HC Surgical should immediately exercise put option on Julian Ong's practice

THE board of HC Surgical Specialists last week provided responses to a series of questions from the Singapore Exchange that cast interesting light on the quandary the company faces in relation to the allegations that one of its specialists, Julian Ong, colluded with a psychiatrist named Chan Herng Nieng to take advantage of vulnerable female patients.

In particular, the responses raise questions about whether the board's continued support of Dr Ong serves the interests of the company's shareholders. If the company acts quickly, it might be able to salvage at least some of its investment in his practice.

Dr Ong was thrust into the spotlight earlier this month after a defamation suit he had brought against a woman named Serene Tiong, who had made the accusations against him and Dr Chan, was dismissed with costs on the grounds that her claims were substantially true. Ms Tiong had gained access to Dr Chan's phone in April 2018 while she was in a relationship with him, and obtained a number of appalling WhatsApp messages between the two doctors that provided evidence of their alleged illicit activities.

Based on HC Surgical's responses to SGX last week, it appears that the company did not have a complete picture of the scandal in which Dr Ong was involved until earlier this month. According to a timeline provided by the company, the first inkling it had that Dr Ong might be involved in anything untoward came in June 2018. That was when he told the company's chief executive Heah Sieu Min that Ms Tiong was spreading "false rumours" and that he intended to take legal action.

Subsequently, on Feb 27, 2019, Dr Ong was informed by the Singapore Medical Council (SMC) that a complaint had been made against him. While he immediately informed Dr Heah of this fact, he also reiterated that the accusations were untrue and that he was already taking legal action.

"Dr Ong wanted to keep matters relating to the suit private as it related to defamatory statements," HC Surgical said, in its responses to SGX's queries last week. "Therefore, the detailed contents relating to the WhatsApp messages and the (SMC complaint) were never made known to the board... until the written grounds of judgement was given at the conclusion of the suit."

HC Surgical cautions, however, that the facts assessed in Dr Ong's suit related specifically to the defamation matter. The company is now waiting for the findings of the SMC to determine if it should take any further action. In the meantime, the company has asked Dr Ong to inform all his patients of the matters alluded to in the complaint to the SMC, and to obtain the consent of each patient to act as their physician if they should so agree.

Financial risks

From the viewpoint of investors, HC Surgical's continued association with Dr Ong clearly poses financial risks. And, it is hard to see how waiting for the SMC's findings will mitigate those risks.

For starters, the damage Dr Ong has brought to his own reputation could potentially hurt the company directly, if he loses existing patients or finds it harder to gain new ones. HC Surgical said in its responses to SGX last week that Julian Ong Endoscopy & Surgery (JOES), in which it has a 70 per cent stake, contributed approximately 17 per cent its revenue for the six months to Nov 30, 2019, and approximately 13 per cent to its profit, after adjusting for non-operating items.

Dr Ong has now been suspended from practising at the four hospitals owned by the Parkway Group - namely, Gleneagles, Mount Elizabeth, Mount Elizabeth Novena and Parkway East. As Dr Ong's primary clinic was at Mount Elizabeth Novena Hospital, the proportion of his revenue from medical services performed at the Parkway Group of Hospitals was approximately 55 per cent for the half year ended Nov 30, HC Surgical said in its responses to SGX last week.

"Moving forward, he will consult majority of his patients at heartland centres owned by the (HC Surgical group). In addition, he will utilise the facilities at an alternative hospital for inpatients, where necessary," the company added.

HC Surgical's continued association with Dr Ong could also adversely affect its growth prospects, if talented doctors and big name investors now steer clear of the group. On April 17, the company said it would pay nearly S$5.2 million for the early redemption of S$5 million worth of convertible bonds issued last year to an investment vehicle run by Heliconia Capital Management. The three-year, 5.5 per cent bonds were convertible into new shares at S$0.5361 per share. The company also cancelled an option for Heliconia to subscribe for S$5 million worth of new shares at S$0.62 per share.

It is unclear if the early redemption of the convertible bond and cancellation of the option for new shares are linked to the scandal surrounding Dr Ong, or simply a consequence of the steep slump in HC Surgical's share price. HC Surgical said the decision was mutually agreed. The company said last year that it hoped to tap Heliconia's network to expand in Vietnam. Shares in HC Surgical closed at S$0.365 on Monday.

Put option solution

Fortunately, HC Surgical has a means of severing its ties with Dr Ong, and recovering some of the funds it has invested in his practice.

The company noted last week that Dr Ong's service agreement contains a clause that allows it to terminate his employment if he is found to be guilty of, among other things, dishonesty, serious misconduct, or bringing discredit to any group company. Moreover, in the event Dr Ong's employment is terminated, HC Surgical has a put option that requires him to buy the company's stake in JOES.

The put option was unveiled in September last year, when HC Surgical announced that it was raising its stake in JOES from 51 per cent to 70 per cent. The company said it would pay nearly S$3.8 million for the additional 19 per cent stake, comprising more than S$2.8 million in cash and the issue of 1.76 million new shares priced at S$0.5388 per share.

HC Surgical purchased its initial 51 per cent stake in JOES in February 2017, for almost S$2.2 million, comprising nearly S$1.6 million in cash and the issue of one million shares priced at S$0.6059 each. Dr Ong officially commenced his employment with HC Surgical in April 2017.

The put option for the 70 per cent of JOES currently held by HC Surgical is exercisable within the 30th month to the 48th month of Dr Ong's employment with the group. When exercised, the put option will require the vendor to buy back the 70 per cent stake in JOES in cash, at a percentage of the purchase consideration that decreases with each year of Dr Ong's employment with the group.

To protect the interests of its shareholders, HC Surgical should quickly distance itself from the scandal surrounding Dr Ong and recover as much of its investment in JOES as possible.

Read more: HC Surgical says none of Julian Ong's patients switched doctors after knowing of complaint