There was talk yesterday on Flamel Technologies SA (Nasdaq: FLML), suggesting the company was the target of shareholder activism by a firm named Redwood Asset Management L.P.
We have gotten our hands on a copy of the letter that was floating around (see below).In the letter, Redwood urged the company to hire a banker to explore a possible sale and suggested that GlaxoSmithKline (NYSE: GSK) and a number of other parties would be interested in acquiring Flamel at a significant premium to the current market price.
Here is where it gets strange. There was no 13D, or other filing. No press release. And we can't find out who Redwood Asset Management L.P. is.
Going through the list of FLML holders, Redwood Asset Management L.P. is not listed. There is a firm based in Canada named Redwood Asset Management, whose President/CEO Jonathan Clapham told us that it was not them that sent the letter. Clapham said "if we owned 950,000 shares of a $22 stock I think I would remember."
An SEC search of "Redwood Asset Management" revealed a firm in New York that has just three SEC filing, with the last one being in 2001. Directory assistance did not show a firm named Redwood Asset Management in New York.
It is possible that a hedge fund can be flying under the SEC radar if it manages less than $100 million, which is the requirement by the SEC to file quarterly 13Fs disclosing their positions. A 950,000 share FLML stake, as the letter states is owned, at $22 per share, would be worth about $21 million dollars. This would suggest - if the letter is true and the fund falls below the $100 million threshold - the position would occupy more than 21% of the portfolio - not a diversified portfolio by any means.
There is also a firm named Redwood Asset Management in Norway, but the last SEC filing on the company was 1998 and no other information could be found on this fund.
No one at Flamel, which is based in France, was able to shed light on the situation.
Calls to various funds, including the other fund mentioned in the letter, OSS Capital's (which does own a 23% stake), led nowhere.
Is Redwood Asset Management L.P. a super secretive activist hedge fund or was the letter written by a scamster. It looks like the letter has some valid points regarding Flamel, but some light needs to be shed on the writer.
Shares of Flamel Technologies closed up 3.3% to $22.15 on Thursday.
COPY OF THE LETTER
July 4th, 2007
Mr. Stephen Willard, CEO
Mr. Elie Vannier, Chairman
Mr. John Vogelstein
Mr. Lodewijk De Vink
Mr. Cornelis Boonstra
Mr. Frederic Lemoine
Dear Mr. Willard and the Board of Directors:Our firm has been a significant shareowner in Flamel Technologies (FLML-NASDAQ) for the past four years. We, along with most other institutional shareholders lost confidence in the previous management team, who constantly promised new licensing agreements as a means of creating shareholder value, and never delivering on this promise. It is against this back drop that we voted our 950,000 shares of Flamel stock in favor of OSS Capital's slate of nominees to replace the previous Board of Directors.
It was represented by the current management team that the major impediment in getting new licensing deals closed was our previous Chief Executive Officer, Mr. Gerard Soula. Once he was replaced, it was stated, a number of deals that were pending would close "shortly". It is now over two years later and still not one new licensing deal has been announced. More importantly, we continue to burn through tens of millions of dollars of shareholders' capital and the stock price is materially lower than it was on January 1, 2004.
The recent FDA approval and subsequent launch of Coreg CR by GlaxoSmithKline should have been a defining event in this company's history. It should have dramatically increased the company's profile with both major pharmaceutical companies and on Wall Street. It seems that neither of these events has occurred. Over the past few months, as I'm sure you are aware, the company has been the subject of a significant number of false rumors. Additionally, the short interest in the stock has grown from approximately one million shares to approximately five million shares currently. The response from our management team and this Board of Directors to these developments has been a deafening silence.
In our twenty five years in the investment business, we have never seen a hostile proxy contest take place where a Board of Directors is replaced by a Board who turns out to be even less shareholder oriented than the Board that they have replaced. It is truly a disgrace that this Board has not permitted formal earnings guidance to be issued by management, as this would address many of the false rumors that currently exist in the marketplace. Additionally, it is an outrage that this company has still not yet figured out a way to repurchase stock in the open market. This is despite the fact that the Board instructed management to do so approximately eight weeks ago.
It is clear that a new direction is required at Flamel. The long suffering shareholders' wishes that the values inherent in this company be "unlocked" have been ignored long enough. The current Board was brought in to create this value and they have failed in this task. Flamel currently trades at approximately 5.5 times 2008 earnings per share (according to the estimate put forth by OSS Capital). Medimmune, Inc. agreed to be acquired by Astrazeneca recently at 39 times its 2008 earnings estimate. Medimmune's Board engaged Goldman Sachs to explore the sale of the company, among other strategic alternatives "because of interest from drugmakers and pressure from shareholders. The combination of buyout interest and unhappy shareholders all forced the Board to pursue this action". We believe that this Board finds itself in a similar situation. We believe that GlaxoSmithKline and a number of other parties would be interested in acquiring Flamel at a significant premium from the current market price.
We are calling on this Board to immediately fulfill the task for which they were installed over two years ago, namely, to maximize the value for the benefit of all of Flamel's shareholders. An investment bank should be retained at once to explore all strategic alternatives and to maximize values immediately. These advisors should explore both the outright sale of the company and the monetization of the Coreg CR royalty stream, with the balance of the pipeline spun-off to existing shareholders in a new equity security.
Should these actions not be taken in a timely manner, we will consider all alternatives available to us.
Redwood Asset Management L.P.
FLML 1-yr chart