West Coast Editor
Dismayed by NeoPharm Inc.'s burn rate, steady stock slide since March, "slow pace" in getting drugs to market and an "inability to prioritize effectively" its projects, former Chairman John Kapoor wants to get rid of four directors and replace them with three new members, reducing the total to five.
NeoPharm's stock (NASDAQ:NEOL) closed Friday at $6.28, down 2 cents. In mid-March, shares were trading well above $22.
Kapoor, the company's founder and largest shareholder of the company - he, along with his wife, holds about 21.7 percent of NeoPharm's stock - has filed "written consent" paperwork with the SEC allowing him to ask shareholders to get rid of Chairman Erick Hanson and three other independent directors: Sander Flaum, Matthew Rogan and Kaveh Safavi. The new board would include only Kapoor and CEO Gregory Young from the original roster.
Kapoor's written consent solicitation requires the majority vote of all stock outstanding at NeoPharm, which intends to counter by filing a consent revocation statement with the SEC. Paul Arndt, corporate communications manager for Lake Forest, Ill.-based NeoPharm, told BioWorld Today the company would not comment further on the matter until that document is filed.
Hanson said in a press release Thursday that company officials were "greatly disappointed" in Kapoor's move, adding that the management and independent directors are "strongly committed to the long-term success of the company."
However, Kapoor has a plan to restructure NeoPharm, dropping the burn rate to about $30 million per year in order to save cash for ongoing development of IL13-PE38QQR for glioblastoma multiforme (brain cancer), now in Phase III trials. The study is testing IL13-PE38QQR head to head with Gliadel Wafer (polifeprosan 20 with carmustine implant) from Guilford Pharmaceuticals Inc., of Baltimore. (See BioWorld Today, Feb. 9, 2004.)
"This is all business-related," said Michael Babich, spokesman for Kapoor with EJ Financial Enterprises Inc., a private investment firm owned by Kapoor. "The fact of the matter is that the company has $88 million in cash, and they're running at a $55 million to $58 million [per year] burn rate."
Kapoor also is chairman of Introgen Therapeutics Inc., of Austin, Texas; Akorn Inc., of Buffalo Grove, Ill.; First Horizon Pharmaceutical Corp., of Alpharetta, Ga.; and Option Care Inc., also of Buffalo Grove.
At NeoPharm, he might be hoping for a turnaround similar to the one engineered at First Horizon a couple of years ago, when the specialty pharma firm had fallen from the glory-days notch of $25-plus per share to around $2. The chief operating officer and chief commercial officer, both friends of the CEO, resigned, followed by the president, chairman and CEO himself in May 2003. That's when Kapoor was appointed executive chairman. First Horizon's stock (NASDAQ:FHRX) closed Friday at $17.17, down 19 cents.
The following account is from Kapoor's NeoPharm filing, which provides a behind-the-scenes look at corporate infighting that dates back to 1998, when Hanson was a director of NeoPharm and CEO of Option Care. Kapoor, chairman and largest shareholder, suggested that Option Care fire Hanson after the firm defaulted on a credit line, which Kapoor then had to personally guarantee.
Option Care got rid of Hanson, but he still held a board seat with NeoPharm, whose then-CEO James Hussey proposed adding Flaum, Rogan and Safavi to the board. Kapoor had no history with any of those three, but believed he had a good working relationship with everybody else.
By December 2002, though, he began to worry about the company, and in June of the following year began making "numerous and repeated" suggestions about improved budgeting, project management and focus on IL13-PE38QQR. In the third quarter of 2003, Kapoor asked the company to hire a chief operating officer, an idea Hussey resisted at first, though NeoPharm ultimately retained an executive search firm.
Things came to a head at a board meeting in February, when Hussey complained that Kapoor was "unduly interfering with the management of the company and criticized the entire board of directors," adding that he would not hire a COO after all, Kapoor wrote in his filing. The board asked Hussey to leave the meeting. He did. Kapoor told the board he thought Hussey should be removed as CEO. No one agreed.
One of Kapoor's criticisms of Hussey involved arbitration with Pharmacia Corp. (now part of New York-based Pfizer Inc.), in which NeoPharm had been embroiled since April 2002. Pharmacia was not pleased with delays in the development programs for the liposome-encapsulated paclitaxel and liposome-encapsulated doxorubicin products under a license agreement signed in February 1999. In May, the arbitration panel dismissed the claims of each party against the other, and NeoPharm's stock dropped from $20.43 (close of trading on April 30) to $18.56 at the close of trading May 3, when the news was made public.
Hussey had predicted arbitration victory, Kapoor said in his filing, though "after the decision of the panel he downplayed the matter and its impact on the company's prospects and cash position."
Kapoor again tried to get Hussey ousted, and this time it worked. The executive search firm that was looking for a COO was told to find a CEO instead, and on June 14 the board voted to hire Young as CEO. Hussey was asked to resign. He did - but it wasn't over, and Kapoor would object also to what happened several days later.
At that time, the board approved Young but told Kapoor he was being replaced by Hanson (formerly of Option Care) as chairman - and voted to pay Hanson $10,000 per month for his service. Kapoor voted against the compensation package but the resolution went through. The price of NeoPharm's stock was $9.15 on June 16, the day before the board's action, and over the next 30 trading days declined to $6.20, Kapoor noted in his filing.
Now, the SEC has 10 days to act on it. "We don't anticipate any obstacles in getting approval," Babich told BioWorld Today. After that, "as soon as we receive half the votes plus one share, it's a dead issue" and the four board members are out, to be replaced by three already chosen by Kapoor.
Babich said Kapoor believes NeoPharm can do much better than it has so far.
"Obviously, you need a very good plan to do so, and we have the plan in hand," Babich said. "This isn't something we decided yesterday. We figured out how it's going to be done."