Activist Hedge Fund Buying Delcath Systems Stock (DCTH)

From Insider Score: A small, value-focused hedge fund that is trying to oust the management of Delcath Systems (DCTH), has bought more shares of the drug-delivery systems maker as its stock trades at an all-time high.

Laddcap Value Advisors, a New York-based hedge fund run by Robert Ladd, a former Neuberger Berman portfolio manager, disclosed this morning that it bought 23.5K shares in a range of $5.68 to $5.75 yesterday. The buys upped Laddcap's stake in DCTH to just over 2M shares, or just under 10.5%. The firm was already an aggressive buyer of DCTH, picking up 57.1K shares in a range of $3.91 to $4.45 from April 6th to April 21st, and more than 220K shares in a range of $4.10 to $4.60 from March 17th to April 5th.

On April 28th, Laddcap, which is DCTH's largest shareholder, filed an updated Form 13D. In the filing, the firm said that DCTH's board and management were aware that Laddcap was "profoundly disappointed with the actions and inactions of DCTH's management and Board in continuing to chart a course away from its primary obligation to enhance stockholder value" and that the company's low enterprise value is "reflective of management's and the Board's self-serving policies." Laddcap urged for DCTH to call a special shareholder meeting, at which shareholders could vote to rescind its poison pill, add a by-law allowing shareholders to vote out company officers, and fire President & CEO M.S. Koly.

DCTH and Koly responded publicly to Laddcap in a May 3rd article in the Stamford Advocate.

"It's an activist hedge fund. This is their business. Sometimes they are correct, sometimes they are not. We think our performance reflects a company that is growing in a proper and suitable fashion," DCTH Chairman Dr. Samuel Herschkowitz said, adding that he fully supports Koly.

Koly, meanwhile, took a shot at Ladd and his fund, saying the company's poison pill, which prohibits anyone from owning more than 14.9% of DCTH, has "been on the books" well before Ladd became an investor and that the hedge fund manager is unhappy because it presents a "barrier" for him. Ladd shot back, calling Koly's management style "oppressive," and saying that the company needs to improve corporate governance and listen to shareholders, specifically him.

"If you say anything critical you are cut off," Ladd said. "I've suggested presentations they can make on Wall Street, investors they could meet. They've literally ignored me."

The battle over DCTH comes at an interesting time for the company, which, according to the Stamford Advocate's Julie Fishman-Lapin, "has developed a drug-delivery method that isolates the liver from the general circulatory system, allowing doctors to administer very high doses of chemotherapy drugs directly to the organ." The system received fast-track status from the Food and Drug Administration last year, and later the FDA granted DCTH a Special Protocol Assessment and Agreement, enabling the company to bring the product to market immediately if clinical trials are successful. The combination of the two FDA approvals is rare, and DCTH is currently conducting Phase III clinical trial at the National Cancer Institute.

Shares of DCTH have responded to Ladd's buying, which put a bid under the stock. This morning, the stock hit $5.92, a new all-time high, and after falling as low as $3.75 in mid-April, the stock is up more than 55% (and it's more than doubled from its June 2005, 52-week low of $2.51). The development-stage company has no revenues, but it does have cash of $12.8M and no debt.

Worth Noting: Laddcap has only one other holding, according to its SEC filings. The firm holds about 4.8% of FAB Industries, a textile maker with headquarters at a rather ritzy Madison Ave. building in Manhattan. FAB Industries traded under the symbol FITN.PK, but the stock doesn't appear to trade any longer, and the company's website doesn't offer up much in terms of details. Laddcap did hold a more than 6% stake in Home Solutions (HOM), but the firm disposed of its entire stake in the company sometime last year.