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Manchester Management Seeks Changes at Vermillion to Protect Shareholder Value

By a GenomeWeb staff reporter

NEW YORK (GenomeWeb News) – A Boston-based hedge fund that holds a nearly 10 percent stake in Vermillion is seeking to make changes to the firm's bylaws in order to give shareholders a louder voice in the company and hold management more accountable, according to a letter it has sent to Vermillion executives.

James Besser, a managing member of Manchester Management, earlier this week sent a letter to Vermillion's management and board, in which he also accuses them of eroding the value of the company's shares. The company has fired back, saying in a letter to shareholders that Besser appears to be seeking "a short term stock price jump for his own benefit."

Besser's letter to the firm is included in a document filed with the US Securities and Exchange Commission on Monday. In it, Besser, who along with Manchester Management owns nearly 1 million shares or 9.2 percent of Vermillion's stock, has asked the company's board to make three changes to its corporate governance "as soon as possible."

The first change is to eliminate a bylaw that prohibits shareholders from calling special meetings under any circumstance. He also is calling for the removal of a so-called "poison pill" that prevents shareholders from making changes in Vermillion's management and/or board. And lastly, he is demanding that Vermillion hold a special meeting where the company's six directors would be up to a vote "so that all shareholders can weigh in on their continuing service in light of events since the last shareholder meeting."

At issue is a "wanton destruction of shareholder value" caused by a 90 percent drop in Vermillion's stock price in the past year, Besser said. Against such a backdrop, he said, "there should be a mechanism by which current shareholders are able to determine whether Vermillion's current management team and board have the judgment and skills necessary to evaluate all the alternatives that must be considered at this point to create a reasonable return going forward."

During the past 52 weeks, shares of the Austin, Texas-based molecular diagnostics firm traded as high as $24.50 on Nasdaq. Shares of Vermillion were up about 3 percent in mid-afternoon trading today at $4.73.

In response to Besser's letter, Vermillion's board today issued a letter to its shareholders in which it said that it is reviewing the firm's bylaws and rights plan to determine whether changes are necessary.

The board also said that it had offered to provide information to Besser that was not public so he could gain a better understanding of Vermillion, but that Besser had turned down the offer "because coming over the wall would have necessarily required a confidentiality agreement and limited his ability to obtain 'liquidity' for his position.

"He claims to want what is best for shareholders, while at the same time refusing complete information. This suggests to us that his goal is not to create long term value for shareholders, but rather a short term stock price jump for his own benefit," Vermillion's board said.

The board added that at least one of Besser's complaints and suggestion for change would have put the firm in violation of SEC regulations.

Besser lays out specific actions by Vermillion's management that he claims led to an erosion of the company's stock price. They include overly optimistic projections of its OVA1 ovarian cancer test; irresponsible behavior in relation to the company's licensing agreement with Quest Diagnostics; a secondary offering priced at $5.45 per share that substantially diluted shareholder; a lack of stock incentives in employment agreements with management; an inability to build an effective sales force; and an unwillingness to do direct sales with hospitals that are not in Quest's network, which have limited the revenue potential for the OVA1 test.

Besser said that he took his concerns to Vermillion earlier this month and the company set up a conference call with its CEO Gail Page, two board members, and himself. After a two-hour discussion, though, "their responses did not give us a clear understanding of what steps Vermillion has taken to avoid continuing to miss the mark on the test ramp," Besser said in his letter.

When things have gone wrong, management has blamed consultants, he added, without taking responsibility for signing off on those decisions. He said that Vermillion declined to discuss certain operations unless he signed a confidentiality agreement, and the company told him that Vermillion's business was too complex to understand without such an agreement in place.

In his letter, Besser questioned the necessity of such a condition, saying that Vermillion has fewer than 50 employees and generates less than $1 million in sales per quarter. "Far bigger companies with far more complex businesses are able to [explain the intricacies of their operations] routinely," he said.

Since the conference call, Besser has corresponded with Vermillion and made recommendations to select board members who either owned a significant amount of Vermillion stock or "had a great deal of public market experience," and to waive the poison pill mechanism that prevents shareholders from making changes to management or the board "so that we can collaborate in arriving at the best possible candidates to help the company."

He also suggested the firm institute a 45-day written notice period from the annual meeting date "to allow the shareholders … to propose an alternative slate that would convince the majority of the holders that their interests are being protected."

Under current Vermillion bylaws, a shareholder who wants to put changes up to a vote with other shareholders has to wait almost two years to do so, according to Besser.

In response, he has received two letters from Vermillion. The first letter is from the company's lawyers asking whether he and Manchester Management had formed a group with other shareholders. In a second letter, Page said she is committed to a review of the bylaws and rights initiative and asked for patience as management pursued its commercialization and development strategy.

"[W]e do not believe that the CEO and board have earned the right for shareholders to be patient unless they are able to present a detailed plan to bring about the improvement," Besser said in his letter.

In its communication to shareholders today, Vermillion said that its goal is to create value for all shareholders and continue growing the market for the OVA1 test and other tests in its pipeline.

"We are continuing to build out our market development efforts and the company is performing to its more information-based plan and continuing to explore opportunities for accelerating adoption," the board said.

It also said that projections the company made were good-faith forecasts, and were revised once it realized its reimbursement estimates for the OVA1 test were too conservative and adoption rate estimates were too optimistic.

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