As we reported last week, Flamel Technologies (NASDAQ:FLML) is in the midst of a proxy battle with an asset managment firm that controls 12% of the company's stock. Flamel, a Lyon, France-based medical technology company, is a Motley FoolHidden Gems recommendation. Flamel's CEO, Gerard Soula, vowed that if this vote goes against his slate of directors, he will resign and sell all his shares.
To dissident shareholder Oscar Schafer, that is hardly a threat -- it's more like a preferred outcome. In short, Schafer believes that while Mr. Soula should be given credit for his role in developing Flamel, the company is worth much more without his active participation.
Somewhat reluctantly, we have concluded that we agree. As such, we have urged all of our Hidden Gems subscribers to vote against Flamel's incumbent management and in favor of Schafer's slate of directors. We informed members on Friday and have determined that it would be beneficial to make this recommendation available for wider dissemination. On the company's proxy, we recommend a vote of "NO" for items 3 through 10 and "YES" on items 18, 19, 20 and 21.
Let us explain
OSS Capital Management is the single largest shareholder of Flamel Technologies. In contrast, insiders -- including CEO Gerard Soula, his management team, and other family members he has decided to employ at the company -- hold less than 5% of the business. In fact, Dr. Soula sold 300,000 shares of Flamel stock at $31 per share in October 2003 (after it had fallen 25%). More recently, Dr. Soula exercised options to purchase 300,000 shares that cost him just $1.36 apiece (more than 90% below the stock's market price).
If that sounds wrong to you, I suggest that your hearing is perfectly tuned.
At Hidden Gems, we agree with Schafer that Flamel is sitting on greatly promising technologies. That's precisely why Tom Gardner recommended these shares in June 2004, after they'd already fallen 35% from their all-time high. It's simply not debatable that this business has been mismanaged in the intervening period. Flamel Technologies has suffered the departure of business partners -- including Biovail (NYSE:BVF) and Bristol-Myers Squibb (NYSE:BMY) -- who have paid their way out of agreements; new partnerships promised by management haven't materialized; and the stock, which had fallen 50% from our recommended price, has only recently risen because of OSS Capital Management's decision to buy up shares and challenge present leadership.
Flamel Technologies is still down more than 25% for us, with no clear sign that the business is improving. At some point, we have to make the determination that Eleanor Roosevelt put simply: "Change means the unknown." In this case, we encourage members on June 15 to opt for the unknown by giving Oscar Schafer, OSS Capital Management, and its proposed board of directors a chance to improve the fortunes of this business for its owners.
The vote is upon us, and its outcome will have serious consequences for Flamel Technologies' future. As we noted, Soula has made it known that he'll remove himself entirely from the company if his board of directors is not elected. Soula's continuing emphasis on his personal role as founder and leader of this business concerns us, particularly since he owns so little stock. Flamel is a public company owned primarily by outside investors. No public company belongs to its founder, nor its board, nor its CEO. Flamel belongs to its shareholders, and outsiders own over 90% of it. Soula's hint that this company will fail without him runs contrary to two of our principles of great leadership: humility and a desire to build teams.
In our opinion, there simply is no question that Flamel's leadership is suspect.
A few caveats
That said, lest you think OSS Capital Management will mount a white horse and save the day, let's not forget the challenges of this business model. Flamel is a pure-play drug delivery company with a different business model than those of traditional drug companies. Flamel employs a proprietary delivery technology to make existing drugs safer, more effective, and more convenient. The R&D is low-risk, since it's already known that the active compound works. However, partners must be convinced that Flamel's technology adds enough value to the product to make the second-generation drug clearly superior to the original. If the technology offers no real improvements in the characteristics listed above, and therefore isn't more marketable, then it's essentially useless for pharmaceutical companies to buy it.
Schafer and his proposed board face a serious challenge in moving this business toward higher predictability, more recurring revenues, and steady rewards for long-term outside owners. However, he will have a company valued at just $400 million that has promising technology, is marginally profitable, and has more than $100 million on its balance sheet. (That cash was raised from public offerings, not generated by operations.) In addition, the company's drug deal with GlaxoSmithKline (NYSE:GSK) should pay off handsomely. Together, these factors suggest that Flamel could provide market-beating opportunities for long-term owners.
For Mr. Schafer's impassioned opinions on Flamel Technologies, read this.
Bill Mann does not own shares in any company mentioned in this article. He is the guest analyst for the Motley Fool Hidden Gems newsletter. To be the first to know what companies he and Tom Gardner are recommending now,click herefor a free 30-day trial.
