Today we, as owner of over 500,000 shares of Columbia Laboratories, Inc.'s ("Columbia" or the "Company") (NASDAQ: CBRX) common stock and one of the Company's largest shareholders, released a letter (the "Letter") today that we had sent to the Company's Board of Directors (the "Board") on October 22, 2013.
We initially intended to keep our letter to the Board private, but the Company's actions have led us to release it publicly with the hope that it may serve as a catalyst for other shareholders to actively scrutinize Columbia's current strategy and bring much needed change to the Company. Our Letter outlined a path for the Company that we believe would deliver a robust mid-20% long-term IRR to Columbia's shareholders, cause a material re-rating of the Company's stock, significantly lower the risk profile of the Company and preserve the business' upside. The Company's response to the Letter has convinced us that they are unwilling to change course and are committed to a path that, in our opinion, will continue Columbia's legacy of destroying shareholder value. Columbia's stock chart since its IPO is a graphical representation of that legacy.
By way of context, by the middle of 2013, after having burned through hundreds of millions of dollars of shareholder value, we understand from publicly available information that the Company was left with approximately $31 million in cash, just one primary product (CRINONE®), 11 employees and two main customers (Actavis (ACT) and Merck (MRK)). Manufacturing was outsourced to a third party and the customers were responsible for product marketing globally, reducing the Company's main function to managing the distribution of the product from the third party manufacturer to its customers. (A few weeks after we sent our Letter, Actavis began insourcing such manufacturing, leaving Merck as the sole customer for Columbia to service). Despite a bloated $7MM annual corporate overhead, the Company has strong and growing cash flows, primarily due to Merck's success in growing the demand for CRINONE® in the international markets. With a large and growing cash balance and a business with minimal capital needs, the shareholder friendly path for Columbia seemed fairly obvious to us: cut expenses to the minimum level needed to support the Company's customers and return excess cash on the balance sheet and future cash flows to the shareholders through dividends and stock buybacks.
Instead, Columbia acquired Molecular Profiles ("MP") in September 2013 for what we consider to be an exorbitant price (approximately 12 times 2014E EBITDA), with no earn-out provisions. We do not consider an acquisition of a foreign company operating in a completely different line of business that does not seem to be able to utilize the Company's NOL assets to be the best use of shareholder capital. The Company's stock price has declined 20% following the announcement of the acquisition, which is not surprising in light of what we believe is strong empirical evidence that many acquisitions, and especially those outside a company's core area of expertise, destroy shareholder value. In its last earnings call, the Company added another leg to its business strategy - 'developing intellectual property and potentially creating new proprietary products.' Given Columbia's track record, we believe that investing additional capital in such projects, which have return profiles that, in our opinion, are dubious, is ill-advised. Columbia has indicated that it will continue to build up cash until it finds another investment opportunity and that it has no intention of returning cash to shareholders.
We do not believe that a board of directors acting in the best interests of shareholders should approve such initiatives. As outlined in the Letter, Columbia can avoid these risks and still deliver very healthy shareholder returns by adopting our recommendations, the key elements of which are as follows:
1) Cut operating expenses for Columbia, excluding MP ("Core Columbia"), to less than $3MM per year as outlined in Exhibit D of the Letter
2) Declare a $1 per share cash dividend by year-end and use all future cash flows of Core Columbia for dividends and stock buybacks (MP, as indicated by management, is expected to be self-funding)
3) Service key customers and implement i) strategies to reduce manufacturing costs and ii) possible value adds that may entice Merck to extend its relationship beyond 2020 through MP, since this MP expertise was one of the rationales for the acquisition
4) Cease acquisition and diversification initiatives
With a stock price that is near all-time lows, we find it odd that management seems convinced that it has shareholder support for its strategy. In the coming days, we intend to outline specific changes that need to be made to the Board and the Company's management team to implement our recommendations and to preserve and enhance shareholder value.
The full text of our Letter and accompanying analysis and exhibits is as follows:
354 Eisenhower Parkway
Plaza I, Second Floor
Livingston, NJ 07039
ATTN: Board of Directors
Ladies and Gentlemen of the Board:
Based on publicly available data and our ownership of over 500,000 shares, we believe we are one of your largest shareholders. We are writing today to outline a path for the Board of Directors of Columbia Laboratories (the "Company" or "Columbia") to consider which, we believe, offers a higher risk adjusted return potential for the Company's shareholders than the current strategy pursued by the management team. We had been advised in our last management call that Columbia could not find examples of situations in which using the Company's cash flows for dividends and buybacks was a way to create shareholder value for a small cap company. We also were told that with the possibility of the Merck relationship post-2020 being terminated, the Company must have other lines of business for share price appreciation. Management therefore felt utilizing the Company's cash for acquisitions and building its cash war chest in anticipation of such potential investments was the appropriate strategy to create shareholder value. We propound an alternative view, that reducing corporate costs and returning the Company's cash flow to its shareholders, creates a much better risk/reward scenario for the shareholders. Our analysis and assumptions are outlined in the attached presentation.
The key elements of our recommendations are as follows:
- Cut operating expenses for Columbia excluding Molecular Profiles ("Core Columbia") to less than $3MM per year as outlined in Exhibit D
- Declare $1 per share cash dividend by year-end and use all future cash flows of Core Columbia for dividends and stock buybacks. Molecular Profiles ("MP"), as indicated by management, is expected to be self-funding
- Service key customers, implement strategies to reduce manufacturing costs as well as possible value adds that may entice Merck to extend its relationship beyond 2020 through MP, since this MP expertise was one of the acquisition rationales
- Cease acquisition and diversification initiatives
As indicated in our attached analysis, our proposed course of action will enable shareholders buying stock at current stock price to realize a robust mid-20% internal rate of return ("IRR"), even assuming Merck and Actavis relationships end by 2020. Any continuation of such contracts beyond 2020 would increase that return further. Stock buybacks at current levels, instead of cash dividends as assumed in our analysis, would further increase IRRs for remaining shareholders.
The Company's current course of action suggests that it plans to build its cash balance, which earns a minimal return, until it can find another reinvestment opportunity like MP. For the Company to create more value than returning the capital to shareholders, one would have to assume that Columbia can earn a higher return on that capital than its shareholders can on their own, while suffering the drag on such returns from its corporate overhead and low return on its cash balance in the mean-time.
Creating shareholder value through acquisitions is challenging, as the history of acquisitions in corporate America has shown us. Columbia, whose stock price has declined from over $100 a share 10 years ago to $7 now while burning through hundreds of millions of dollars of shareholder capital, has a particular credibility issue. Consequently, we find it hard to justify an acquisitive growth strategy, especially when healthy returns can be generated with manageable risk, as outlined in our proposal.
We understand that what we propose is not sexy, requires tough decisions and certainly requires a level of respect for shareholder capital that is not the norm in corporate America. But we believe it is the right path for the shareholders and the Board has a fiduciary responsibility to that effect. We hope that you will give our proposal due and prompt consideration and we offer to make ourselves available in person to explain our thinking and answer any questions you may have.
We look forward to hearing from you.
Analysis & Assumptions
Additional disclosure: Luzich Partners LLC (“Luzich Partners”) is an investment fund that is in the business of buying and selling securities and other financial instruments. Luzich Partners currently maintains a long position in the common stock of Columbia Laboratories, Inc. (“Columbia”). Luzich Partners will profit if the trading price of Columbia common stock increases and will lose money if the trading price of common stock of Columbia decreases. Luzich Partners may change its views about or its investment positions in Columbia at any time, for any reason or no reason. Luzich Partners may buy, sell, cover or otherwise change the form or substance of any of its investments related to Columbia at any time for any reason or no reason. Luzich Partners disclaims any obligation to notify the market or any other party of any such changes. The information and opinions expressed in this letter (the “Letter”) are based on publicly available information about Columbia. Luzich Partners recognizes that there may be non-public information in the possession of Columbia or others that could lead Columbia or others to disagree with Luzich Partners’ analyses, conclusions and opinions. The Letter includes forward-looking statements, estimates, projections and opinions prepared with respect to, among other things, Columbia’s anticipated operating performance, access to capital markets, market conditions, assets and liabilities. Such statements, estimates, projections and opinions may prove to be substantially inaccurate and are inherently subject to significant risks and uncertainties beyond Luzich Partners’ control. Although Luzich Partners believes the statements it makes in the Letter are accurate in all material respects and do not omit to state material facts necessary to make those statements not misleading, Luzich Partners makes no representation or warranty, express or implied, as to the accuracy or completeness of those statements or any other written or oral communication it makes with respect to Columbia and any other companies mentioned, and Luzich Partners expressly disclaims any liability relating to those statements or such communications (or any inaccuracies or omissions therein). Thus, shareholders and others should conduct their own independent investigation and analysis of those statements and communications and of Columbia and other companies to which those statements or communications may be relevant. The statements Luzich Partners makes in the Letter are not investment advice or a recommendation or solicitation to buy or sell any securities. Except where otherwise indicated, the Letter speaks as of October 22, 2013, and Luzich Partners undertakes no obligation to correct, update or revise those statements or to otherwise provide any additional materials. Luzich Partners also undertakes no commitment to take or refrain from taking any action with respect to Columbia or any other company.