Control Contest

Bradley Pharmaceuticals strives to fend off an effort to retool its leadershipFAIRFIELD – Bradley Pharmaceuticals last week was digging in for a showdown with hedge fund operator Costa Brava Partnership III. At issue is who sits on Bradley’s board of directors.

Boston-based Costa Brava began purchasing common shares of the Fairfield-based manufacturer of dermatologic and other specialty medicines in early 2005 and now owns approximately 9.5% of the stock, making it Bradley’s largest individual shareholder. Costa Brava last month filed a proxy statement with the U.S. Securities and Exchange Commission in which it nominated Douglas E. Linton, John S. Ross and Seth W. Hamot for seats on Bradley’s board.

Bradley executives contend that Costa Brava wants to disrupt the company’s board for its own personal gain, while Costa Brava officials say they want to tighten executive oversight of Bradley’s financial reporting and inventory control.

Bradley stockholders will be asked to decide whether to vote to retain the company’s existing board of directors or Costa Brava’s proposed list of three new board members at Bradley’s annual shareholder meeting to be Oct. 26 in New York City.

Costa Brava CEO Seth W. Hamot, who last week held a series of meetings in New York City with Bradley stockholders to pitch his slate of directors, claims that Bradley’s board doesn’t represent the interests of the company’s common shareholders.

“It’s important that Bradley’s public stockholders have an independent voice on the board of directors, and our nominees are well-qualified and ready to serve fellow stockholders in that role,” says Hamot. Only three of the board seats are open to public shareholders.

Presently, three Glassman family members—Chairman and CEO Daniel, his wife Iris and their son, Bradley —hold 10.5% of the company’s common stock and 99% of its Class B common stock.

Bradley Pharmaceuticals filed a proxy statement last month nominating Robert S. Whitehead, Thomas Stagnaro and current member William J. Murphy to the board and asking shareholders to reject Costa Brava’s board of director nominees as unqualified. “Costa Brava has nominated three directors who they believe could be of assistance to the company, but they lack experience completely in specialty pharmaceuticals,” said Glassman in an interview with NJBIZ. He and wife Iris, the company treasurer, are also board members.

Hamot disagrees with Glassman’s assessment, saying nominee Douglas E. Linton has direct pharmaceutical experience, and once served as a distribution executive for Cardinal Health, a Dublin, Ohio-based drug wholesaler. “I wanted someone who understood the logistics of the business from the buyers’ end to help Bradley deal with the inventory-return issues,” says Hamot. “So I specifically targeted someone who had an understanding of logistics of the wholesale distribution chain. Linton is that guy.”

In addition to claims of incompetence, Glassman argues that Costa Brava’s proxy fight is a move for self-enrichment, not just board representation. “They have a reason to create this activism for very self-serving purposes,” Glassman says. “Hamot is trying to build a reputation on our back and it is very bothersome.”

Hamot says Costa Brava’s move to put three new people on Bradley’s board isn’t about money, but about improving Bradley’s operating efficiency and points out the firm has run into accounting issues that caused it to delay filing of SEC reports.

“It took a long time to get any financial controls in place to actually produce timely filings on the SEC requirements,” Hamot says. “They were late from the third quarter of 2004 through the first quarter of 2005.”

In addition to Bradley’s alleged filing problems, Hamot says the company’s inventory returns have increased the last two years. “[Product] returns have gone through the roof,” he says. “This becomes a real problem in trying to figure out how well Bradley is doing.”

In an e-mail exchange with NJBIZ, Bradley representatives explained the delayed filings as a response to an internal investigation its directors had sought in response to an informal request for documents from the SEC. The agency was concerned about the firm’s method of recognizing revenue. On the issue of the inventory, the company says that despite tough generic competition, its business is growing.

Costa Brava had originally filed a lawsuit against Bradley in the Court of Chancery in Delaware in August seeking relief for what Costa alleges are two “deprivations” of Bradley shareholder rights. The hedge fund said Bradley had violated its own bylaws by expanding its board size to nine from eight seats without allowing the new person’s selection by the board members representing holders of Bradley’s common stock.

The Chancery Court dismissed that claim as unfounded.

Costa Brava is also asking the Chancery Court to declare that Bradley’s Class B common stock—of which the Glassmans are the primary holders—is entitled to one vote per share, not five votes per share as Bradley has declared. This second claim is still pending.

“We will defend our position vigorously,” says Glassman. “Lawsuits have been defended by this company very nicely.”

Glassman says he’s confident stockholders will reject Costa Brava’s petition and cites the company’s recent financial performance under the current board.

Bradley for the first half of 2006 posted net sales of $71.9 million, a 17% increase over the same period in 2005. The company generated net income of $4.8 million, a roughly 112% increase over $2.3 million for the same period last year.

Bradley’s common stock was hovering around $16.95 per share on the New York Stock Exchange last week, well up in its 52-week range of $9.15 to $17.25.

“We’ve had a 50% increase in sales in each of the last three years. Our net sales were up more than 17% and our net income up more 110% for the first half of 2006. We’ve had a tremendous track record,” Glassman says.

E-mail jmcconville@njbiz.com
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