By: Dylan Sikes - AllPennyStocks.com News

Thursday, September 19, 2013

Shareholders generally buy into management and a business model; that’s the whole idea of expecting share appreciation, right? On the same token, if they don’t like the direction of management, investors certainly have the right to express their feelings and it can sometimes can get brutal. Most everyone has heard of activist investors like Carl Icahn and William Ackman, but there are plenty of others that don’t end up on CNBC regularly that aren’t afraid to bark at executives to let their feelings be known. Such is the case in recent weeks with regards to Transcept Pharmaceuticals, Inc. (Nasdaq:TSPT) with some of their largest shareholders sending letters to the Transcept board (and filed with the Securities and Exchange Commission) sharply criticizing the direction of the company and use of funds. All the while, fellow Transcept shareholder Retrophin, Inc. (OTCQB:RTRX) has made offers to acquire the company, first at $3.50 and now $4.00.

Retrophin, a small, clinical stage developer of drugs for hard-to-treat diseases like Duchenne Muscular Dystrophy and Focal Segmental Glomerulosclerosis (FSGS), made its first offer to buy the remaining shares that it does not own at $3.50 per share on September 10. Transcept was not receptive to the idea, to say the least, adopting a Tax Benefit Preservation Plan, colloquially referred to as a “poison pill,” to keep shareholders from buying more than 4.99 percent of the company. This type of plan is adopted to shield the company from a hostile takeover.

Transcept only has one drug on the market (in fact their website doesn’t even have a pipeline shown), called Intermezzo, an oral sleep aid. Purdue Pharma holds commercialization and development rights for the drug that generated $500,000 in royalty payments during the second quarter for Transcept. Net loss for the quarter at Transcept was $6.7 million, or 36 cents per share. On the bright side, the company did end the quarter with $77.6 million in cash, cash equivalents and marketable securities.

Transcept has disclosed what type of plan it has hatched, but it seems that they have some potential acquisitions in mind to re-build their developmental pipeline. 18 months ago, shares of TSPT were near $13, but skidded since to 4-1/2 year lows at $2.52 at the end of August.

The company’s largest shareholders have now stepped up saying that the company needs to employ a share repurchase plan with its cash to bolster value, not use the funds for an unnamed acquisition.

Here’s some excerpts from letters to the Transcept board (We are going to go a bit at length, but this is quite a tongue-lashing that merits a read):

Roumell Asset Management, LLC, which owns approximately 12.3 percent of Transcept’s outstanding shares, spent some time quoting the wisdom of billionaire Warren Buffett’s business model to not make acquisitions when a stock price is below intrinsic value, but to perform share buybacks.

“The company appears to be acting out of a desire to perpetuate itself and the interests of its management, rather than those of its owners.”

“Thus far, the company has failed to successfully bring a commercially viable drug to market. Second, notwithstanding this failure, it issued stock options representing nearly 4% of the outstanding shares as an incentive for management to stay motivated and engaged. We believe that success, not failure, should be rewarded.”

“The Board evidently believed that shareholders needed to hand over 3.8% of the company’s value in order to be entitled to the continued services of management despite their sub-par performance. Is the Board unaware of the industry’s dramatic workforce reductions? Earlier this year, Astra Zeneca announced 5,000 new lay-offs in addition to the 30,000 since 2007. Talent is available, able and willing if current members of the management team are not, absent more option grants.”

Peter Collery of SC Fundamental, which holds about 6.7 percent of Transcept and wants a buyback plan incorporated, didn’t pull any punches in its filings and letters to the board either recently.

“There is an old saying to the effect that you wouldn’t believe how obtuse a man can be when his job depends on not understanding something. We find ourselves increasingly inclined to think that this saying applies here.”

“I should note how troubled we are by your presumption that the company’s money is yours to do with as you see fit. You and your fellow directors have a fiduciary duty to company shareholders.”

“If you choose to forego this option to pursue instead a course that Transcept’s owners strongly disapprove of (why else would the shares trade at such a discount?), you should expect to have your actions scrutinized, perhaps in a judicial forum.”

“I’d like… also to express my displeasure with the company’s recent grant of nearly 600,000 management stock options with a strike price of $2.93 per share.”

“It is incredible that management should be granted undervalued stock options as a “reward” for having created that distrust and I would expect that an inquiry into the deliberations surrounding this recent option grant, and particularly, the suitability of the strike price would be quite interesting.”

Wow. Interested parties are encouraged to read the complete SEC filings.

Retrophin bumping their offer to $4 per share in cash on Wednesday afternoon also came with a letter expressing their disappointment in the management and board at Transcept to not engage in discussions, instead enacting a poison pill. Retrophin’s chief executive Martin Shkreli said in the letter that the company may actually be willing to increase its offer if it is able to perform thorough due diligence and negotiate a definitive acquisition agreement. The offer is open until September 30.

Shares of TSPT have climbed from the aforementioned August lows with the chatter surrounding the company, including rising another 6% by mid-day on Thursday. Shares of RTRX are also up roughly 5% on Thursday. Shares have risen about 250 percent in the last 12 months.

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