Flamel Inflames Passions

Everything about this company may be small -- its size, its business, its profits -- but it's got a big fight on its hands, and the drama is set to unfold at its shareholder meeting later this month.

Motley Fool Hidden Gems selection FlamelTechnologies (Nasdaq: FLML  ) is a small-cap nanotech pioneer with earnings that are ephemeral at times, dependent on its ability to ink deals to license its revolutionary Micropump and Medusa technologies to big pharmaceutical partners. One is a controlled-release system for dispensing drugs in the body, the other a slow-acting therapeutic protein. Both have the potential to earn the company, its shareholders, and its partners big money.

But deals for these technologies have been few and far between. Management promised two or three new deals over the past year, but the company has actually lost partners in that time. In March, its deal with Biovail (NYSE: BVF  ) to develop the Micropump platform with the herpes treatment Genvir flamed out. Last June, Bristol-Myers Squibb (NYSE: BMY  ) shot down its agreement to develop the Medusa platform with Basulin, a controlled-release insulin for treatment of Type I and Type II diabetes.

That actually marks the third setback for the Medusa technology. Novo Nordisk (NYSE: NVO  ) had previously backed out of a Basulin-focused agreement several years ago, and GlaxoSmithKline (NYSE: GSK  ) ended one for Augmentin, a treatment for respiratory, skin, and urinary tract infections. Parents are probably familiar with Augmentin as a treatment for their children's stubborn ear infections.

However, the failed partnerships had more to do with outside forces than the quality of Flamel's technology. Biovail had a host of internal issues to contend with and could not get moving on Genvir, despite Flamel's pleadings, while a reorganization at Bristol-Myers Squibb made Basulin less of a strategic focus. Flamel regained control of the drugs and the results from studies performed on them. Investors have been waiting ever since for Flamel to farm those drugs out to new partners.

And waiting. And waiting.

Some shareholders are getting antsy for action, and they're mounting a challenge at the June 22 annual meeting to force Flamel's hand. Oscar Schafer, a principal at OSS Capital Management, wants to replace the entire current board of directors with a slate of his own, including himself. He believes that Gerard Soula, Flamel's chairman and CEO, isn't doing enough to ink deals that highlight the prowess of Micropump and Medusa -- and the showdown is getting personal.

In filings and in conference calls, arguments are turning hostile, even nasty. Schafer accuses Soula of Napoleonic excesses, operating with an imperial mindset of "Flamel: C'est moi." In turn, in an extraordinary letter to shareholders, Soula attacks the credibility of Schafer's plan for the company's future and pouts that if the dissident board is elected, he will resign. In conference calls, shareholders have been heard calling management liars. The animosity is as thick as Soula's French accent.

It would all be fascinating to watch if I weren't also a shareholder concerned about the future of the company.

While I would love Soula and Flamel to sign a new deal every week -- there are literally more than 100 companies they could partner with -- the "right" deal is better than just any deal. Flamel's stock price has fallen 24% since it was first recommended in Hidden Gems. Yet as the CEO noted, the company's recent supply agreement with Glaxo for its potential blockbuster beta-blocker Coreg was two years in the making. When companies commit to spending tens, if not hundreds, of millions of dollars, they tend to be cautious. Flamel also signed up TAP Pharmaceuticals to develop the Micropump technology with lansoprazole, an acid reflux treatment.

Management hasn't necessarily been standing still, but it hasn't been all that forthcoming with guidance either, which has made for an incendiary atmosphere. Flamel has been tight-lipped in the past about the company's progress. At the time, management told shareholders the company's caginess stemmed from agreements with its partners. Now Flamel's managers say that they were concerned about the soaring stock price and did not want to build up expectations they couldn't meet. The new rationale strikes far too close to stock price massaging, particularly since Flamel is willing to be more open now that the share price is down.

I think management has taken some of its recent criticism to heart and is opting for a little less opacity. I also think Soula is taking these attacks too personally, but that might stem from a desire to protect the company he created. Opting for more transparency should allay many investors' fears about Flamel's future; I doubt that would have happened if these dissident shareholders hadn't become so vocal. Yet I also don't see that the upstarts' plan is the best one either. Shaking things up is just as likely to hurt the company as help it.

Regardless, there are big doings for this little company. Soula may be right about at least one thing: The future of Flamel rests on this conflict's outcome.

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Fool contributor Rich Duprey owns shares of Flamel but none of the other stocks mentioned in the article. The Fool has a disclosure policy.


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