Flamel's CEO Must Go

Last June, Motley Fool Co-Founder Tom Gardner recommended FlamelTechnologies (Nasdaq: FLML  ) in his Motley Fool Hidden Gems newsletter because he saw a drug delivery leader with tremendous potential. While the company still has such potential, it has yet to materialize. Or, more accurately, it's tried to materialize, but it's been suffocated.

Because the biotech firm has disappointed, investors have understandably not rewarded its lousy results. In the past year, Flamel has been on the fast track to nowhere. One setback after another has dropped the stock nearly 20%.

We believe incompetent leadership has been choking Flamel, and we're recommending that shareholders vote against the incumbent directors -- a vote that will oust the now-problematic CEO as well -- on their proxies.

Let us explain.

The business
Flamel was founded 15 years ago by current CEO Gerard Soula. The company has developed two proprietary drug delivery technologies, Medusa and Micropump. Its goal for these technologies is to apply them to drugs that have already been approved and make them better. The enhanced second-generation drugs that use one of Flamel's technologies could gain advantages in efficacy, safety, and convenience of use. These improvements represent competitive edges that should allow the drug to capture substantial market share.

Flamel will not be marketing the improved drugs itself. It needs to find partners, typically large pharmaceutical companies such as GlaxoSmithKline (NYSE: GSK  ) and Merck (NYSE: MRK  ) , to finance the R&D and commercialize the products. Flamel will usually receive an up-front cash payment, milestone payments as the drug is developed, and royalties of net sales from the partnerships. It is through these deals that Flamel will make money from its technology and increase the value of the company for shareholders.

Since Flamel depends on these partnerships to make money, striking new deals is crucial. Unfortunately, Flamel has been consistently failing the task.

Promises broken
Since landing partnerships is so vital to the company's future success, you may imagine that it is very active in this area. But it's not. Over the past 18 months, Flamel has delivered exactly one new partnership, licensing its Micropump technology to TAP Pharmaceuticals for use in developing a new formulation of its blockbuster drug, Prevacid.

Aside from that solitary success, business development has been a disaster for Flamel. Over this same period, its previous deals with Bristol-Myers Squibb (NYSE: BMY  ) and Biovail (NYSE: BVF  ) have fallen apart. Flamel needs to be building its business, but it's taken one step forward and two steps back. This is unacceptable.

In the wake of these failures, CEO Soula has been talking a big game about how new partnerships are in the works. While I agree with Soula that major deals take time, I also feel that talk is cheap. Too often in the drug industry the phrase "we are looking for a partner" is nothing more than a euphemism for "we are stringing you along because we don't want to kill the drug program and our stock." I think that's the case with Basulin, for example, which has been returned to Flamel by a partner not once, but twice.

With Soula now begging for more time, the question remains: How much time does he need? Since the beginning of 2002, only six drug partnerships have been forged, and three of them have been terminated. That leaves exactly three ongoing partnerships initiated in the past three and a half years (see the table below).

Flamel's Partnerships

Partner

Date Drug Status
Servier Monde Jan. '02 ACE inhibitor Ongoing
GlaxoSmithKline July '02 Augmentin Terminated
GlaxoSmithKline March '03 Coreg Ongoing
Biovail April '03 Genvir Terminated
Bristol-Myers Squibb Aug. '03 Basulin Terminated
TAP Pharmaceuticals Sept. '04 Prevacid Ongoing
*Source: Flamel press releases

Frankly, I don't see what difference additional time will make. Over a fairly long period of time, Dr. Soula has not demonstrated a track record of success for this company, which is highly dependent upon partnerships.

It's time for a change
We're not the only ones who have been disappointed with management. Respected hedge fund manager Oscar Schafer, managing partner of O.S.S. Capital Management, is also concerned with the performance and direction of Flamel. Because he owns approximately 12% of the company, Schafer's opinions carry a lot of weight.

Schafer also believes that Flamel's technology holds promise but that management has failed to deliver the partnerships required to create value for shareholders. (For the full details of Schafer's take on Flamel, read this SEC filing.)

Flamel will be holding its annual meeting on June 22. Schafer has put forth a resolution to remove the company's current board of directors and replace them with three of his nominees. If the proposal passes, Soula will leave the company -- he's already said that he wouldn't work with Schafer's board.

Take control of your company
At The Motley Fool, we strongly believe that when we buy shares of a company we are part owners of that business. As my colleague Bill Mann wrote yesterday, we recommend a "NO" vote for items 3 through 10 and a "YES" vote on items 18, 19, 20, and 21 on the proxy. It is our duty and obligation to ensure that the CEO and board of directors manage the company in our best interests. When they have failed us, we must make our voices be heard loud and clear that we are not pleased.

And right now, fellow Fools, we're not happy with the current situation at Flamel. We think it's time to clean house.

If you'd like to join our Hidden Gems community and follow the Flamel plotline along with us, Tom Gardner is offering afree 30-day trial. You'll get two stock recommendations a month, as well as access to all our back issues.Click hereto learn more.

For additional articles on biotechnology, see:

Motley Fool Rule Breakers biotech analystCharly Traversdoes not own shares of any company mentioned in this article. Merck is a Motley Fool Income Investor recommendation. The Motley Fool has adisclosure policy.


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