The battle between Broadfin Capital and the Board of Cardica, Inc. (NASDAQ:CRDC) is heating up. As promised in a recent letter, Broadfin Capital and manager Kevin Kotler have stepped up their activist efforts and have issued a proxy statement, seeking shareholder support at the company’s next annual meeting. According to a recent filing with the Securities and Exchange Commission, Broadfin and Kotler are seeking an overhaul of the company’s Board, having put together a list of eight nominees. In 2014, Cardica shareholders elected three members nominated by Broadfin and now Kotler is looking to have them re-elected and replace the remaining five directors. Together, Broadfin Capital holds 8.97 million shares of Cardica, or 10.1% of its common stock, which makes it the largest shareholder.
Broadfin Capital has celebrated its 10th anniversary this year, having grown into a fund with a public equity portfolio valued at more than $1.8 billion at the end of the second quarter. Kevin Kotler is mainly interested in bio-technology companies, having invested 81% of said funds in the healthcare sector, while also holding some finance stocks, which account for 12% of his public portfolio. At the end of the second quarter, his largest equity position was in Horizon Pharma PLC (NASDAQ:HZNP), despite having made a 32% reduction in it, to 4.81 million shares. Kotler also dumped 27% of his holding of Retrophin Inc (NASDAQ:RTRX), leaving Broadfin with 2.16 million shares, but increased his bet on Flamel Technologies S.A. (ADR) (NASDAQ:FLML) by 6% to amass 4.97 million shares.
Most investors can’t outperform the stock market by individually picking stocks because stock returns aren’t evenly distributed. A randomly picked stock has only a 35% to 45% chance (depending on the investment horizon) to outperform the market. There are a few exceptions, one of which is when it comes to purchases made by corporate insiders. Academic research has shown that certain insider purchases historically outperformed the market by an average of seven percentage points per year. This effect is more pronounced in small-cap stocks. Another exception is the small-cap stock picks of hedge funds. Our research has shown that the 15 most popular small-cap stocks among hedge funds outperformed the market by nearly a percentage point per month between 1999 and 2012. We have been forward testing the performance of these stock picks since the end of August 2012 and they have returned 118% over the ensuing 36 months, outperforming the S&P 500 Index by over 60 percentage points (read the details here). The trick is focusing only on the best small-cap stock picks of funds, not their large-cap stock picks which are extensively covered by analysts and followed by almost everybody.
Broadfin and Kotler are accusing the five board members they seek to offload of incompetency and of intentionally marginalizing the three members that were nominated in 2014: Gregory D. Casciaro, R. Michael Kleine and Samuel E. Navarro. Furthermore, Broadfin criticized the board’s attitude towards shareholders, their poor use of cash, and missed expectations in a presentation alongside its latest filing. As a result, Broadfin has now compiled a list of eight director nominees, including Kotler, to be elected at the company’s next annual shareholder meeting. The fund is also pushing for a revision of the executive compensation schemes, as well as the election of a new audit company, BDO USA, LLP, for Cardica, Inc. (NASDAQ:CRDC)’s fiscal year ending June 30, 2016.