fisher Scientific, Inc. is prepared to purchase Life Technologies. In January 2013, Reuters reported, “that Thermo Fisher Scientific Inc is nearing a deal to buy Life Technologies Corp for close to $13 billion. The final price being negotiated is in the region of $75 per share, valuing Life Technologies at close to $13 billion. A deal at $75 per share would represent a premium of 36% on Life Technologies’ closing share price on January 17, 2013.”
In April 2013, the former Attorney General of Louisiana Charles C. Foti, Jr., and the law firm of Kahn Swick & Foti, LLC announced that “KSF has commenced an investigation into the Board of Directors of Life Technologies Corp (Life Technologies or the Company) in connection with their conduct related to the sale of the Company to Thermo Fisher Scientific.” Between April 14, 2013 and April 19, 2013, nine other white shoe law firms across the United States released similar announcements.
In short, company shareholders alleged that the Board of Directors of Life Technologies, including Dr. Pescovitz, had breached its fiduciary responsibility in agreeing to the sale of that company to Thermo Fisher Scientific without shopping the company around to determine whether the $76 dollar per share purchase price was the best possible deal for shareholders.
The University of Michigan has done business with Fisher Scientific for many years.
While Dr. Pescovitz benefits from her seat on the Board of Life Technology, and Life Technology benefits from a $45 million dollar 5-year contract with U of M, this comes on the heels of a 2012 email sent out by Dr. Pescovitz to hospital employees in which she writes, “We find ourselves at a significant crossroad for our Health System, where larger-than-expected deficits now require us to focus intently on ensuring we have a positive margin for this year so that we have a solid foundation to weather expected financial pressures in the years ahead.
Our expenses after the first four months of our current fiscal year, which began July 1, are greatly exceeding our revenue, which leaves us with a much larger than expected financial challenge. Both the Hospitals and Health Centers and the Medical School need to considerably reduce operating expenses for the remainder of this fiscal year to offset this deficit….” Dr. Pescovitz goes on to write that expense management plans to deal with the projected deficit included “attrition management; reductions in appointment effort, overtime, temporary staff and contract labor; and savings from improvements in supply chain efforts.”
According to the 2013-2014 UMHS budget approval Action Request signed by Dr. Pescovitz and submitted to the Regents on June 20, 2013, the cost of payroll and supplies rose a combined 14.8 percent. While the University of Michigan Hospitals and health Centers’s operating margin target is expected to rise from 0.1 to 0.8 percent, Dr. Pescovitz reported that “strategic rate setting”—prices for services—had been increased 5 percent, on average. Without that increase, it’s likely Dr. Pescovitz would have faced a deficit in her $2.3 billion dollar operating budget. In 2013 the University of Michigan Hospitals and Health Centers showed a $2.1 million dollar operating surplus on revenues of $2.3 billion dollars.
The $45 million dollar contract to Life Technologies may not seem notable in terms of the gross revenue of either Life Technologies ($13 billion in 2012) or the University of Michigan Hospitals and Health Centers ($2.3 billion in 2013). However, viewed in light of the small operating margins facing Dr. Pescotivz’s health system, as well as the large increase in the cost of supplies projected in Dr. Pescovitz’s 2013-2014 operating budget, and industry experts suggest a closer look is merited.
Dr. Pescovitz’s service as a member of the Life Technologies Board of Directors, industry experts suggest, make it only appropriate but crucial to examine the particulars of the October 2013 award of the contract between the University of Michigan Hospitals and Health Centers and Life Technologies.
In response to questions about whether Dr. Pescovitz had exercised any influence in the choice of Life Technologies, Rick Fitzgerald, a spokesman for the University of Michigan responded in an email, “Life Technologies is a company formed by the merger of two other companies, Invitrogen and Applied Bio Systems. My understanding is that there now is a merger pending between Life Technologies and Thermo Fisher Scientific. Dr. Pescovitz ended her service on the Life Technologies board at the end of 2013.”
When asked whether Dr. Pescovitz knew either in her capacity as a Life Technologies Board member or as the head of the University of Michigan Hospitals, that Life Technologies was under consideration prior to the award of the contract, Rick Fitzgerald said, “No.” He pointed to what he referred to as the “added context provided”—the claim that Dr. Pescovitz had ended her service on the Life Technologies Board as of “the end of 2013.”
However, the $45 million dollar contract between Life Technologies and the University of Michigan was approved by Regents in their October 2013 meeting. Furthermore, financial disclosures filed by Life Technologies with the SEC dated January 7, 2014 list Dr. Pescovitz as a Director of the company and reveal that she received an additional 391 shares of non-market acquisition stock worth approximately $40,500 days after U of M’s Rick Fitzgerald claimed she “ended her service” on the Life Technologies Board.
It’s not clear whether Dr. Pescovitz’s relationship with Life Technologies was misrepresented in order to, perhaps, put an end to questions about the $45 million dollar contract and whether Dr. Pescovitz had exerted any influence on behalf of the company, or whether Life Technologies made a material error in its January 7, 2014 filing with the Security and Exchange Commission concerning the 391 shares of stock given to Dr. Pescovitz. However, as of January 14, 2014 the Life Technologies website lists Dr. Pescovitz as a Director and includes information filed with the SEC about the 391 shares of stock given to her in January 2014.
A reliable source shared an email with The Ann Arbor Independent that indicates the Detroit Free Press has begun investigating Dr. Pescovitz’s conflict of interest triggered by the $45 million dollar Life Technologies contract. It’s part of a state-wide investigation of conflicts of interest.