Hedge Funds Take Aim at Nabi

After duking it out with Ligand, two money managers tell Nabi execs to consider selling the company.
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David Knott and Daniel Loeb are becoming quite a tag team when it comes to small, distressed pharmaceutical companies.

Last fall, the two hedge fund managers joined forces, or at least their shares, to push for changes in management and strategy at San Diego-based

Ligand Pharmaceuticals

(LGND) - Get Report

.

Now, they're making noise about the management and strategy of

Nabi Biopharmaceuticals

(NABI)

, saying the company should consider finding a buyer.

The hedge funds' disenchantment comes too late for a proxy fight, but the fund managers can still press their case at Nabi's May 12 annual meeting. Nabi executives will get a chance to answer Wall Street's questions when they discuss their first-quarter results after markets close Wednesday.

To get Ligand's attention, Loeb threatened a proxy fight for a company whose

financial and accounting problems triggered an investigation by the

Securities and Exchange Commission

and a delisting by

Nasdaq

. The stock still trades on the pink sheets.

As Ligand's largest shareholder, Loeb said he wanted the company to make changes even though it had already hired an investment banking firm to explore strategic alternatives.

Ligand agreed in early December to allow three of Loeb's designees, including Loeb, to become directors, expanding the board to 11 members. Ligand also agreed to pay Loeb's investment management firm, Third Point LLC, up to $475,000 "to reimburse certain out-of-pocket expenses."

Ligand had resisted Loeb, who owned 9.95% of the shares when he threatened the proxy fight. The clincher in Ligand's settlement may have been Knott's request that Ligand listen to Loeb. Knott owns 9.8% of Ligand's shares. He's the second biggest shareholder.

According to SEC filings, Knott, of Syosset, N.Y., told Ligand that although he had acquired shares for investment purposes only, he agreed with Loeb's evaluation. Knott told Ligand that he didn't want a proxy fight, but he would probably vote with Loeb. Then, Ligand settled with Loeb.

A Two-Pronged Attack

A few months later, a similar scene is playing out in Boca Raton, Fla., where Nabi is struggling with a staggering stock following

a big scientific setback in November.

Between Feb. 24 and April 17, a recent SEC filing shows that Loeb bought around 4.9 million Nabi shares through Third Point and his Third Point Offshore Fund. They now own 8.16 million shares, or 13.7%, making Loeb the biggest shareholder. The New York hedge fund manager told Nabi to consider selling the company due to its "poor execution in converting assets into shareholder value," says a filing with the SEC.

Meanwhile, Knott had been investing in Nabi for a period of time, preferring that his holdings be viewed "solely for investment purposes." However, on April 12, he revealed that he had raised his stake from 4.05 million shares, or 6.8%, to 5.66 million shares, or 9.5%, becoming the second-largest shareholder.

He made the purchases through his management company, Knott Partners, and five other entities that he controls. Knott told the SEC he wished to take "a more active investor role to help ensure that

Nabi's intrinsic value is realized."

On April 19, Anthony Campbell, one of Knott's executives, wrote a blistering letter to Thomas McLain, Nabi's chairman and CEO, attacking McLain's stewardship and his company's performance. McLain has been with Nabi for eight years. He was previously the company's financial chief.

"The shareholders of Nabi have suffered enough," said Campbell, accusing the company of missing revenue projections and scientific goals "on numerous occasions." He said Nabi should replace its investment banker, Lehman Brothers, "to seek ways to surface the value of Nabi, which we believe to be substantially higher than its present stock price." He said its options should include a possible sale.

Although Campbell alleged that McLain has "repeatedly ignored calls from major companies seeking to buy Nabi," McLain responded that, to his knowledge, "that statement is factually inaccurate."

In an April 25 letter, McLain says Nabi is "committed to follow up every call" it receives from companies interested in a collaboration or alliance. However, Nabi won't comment on "potential transaction or rumors about transactions."

Trying to Regroup

Nabi's stock has suffered ever since it reported in early November that a late-stage clinical trial of a vaccine failed to meet its goals. The vaccine, called StaphVax, is designed to guard against

Staphylococcus aureus

, the leading cause of hospital-based infections. On Nov. 1, the day before the announcement, the stock closed at $12.85. After the news, it plunged to $3.63.

The stock has moved up a bit, thanks to Nabi's March 21 decision to resume developing StaphVax and to the hedge funds' activities. The stock closed at $6.33 on Tuesday.

Nabi's decision to continue working on StaphVax was prompted by an independent advisory panel review that showed there were differences in the effectiveness of the vaccine used in the latest test vs. the vaccine used in a previous, successful clinical trial. The vaccine for the first test was made by Nabi, while the second vaccine was made by another manufacturer.

Nabi will seek a partner to help it conduct new clinical trials of StaphVax. The company also will resume research on Altastaph, a proposed treatment for

Staphylococcus aureus

infections. Nabi will develop this product by itself.