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Glenn vs. The Volcano: Engaged Sends a Letter to Volcano Corporation
Investment Firm Engaged Capital Calls for Major Changes at Volcano Corporation;
Volcano Replies, Promising to "Review and Consider the Ideas"
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Volcano and Engaged Capital logos on illustration of coronary artery
September 29, 2014 (updated with stock data on September 30) -- Today saw a "volley across the bow" between Volcano Corporation (Nasdaq: VOLC), a major manufacturer of IVUS, FFR and iFR technologies, and Engaged Capital LLC, an investment firm which holds over two million shares, or 5.1%, of Volcano stock.

Engaged founder Glenn W. Welling sent a letter to Volcano demanding that the company begin a search for a new CEO and find a buyer for the company (press release printed below). The letter was prompted by the fact that Volcano's stock price has dropped by more than half over the past year. Engaged has been in discussions with Volcano during this period, but today Engaged issued a 13-page letter detailing the reasons that Volcano needs to change direction.

Volcano immediately issued a statement (also printed below) in response.

To put these developments in perspective, Volcano's main products are intravascular imaging, namely IVUS, with which it competes successfully with the major device manufacturer Boston Scientific, and physiologic measurement (FFR and iFR) with which it competes successfully with St. Jude Medical.

Fractional Flow Reserve (FFR) has gained credence in the interventional cardiology community with the publication of the FAME and FAME 2 studies, which showed the clinical significance of pressure measurements in reducing complications and costs associated with PCI. Since Volcano has approximately 50% of the FFR market and 100% of the iFR technology, one would think that this was a successful medical device story, especially since new data supporting these modalities were affirmed at both the recent European Society of Cardiology and Transcatheter Cardiovascular Therapeutics meetings.

However, the stock market, and Engaged Capital, seem to think otherwise. Although Volcano's stock price was up a little over 2% on Monday, September 29, it closed down 3.71% on Tuesday, September 30, its lowest close in over eight years. In its letter, Engaged states that it wants to see Volcano become more profitable to make it more attractive for a potential acquirer, and it has some harsh medicine for accomplishing that goal. The letter goes on to say, "Alternatively, the best risk-adjusted outcome for VOLC shareholders is likely a sale of the Company today." With its stock price dropping even more since the release of Engaged's letter yesterday to one-third of what it was three years ago, some might think the company is already an attractive acquisition.

The founder of a major medical device company once told this reporter that there was little relation between the stock price and the success of a company. In fact, when his firm acquired another large manufacturer, he had the stock tickers removed from their offices, so that the employees would be focused on their work, rather than the market. Whether or not his observation holds true with the current dispute between Volcano and Engaged is yet to be determined.

Today's press releases from Volcano Corporation and Engaged Capital follow:

Volcano Issues Statement Regarding Letter From Engaged Capital

September 29, 2014 -- San Diego -- Volcano Corporation (Nasdaq: VOLC), a leading company focused on improving patient and economic outcomes on a global basis by developing and delivering innovative minimally invasive coronary and peripheral visualization, physiology diagnostics and therapies, today confirmed receipt of a letter to its Board of Directors from Engaged Capital, LLC. The Company issued the following statement in response:

Volcano welcomes the perspectives of its shareholders, and has a longstanding policy of open communications with all of our investors, including Engaged Capital. The Company will carefully review and consider the ideas presented in the letter and continue its dialogue with Engaged Capital.

The Volcano Board of Directors and management team regularly evaluate the Company's strategic priorities, capital structure and allocation towards the goal of enhancing value for all shareholders. The Company is taking the right steps to manage the business while focusing on strategic initiatives to position Volcano for long-term success. Notably, Volcano continues to execute on a long-term strategy focused on coronary imaging and physiology leadership, peripheral expansion, profitability and business scale, with the goal of creating value for shareholders. Actions taken in 2014 include:

  • Realigning portfolio to improve top-line growth, including the acquisition of AtheroMed, Inc. and the planned divestiture of Axsun Technologies, Inc.;
  • Building on market leadership in Coronary Imaging and Physiology segments, supported by the global LMR of Sync-RX® Systems, iFR® adenosine free FFR global launch, and Veratta® FFR wires global launch;
  • Expanding presence in peripheral market through leadership position of Intravascular Imaging, supported by Pioneer Plus, Crux® and AtheroMed Phoenix roll out;
  • Enhancing financial leverage and profitability, through effective SG&A, capital allocation strategy and financial discipline, as well as improving gross margins with the transition of disposable manufacturing to Costa Rica; and
  • Settling all existing litigation with St. Jude Medical, Inc., significantly reducing legal expenses.

In addition, in December 2013, Volcano's Board of Directors authorized a $200 million share repurchase program, $100 million of which was executed under an Accelerated Share Repurchase.

About Volcano Corporation
Through its multi-modality platform, Volcano Corporation is the global leader in intravascular imaging for coronary and peripheral applications, and physiology. The company also offers a suite of peripheral therapeutic devices. The company's broad range of technologies makes imaging and therapy simpler, more informative and less invasive and offers physicians and their patients around the world with industry-leading tools that aid diagnosis and guide and provide therapy. Founded in cardiovascular care and expanding into other specialties, Volcano is focused on improving patient and economic outcomes. For more information, visit the company's website at

Forward-Looking Statements
This press release contains forward-looking statements within the meaning of the U.S. Private Securities Litigation Reform Act of 1995. Any statements in this press release regarding Volcano's business that are not historical facts may be considered "forward-looking statements," including statements regarding Volcano's expected revenue growth and margins; its growth and other strategies and ability to execute on these strategies; development of its base business and pipeline; product launches; benefits from recent acquisitions; and benefits from its products and technologies, including new products. Forward-looking statements are based on management's current expectations and are subject to risks and uncertainties that may cause Volcano's actual results to differ materially and adversely from statements contained herein. Some of the potential risks and uncertainties that could cause actual results to differ include the risks that Volcano's revenue, margins, or other projections may turn out to be inaccurate or Volcano may encounter unanticipated difficulty in achieving these projections; global and regional macroeconomic conditions, generally, and in the medical device industry, specifically; currency exchange rate fluctuations; the effect of competitive factors and the company's reactions to those factors; purchasing decisions with respect to the company's products; the pace and extent of market adoption of the company's products and technologies; the success of Volcano's growth and other strategies, including the integration of recently-acquired businesses; the impact and benefits of market development; our ability to protect our intellectual property; dependence upon third parties; unexpected new data, safety and technical issues; market conditions and other risks inherent to medical device development and commercialization. These and additional risks and uncertainties are fully described in Volcano's filings made with the Securities and Exchange Commission, including our 10-Q for the quarter ended June 30, 2014. Undue reliance should not be placed on forward-looking statements, which speak only as of the date they are made. Volcano disclaims any obligation to update any forward-looking statements to reflect new information, events or circumstances after the date they are made, or to reflect the occurrence of unanticipated events.

Engaged Capital Sends Letter to the Board of Volcano Corporation

Calls on Board to immediately appoint shareholder representatives, evaluate strategic alternatives and begin CEO search

September 29, 2014 -- Newport Beach, California -- Engaged Capital, an investment firm specializing in small and mid-cap North American equities and beneficial owner of approximately 2,638,403 shares of the common stock of Volcano Corporation ("VOLC" or the "Company") (Nasdaq:VOLC), today sent an open letter to the Company's Board of Directors (the "Board"), filed with the U.S. Securities and Exchange Commission.

In its letter to the Board, Engaged Capital highlighted the multi-year history of management's flawed long-term plans and the Board's lackadaisical oversight. The Company's excessive operating expenses, misinformed and value destructive capital allocation, and excessive executive compensation all stem from a profound failure of leadership. As a result of these failures, VOLC shareholders have suffered greatly.

Engaged Capital believes there is an opportunity to reverse VOLC's underperformance and unlock significant shareholder value if the Board immediately sets a new course for the Company.

"Shareholders have suffered through a prolonged period of material underperformance due to management's overly optimistic business plans and its inability to identify and react to changing market conditions," said Glenn W. Welling, Principal and Chief Investment Officer of Engaged Capital. "It is time for new leadership. We urge the Board to immediately commence a parallel process to evaluate strategic alternatives and conduct a search for CEO candidates with a history of driving profitability and extracting value from medical device assets."

"We have offered on three separate occasions, both orally and in writing, highly-qualified candidates to serve as board members, only to have these private entreaties summarily rejected. Instead of seeking to work constructively with one of VOLC's largest shareholders, the Board has irrationally positioned the Company for a costly and unnecessary proxy fight. If the Board fails to uphold its fiduciary responsibilities, shareholders will have no choice but to vote to replace Chairman Ron Matricaria, CEO Scott Huennekens and Lesley Howe as directors of the Company at the 2015 annual meeting," continued Mr. Welling.

About Engaged Capital
Engaged Capital, LLC, ("Engaged Capital") was established in 2012 by a group of professionals with significant experience in activist investing in North America and was seeded by Grosvenor Capital Management, L.P., one of the oldest and largest global alternative investment managers. Engaged Capital is a limited liability company owned by its principals and formed to create long-term shareholder value by bringing an owner's perspective to the managements and boards of undervalued public companies. Engaged Capital manages both a long-only and long/short North American equity fund. Engaged Capital's efforts and resources are dedicated to a single investment style, "Constructive Activism" with a focus on delivering superior, long-term, risk-adjusted returns for investors. Engaged Capital is based in Newport Beach, California.

Reported by Burt Cohen, September 29, 2014