Kevin Kotler‘s healthcare fund Broadfin Capital, the top performing fund in our database this year based on the calculated returns of its public equity positions in companies with a $1 billion+ market cap, has had it with the childish gamesmanship of Cardica, Inc. (NASDAQ:CRDC)‘s Board of Directors. According to a recent filing with the SEC, the fund is going to issue a proxy statement and an accompanying proxy card at the upcoming shareholders meeting in order to solicit votes for the nomination of eight candidates for election to Cardica’s Board of Directors. Broadfin owns about 8.87 million shares of Cardica, which when combined with certain shares of the company’s preferred stock that the fund holds together with its nominees, accounts for nearly 21.2% of the company’s shares.
After working for The Galleon Group, ABN AMRO, and ING Barings, Kotler founded Broadfin Capital in June 2005. According to Symmetric.io, Broadfin ranks at the top among hedge funds as far as stock picking for the last three years is concerned. Most of Broadfin’s major holdings are in the small-cap biotechnology space. The market value of the fund’s public equity portfolio currently stands at about $1.86 billion with 80% of those investments in the healthcare sector. Another 14% belong to the finance sector.
Follow Kevin Kotler's Broadfin Capital
We pay attention to hedge funds’ moves because our research has shown that hedge funds are extremely talented at picking stocks on the long side of their portfolios. It is true that hedge fund investors have been underperforming the market in recent years. However, this was mainly because hedge funds’ short stock picks lost a ton of money during the bull market that started in March 2009. Hedge fund investors also paid an arm and a leg for the services that they received. We have been tracking the performance of hedge funds’ 15 most popular small-cap stock picks in real time since the end of August 2012. These stocks have returned 118% since then and outperformed the S&P 500 Index by around 60 percentage points (see the details here). That’s why we believe it is important to pay attention to hedge fund sentiment; we also don’t like paying huge fees.
Hedge funds have generally stayed put with their investments in Cardica, Inc. (NASDAQ:CRDC) during the April-June quarter, even though the healthcare company’s stock price depreciated by about 23% during this period. Among the funds that we track, six had an aggregate investment of $13.05 million in the company at the end of June compared to seven firms with $16.37 million in shares at the end of March. Stephen Dubois‘ Camber Capital Management was the second-largest stockholder of the company among these after Broadfin, holding some 8.37 million shares valued at $4.18 million.
Although Broadfin was able to elect three directors to the company’s board last year after sending a letter to the board expressing its intentions to avoid a proxy contest, the incumbent directors took steps such as expanding the board, which reduced the capacity of the three nominees to affect a meaningful change at Cardica, Inc., a change that is desperately needed given that the stock price has cratered by more than 47% in the last ten months and the enterprise value of the firm has crashed by 76% to just $8.5 million during the same period. Meanwhile, according to Broadfin, the Board has been wasting cash owing to its slow decision making processes and has also been missing milestones. Furthermore, after CEO Bernard A. Hausen resigned in early August, the board failed to come up with a succession plan and appoint an interim CEO despite the presence of some obvious candidates on the board with CEO experience.
Cardica, Inc. (NASDAQ:CRDC)’s board has apparently been playing a cat-and-mouse game with Broadfin, as it orchestrated the resignation of three directors so that at the 2014 shareholder meeting the directors that Broadfin had identified as problematic could not be removed. Similar tactics continued when the company denied Broadfin access to information pertaining to Cardica unless the fund signed a confidentiality agreement. When Broadfin finally entered into this agreement in August, the board announced the date of the next shareholder meeting just five days after rendering the Nondisclosure agreement null and void.
Tired of these childish games, which have resulted in nothing but further erosion of shareholder value, Broadfin is entering into a proxy contest with Cardica, Inc. (NASDAQ:CRDC). We’ll keep you updated on the proxy content as the battle progresses.
Disclosure: None
