Pharma’s Cutting Edge

The Future of Biotech Funding? A Hedge Fund Battles a Biotech for Control

I don’t recall ever reading about a Board member’s attempt to lead a coup d’etat against a standing Board in the development-stage biotech arena. Usually such public battles are reserved for larger companies with real profits or at least the potential for real profits in the near future. And usually the group trying to take control is a private equity fund (or individual) looking to shake up a firm via merger or dissolution, hoping for a quick return on investment–the so-called corporate raiders.

Something very different than the norm is happening in Vancouver, where AnorMED’s board is under attack from a hedge fund: Baker Brothers Advisors and Felix Baker in particular. The story makes for some interesting reading, but the real interest to industry is the possible precedent being set. Hedge funds increasingly take large positions in development-stage healthcare companies. That’s no surprise given the large influx of cash into hedge funds over the past decade. Combine cash from powerful investors with a need to out-perform traditional investment funds, and these funds are no longer merely influential investors via the strength of their holdings. They’re becoming increasingly willing to exert influence over how their investments are managed. AnorMED’s fight with the Baker brothers is merely the most glaring example of this trend.

The story of this attempted coup apparently began some time prior to last November when AnorMED engaged in financing with an underwriting syndicate co-led by Raymond James Ltd and BMO Nesbitt Burns Inc. in which the underwriters purchased 6,250,000 Common Shares from AnorMED and sold the shares to the public at a price of $4.00 per Common Share (CDN), representing an aggregate issue amount of $25,000,000. At the time of the announced bought deal, AnorMED was trading at $3.50 (USD) on the AMEX, yielding a deal discount to market of $0.10 USD.

Following the finance announcement, the Baker brothers (Felix and Julian), whose funds owned 23% of AnorMED, filed a Schedule 13D with the SEC, in which they indicated their displeasure with the decision:

“Because of what the Filing Persons believe to be a questionable decision of the Board of Directors and management with respect to its most recent bought deal financing, the Filing Persons believe that it may be necessary to evaluate certain of their options with respect to their investment in the Issuer in an attempt to ensure that future board decisions and management actions are in the best interests of all of the Issuer’s shareholders.

The Filing Persons strongly believe that the Issuer’s current stock price does not adequately reflect the potential value of the Issuer. In light of that belief, the Filing Persons may wish to speak to other shareholders to elicit and share views regarding operating and financing plans that would maximize shareholder value. The Filing Persons believe that such communications may be necessary to protect shareholders interests in light of the Board of Directors’ decision on November 21, 2005 to pursue a bought deal financing instead of a backstopped rights offering which had been proposed.

The Filing Persons intend to continue to evaluate their alternatives as circumstances develop.”

And so they did.

About one month later, the Baker brothers filed an amendment to the 13D calling for a special election that would replace AnorMED’s Board:

“Following the filing by the Reporting Persons [Baker Brothers] of their Amendment No. 1 to their statement on Schedule 13D, the Reporting Persons were contacted by David Scott, the Chairman of the Board of the Company. In their discussion with Mr. Scott, the Reporting Persons suggested that the composition of the Board of Directors be changed so that Felix Baker, who is already a director of the Company, would become Chairman and a majority of the members of the Board would consist of Dr. Baker and independent nominees suggested by him.

Following this, AnorMED convened a special committee of its Board, sans Felix Baker (a Director), at which time it proposed to discuss Dr. Baker’s proposal but also some other important issues, as described in this letter from Felix Baker to David Scott, AnorMED’s Chairman:

“I feel the need to write to express my concern with some of the recent actions that the directors of AnorMED have taken in response to our requisition to call a special meeting of the shareholders to consider replacing the current board of AnorMED with a new board….

As representative of the largest shareholder of AnorMED, I was alarmed to hear on the February 7 conference call that the same Special Committee will ‘also be taking the opportunity to evaluate the Company’s current strategy and direction and review alternatives that may be available.’ Such actions clearly go significantly beyond the stated mandate of the Special Committee, which is to respond to the requisition.

I feel strongly that under any circumstances an overall evaluation of a company’s strategy and direction is a job for the company’s full Board of Directors…. Excluding me from these discussions, on the pretence that by questioning the judgment of the current board or as the only director who is a significant shareholder of AnorMED I am ‘conflicted,’ only proves that you and this board are uninterested in a process that values shareholder input or decision making which maximizes shareholder value.

…We see this as an attempt by the Special Committee to explore ways to change AnorMED’s strategy, possibly by selling or mortgaging the company’s assets, for the purpose of entrenching the current Board rather than dealing with shareholders’ concerns in a timely way.

…In my view, by apparently conferring extremely broad powers on the Special Committee that are totally unrelated to the requisition, and by adopting a Shareholder Rights Plan, the Board has reacted inappropriately to the fairly straightforward request of the Baker Funds to put the question of a significant realignment of AnorMED’s Board of Directors before all shareholders for a vote….

It would be an error of monumental proportions for the current Board or any committee thereof to consider or approve any significant transactions in the face of the forthcoming shareholders’ meeting. Consistent with the By-Laws of AnorMED, the Board had the ability to call the shareholders meeting to consider the one issue presented by our requisition at a much earlier date than it selected. In electing to defer the time of the shareholders meeting to the latest possible date and to divert the focus required by its mandate in order explore ‘alternatives’, the Special Committee and the Board have only reinforced the concerns which led our funds to request a significant realignment of the Board in the first place.”

So, as we can see, the Board was apparently worried that the Baker brothers were acting to acquire the company and they wanted to make sure that their poison pills were sufficiently potent and their golden parachutes packed and ready to be deployed. The shareholder rights plan was adopted on February 2nd.

On February 23rd, Felix Baker again corresponded with David Scott, Chairman.

“Dear David:

I am writing to you in response to the press release issued by AOnrMED Inc. on February 20, 2006. As AnorMED’s largest shareholder, we are deeply concerned by the misleading statements in the press release regarding the attempts to date by Baker Brothers Investments Funds to come to an agreement with the Special Committee of AnorMED on proposed and needed changes to the Company’s Board. We are concerned that the release may not have been appropriate under applicable Canadian securities laws governing proxy solicitations. By issuing this release as a corporate release on behalf of AnorMED, Inc. the Special Committee has again exceeded the boundaries of its mandate.

Our primary concern, as shareholders, is that the Board as currently constituted will fail to make decisions that will result in maximum value being realized for all shareholders of AnorMED….

Current shareholders have no reason to take comfort in the statement in the press release that ‘The willingness of the Company to replace and/or add new directors is consistent with AnorMED’s past practice.’ In fact, AnorMED’s past practice is not consistent with making significant changes to the Board. If ‘the Company’s goal has always been to recruit independent Directors, as necessary, that bring relevant business and industry experience and who will act in the best interests of all AnorMED shareholders’, as the press release states, then the current Board has failed the Company miserably in that goal.

Your press release states that ‘the Chairman of AnorMED as well as other members of the Special Committee and management have been actively meeting and talking to [Dr. Baker] in a concerted effort to come to an agreement on a group of directors that is satisfactory to all’. This is a clear exaggeration of any efforts you or the Special Committee have made.

The fact is that this discussion started with the compromise proposal the Baker Funds made to you and Mike Abrams on January 5 which would lead to the replacement of only four of the current AnorMED directors. In that proposal, only one of the five new directors we would recommend would be a representative of the Baker Funds. The other four would all be directors who are fully independent of the Baker Funds and AnorMED management. We reiterated this proposal to you on January 13, 2006. After almost two months, we have yet to receive a response to that proposal.

The press release further claims that To date Mr. Baker has been unwilling to consent to the consideration of a Board that is fully independent of himself and the shareholders he represents’. This is completely false. In no instance have you or any member of the Special Committee asked us to consider a proposal that precludes our continued representation on the Board. If you meant to suggest by this statement that Baker Brothers Investments is unwilling to consider a Board that is independent from Baker Brothers Investments, this is also clearly false. Both the initial proposal we made to you on January 5, 2006 and the slate we have proposed for election at the upcoming shareholders meeting would result in a Board that is independent from Baker Brothers Investments and the shareholders we represent.

Since first informing the Special Committee and Mike Abrams of our proposed slate on January 20, 2006, the Baker Funds have been persistently and patiently attempting to elicit your response to what inadequacies, if any, can be found in any of the Board nominees we have proposed. Neither you nor any other member of the Special Committee has responded to this very simple and straightforward question. You may call our belief that you are unwilling to find a consensual solution ‘ridiculous’, but your claim that you are making a ‘concerted effort’ to resolve our differences suggests the opposite since you remain unwilling to discuss the merits of any of the independent candidates we have proposed.

AnorMED’s public mischaracterization of what has actually transpired between the Baker Funds and AnorMED only heightens our concern that the Special Committee’s true agenda is the entrenchment of the current Board. This is compounded by the fact that the Special Committee (comprised of all members of the Board other than Mike Abrams and me) has embarked on a frolic by, first, adopting a Shareholder Rights Plan that just six months earlier was not put before shareholders for renewal based on management’s conclusion that there was insufficient shareholder support for such a plan and, second, exploring strategic ‘alternatives’ in response to our requisition. While the Special Committee may make attempts at this point to modestly evolve the current Board’s composition, we remain confident that shareholders will recognize these attempts as a smokescreen set to create the illusion that the current Board is open to change — when all the facts to date indicate otherwise.

Contrary to your public assertions, we remain entirely committed to finding a mutually acceptable solution that results in a meaningful change to the current composition of the Board and its transformation into a Board comprised of individuals in whom shareholders can reasonably have confidence….”

In response, David Scott accused Felix Baker of hypocrisy:

“Dear Felix:

First, let me stress that each of the directors on the Special Committee of directors of AnorMED Inc. is trying to fulfill his or her duty to the Company in these difficult circumstances that you have created. You stated in your letter that the actions of the Special Committee go beyond the stated mandate of the Special Committee. However, the resolution passed by the Board at a meeting that you attended states that the Special Committee is authorized to ‘evaluate the concerns of the requisitionists as well as the views of other shareholders, and to take such steps, if any, as the Special Committee deems appropriate to address such concerns’.

The Schedule 13-D dated December 8, 2005, that you filed stated that the ‘[requisitionists] strongly believe that the [Company’s] current stock price does not adequately reflect the potential value of the [Company]. In light of that belief, the [requisitionists] may wish to speak to other shareholders to elicit and share views regarding the operating and financing plans that would maximize shareholder value’. Obviously these matters are concerns to the requisitionists. The Special Committee, which is obliged to evaluate such concerns, is looking at various matters, including the Company’s strategy, in its response to be contained in the proxy circular. We are of the view that the Special Committee is doing what the Board has set out for them to do and is acting within its powers. Furthermore, the Special Committee is only making recommendations to the full Board. The full Board, which includes you, will then have the opportunity to evaluate the Special Committee’s recommendations and come to its own decision. This is not an attempt to exclude you from key Board decisions.

In your letter you also state that there was ‘no reason’ for the Special Committee to recommend the adoption of a shareholder rights plan at this time. We find this remarkable as experience has shown that the sort of disruptive process that you have initiated at the Company may well lead to unsolicited offers or change of control transactions. The Special Committee recognized this fact in reviewing your requisition. A shareholder rights plan is designed to protect all of the Company’s shareholders in the event of an actual or contemplated unsolicited offer or change of control transaction. Accordingly, the Special Committee determined that it was in the best interests of the Company and the shareholders to recommend the implementation of the shareholder rights plan at this time.

Finally, I am especially troubled by the allegation in your letter that the Special Committee is not prepared to negotiate a consensual arrangement. The Special Committee determined in its first meeting that every effort should be taken to avoid exposing the Company and our shareholders to a time consuming and disruptive proxy contest. As a result and as you know, the Special Committee has made numerous attempts to reach an amicable resolution with you. Frankly, your description of our unwillingness to negotiate a consensual arrangement is ridiculous. Your position is tantamount to asserting that unless the Special Committee accepts your proposal, the Special Committee is not willing to negotiate. To date, there has been no movement on your part despite our willingness to reach an arrangement that would be acceptable to all. We would very much like to reach a consensual arrangement and hope that you are willing to cooperate with us.”