|[December 03, 2012]
Voce Capital Launches Proxy Contest to Replace Obagi Board
SAN FRANCISCO --(Business Wire)--
Voce Capital Management LLC ("Voce"), which led the successful campaign
to defeat the poison pill at the 2012 annual meeting of Obagi Medical
Products, Inc. ("Obagi") (Nasdaq:OMPI) earlier this year, today
announces its intention to replace six members of the Obagi Board of
Directors with independent nominees and demands that the Company hold
the annual meeting by February 28, 2013.
In a letter today to Obagi, Voce criticized the Board for continued
mismanagement of the Company, its refusal to address Voce's demands for
corporate governance reform and its unbending hostility toward all
acquisition interest. Directly addressing Obagi's Board members, Voce
stated in its letter:
Your failings as a Board are many and varied. But they all stem
from a common flaw: Your incentives are misaligned with, and in
many ways adverse to, those of shareholders. You have but a de
minimis economic stake in Obagi's success and it appears to us
that your paramount objective is perpetuating your control over
the Company at all costs. As a result of Stonington Partners
engulfing influence, none of the normal checks and balances exist
to hold you accountable or to keep you honest. Accordingly, we
have concluded that the only way to fix Obagi - indeed, to save
it - is with the replacement of the Board with new, independent
Voce's distinguished nominees include Dr. George Lasezkay, the former
head of strategy and corporate development for Allergan; Joseph
Whitters, an advisor to Frazier Health Care and the Chairman of the
Board of Mentor at the time of its $1 billion acquisition by Johnson &
Johnson; Jim Hickey, who has served as Chief Executive of six different
medical devices companies, and was recently the Chairman of the Board of
Vital Images when it was acquired by Toshiba (News - Alert); Kristin McDonnell, who was
recently CEO of Limelife, a female-oriented mobile media company, with
two decades of previous senior marketing experience in a variety of
consumer-oriented companies; Joseph Lash, a private equity investor,
senior Wall Street advisor and experienced public company Board member;
and one Voce representative, J. Daniel Plants, its Managing Partner and
a former investment banking executive at Goldman Sachs and JPMorgan
Chase. "Unlike the current Stonington claque, our nominees have no
business ties to one another or (with the exception of Voce's sole
representative on the slate) to Voce and will represent the interests of all
Obagi shareholders," stated Voce. Voce's letter (which follows this
release) contains more extensive biographical information on the
Finally, Voce's letter calls upon Obagi to hold the annual meeting no
later than February 28, 2013. Consistent with the concerns Voce has
recently expressed about the destruction of value at Obagi, it states
that "waiting until June to hold the annual meeting will likely result
in the further deterioration of Obagi's franchise value. The Company
simply cannot afford another six months of reckless leadership and
wasteful spending on the Board and CEO's internet dream." The letter
concludes "that most of the shareholders remain fully informed on the
Company's myriad issues. Quite simply, there is no need to wait until
next June to resolve these long-simmering disagreements."
Voce's Mr. Plants added the following comment upon the sending of
today's letter: "The credibility and experience of our nominees dwarfs
that of the current Directors. For the benefit of all involved, we hope
that our fellow shareholders will join our call for an early meeting and
communicate their sentiments directly to the Obagi Board."
About Voce Capital Management
Voce Capital Management LLC is an employee-owned investment manager and
the adviser to Voce Catalyst Partners LP, a private investment
VOCE CATALYST PARTNERS LP, VOCE CAPITAL PARTNERS LP, VOCE CAPITAL
MANAGEMENT LLC AND J. DANIEL PLANTS (COLLECTIVELY, "VOCE") INTEND TO
FILE WITH THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC (News - Alert)") A
DEFINITIVE PROXY STATEMENT AND ACCOMPANYING PROXY CARD TO BE USED TO
SOLICIT WRITTEN PROXIES FROM THE STOCKHOLDERS OF OBAGI MEDICAL PRODUCTS,
INC. (THE "COMPANY") IN CONNECTION WITH THE COMPANY'S 2013 ANNUAL
MEETING OF STOCKHOLDERS. ALL STOCKHOLDERS OF THE COMPANY ARE ADVISED TO
READ THE DEFINITIVE PROXY STATEMENT AND OTHER DOCUMENTS RELATED TO THE
SOLICITATION OF PROXIES BY VOCE, JAMES B. HICKEY, JR., GEORGE M.
LASEZKAY, JOSEPH V. LASH, KRISTIN MCDONNELL AND JOSEPH E. WITTERS
(COLLECTIVELY, THE "PARTICIPANTS") FROM THE STOCKHOLDERS OF THE COMPANY,
WHEN THEY BECOME AVAILABLE, BECAUSE THEY WILL CONTAIN IMPORTANT
INFORMATION, INCLUDING ADDITIONAL INFORMATION RELATED TO THE
PARTICIPANTS. WHEN COMPLETED, THE DEFINITIVE PROXY STATEMENT AND FORM OF
PROXY WILL BE FURNISHED TO SOME OR ALL OF THE STOCKHOLDERS OF THE
COMPANY AND WILL, ALONG WITH OTHER RELEVANT DOCUMENTS, BE AVAILABLE AT
NO CHARGE ON (News - Alert) THE SEC'S WEB SITE AT HTTP://WWW.SEC.GOV.
IN ADDITION, VOCE WILL PROVIDE COPIES OF THE DEFINITIVE PROXY STATEMENT
AND ACCOMPANYING PROXY CARD (WHEN AVAILABLE) WITHOUT CHARGE UPON REQUEST.
The full text of Voce's letter follows.
December 3, 2012
Members of the Board of Directors
Obagi Medical Products, Inc.
Kilroy Airport Way, Suite 500
Long Beach, CA 90806
Attention: Corporate Secretary
Gentlemen and Lady:
Voce Capital Management LLC ("VCM") is the investment advisor to Voce
Catalyst Partners LP ("VCP" and, together with VCM, "Voce"). VCP has
been a shareholder of Obagi Medical Products, Inc. ("Obagi" or the
"Company") continuously since June 2, 2011.
On February 10, 2012 we wrote you a detailed letter expressing our
concerns about Obagi's corporate governance; the Board's unwillingness
to evaluate, and hostility toward, inbound acquisition interest; and the
Company's leadership and strategy. We then actively opposed the poison
pill you had recently enacted, leading the successful campaign to defeat
its ratification. The rebuke that you received at the shareholders
meeting - the poison pill garnered the support of less than one-third of
the shares outstanding - was a clear message from the Company's
shareholders. After the meeting, we stated that "the vote on the poison
pill was nothing short of a referendum on the Board's stand-alone
strategy and its persistent disrespect for shareholders." We went on to
reiterate our calls for Board reform and a credible review of Obagi's
strategy and alternatives.
In the ensuing months you have not only failed to address these issues
but in many respects they have grown far worse. The Company's corporate
governance continues to reek of entrenchment; the poorly-conceived
internet plan, on which you have bet the Company's future, is in
tatters; a significant amount of shareholder capital has been
squandered; and the Company continues to shun credible overtures from
parties interested in acquiring Obagi, while industry consolidation
swirls around you at an ever-quickening pace.
Accordingly, we are writing to advise you that we intend to replace a
majority of the Obagi Board at the 2013 annual meeting of shareholders.
Our six nominees bring credibility and experience that dwarfs that of
the current Board. Unlike the current Stonington claque, our nominees
have no business ties to one another or (with the exception of Voce's
sole representative on the slate) to Voce and will represent the
interests of all Obagi shareholders.
Finally, there is simply no reason to defer resolution of these matters
until next June. The issues to be decided are well known to all, and we
therefore call upon you to accelerate the annual meeting by holding it
no later than February 28, 2013.
* * *
One would have hoped that the results of the vote on the poison pill in
June, and the criticism of the Board's actions leading up to it, might
have ushered in urgently needed reform at Obagi. So how have you
responded to these events
Corporate governance. Your first reaction to the poison
pill's defeat was to vote yourselves a substantial raise, increasing the
Board's cash compensation, annual stock grant and per meeting fees. The
average Director's annual compensation was increased by more than
two-thirds. In addition to his increased annual retainer, Mr.
Fitzgibbons will now receive $30,000 for his service as Chairman of the
Board. None of your compensation contains a performance component nor is
it linked to any shareholder value measure. In keeping with your prior
disclosure habits, this information was buried within your 10-Q rather
than disclosed in an 8-K.
Then in August you appointed a new member, Kristina Leslie, to the
Board. We welcome fresh perspective in this Board room, but the mere
addition of one Director hardly constitutes "reform" of the Board in any
meaningful sense. None of the existing Directors have stepped down,
including and especially the two Stonington Partners Directors whose
removal we have repeatedly demanded. The entirety of the Company's
corporate governance has been corrupted by the dominance of Stonington
Partners. Messrs. Fitzgibbons and Bartholdson cling to their Board seats
despite the fact that their defunct leveraged buyout fund long ago sold
its ownership in Obagi back to the Company. The remaining
"independent" Directors have all previously been appointed by Stonington
Partners to sit together on other Stonington portfolio company boards.1
The independent Directors continue to own well less than 1% of the
Company's shares. Despite authorizing a significant repurchase of
Obagi's shares following the annual meeting, once again not a single
Director thought the Company was an interesting enough investment
opportunity to actually purchase shares with his or her own capital. We
still cannot find a single instance when any current Director has ever
purchased a share of Obagi stock in the open market. And in fact some of
the Company's managers actually sold shares during this period.2
You have continued to make payments of almost $1 million per year to
affiliates of Cobrek Pharmaceuticals ("Cobrek"), a private company where
Mr. Hummel is also CEO and in which he holds a significant equity stake.
These include compensation to members of Cobrek's Board of Directors and
one of its outside consultants. Cobrek is located in Chicago, some 2000
miles from Obagi's headquarters. Are we to believe that there are no
similar services available in Southern California, where Obagi is based
Could it be true that the most qualified individuals to perform these
duties happen to work for a small private company headed and owned by
Mr. Hummel We are at a loss as to how any Director faithfully
discharging his fiduciary responsibilities could condone these ongoing
Strategic alternatives. Beginning with our February 2012
letter, we have repeatedly insisted that the Obagi Board stop squelching
inbound acquisition interest in the Company. This interest has been
substantial and ongoing for many years. Obagi received several written
proposals to acquire the Company in 2011. The Board responded by telling
potential acquirers that it would not consider acquisition proposals. In
response to these offers it also enacted the aforementioned poison pill.
Even after we sent our February letter - and even after the
shareholder vote in June - Obagi has continued to turn away parties
interested in acquiring the Company. Direct and specific proposals have
been made by the CEOs of interested parties and by the investment
bankers specifically retained to assist them with an Obagi acquisition.
Yet Obagi has never properly explored or attempted to qualify or
negotiate these offers nor sought to solicit superior ones. The message
from the Obagi Board and CEO has been the same each and every time: "Just.
And this is not purely a recent phenomenon. Obagi's previous CEO - who
even by Chairman Fitzgibbons' account led "its successful initial public
offering, developed and introduced several new products and saw its
annual sales revenues grow from $56 million to $104 million"3
- was ultimately sacked by this same Board in 2010 because he wanted to
sell the Company. Industry leaders have told us similar stories of
failed attempts stretching back almost a decade. Time and again,
Stonington Partners has refused to engage in meaningful dialog about a
potential sale of Obagi. The conclusion we draw is that there is not,
has not been and under this Board never will be a good-faith willingness
to consider selling Obagi.
This is not only a shame but a huge missed opportunity, because the
aesthetics and dermatology sectors have been marked by strong and
consistent strategic consolidation. Last month, Allergan announced the
acquisition of Obagi's arch-rival, privately held SkinMedica, for more
than $350 million. SkinMedica makes similar, and competitive, topical
facial aesthetic products and sells them through the same dermatology
channels. In September, Valeant announced the acquisition of Medicis,
another player in aesthetic dermatology, for $2.6 billion. Obagi has
been and continues to be attractive to an array of potential acquirers
from several industry sectors and geographies, and the synergy potential
for many of them is significant. It is incomprehensible that the Obagi
Board will not even consider whether the strategic premium available to
shareholders in such a transaction might be superior to the status quo.
* * *
The Obagi Board remains as entrenched as ever. Now, you and Mr. Hummel -
a Board member himself at the time you chose him to be CEO - are asking
shareholders to wait another two years to let an unproven and
controversial e-commerce project take wing. We see no evidence to
believe that it will ever succeed and, even worse, it could destroy the
Company in the process.
Obagi is unique for many reasons, but top among them is that the
products require a prescription and the vast majority of sales are
conducted through the physician's practice. To support this business
model Obagi has built a specialized physician salesforce that carries
only Obagi products, and it has achieved remarkably strong penetration
of high value dermatology and plastic surgery practices. These elements
combined are integral to Obagi's brand, patient efficacy and high
profitability for company and customer alike. Other dermatology players
have tried and failed to build direct sales teams, and even more covet
such distribution for their own products. The decision to launch a
direct-to-consumer marketing and fulfillment business is thus an
extremely risky strategic shift for Obagi, posing the potential for real
or perceived channel conflict which could endanger Obagi's core
As recently as March of 2012 Mr. Hummel stated that "I am enthusiastic
in my belief that we can deliver a compounded annual growth rate in the
next five years of approximately 15-20%."4 On the earnings
call that day, he reiterated that goal but shortened the window to 2016,
i.e., four years. In August, he stated that "[o]ur goal is to clearly
double the size of the business."5 So where was this growth
going to come from
From the beginning of his tenure Mr. Hummel alluded many times to
significant international opportunities and identified this as a major
component of his growth strategy. In early 2011, he announced that the
Company was spending $2 million just "to analyze certain international
regions." In his two years of leading Obagi, international revenues have
grown by about $4 million. While the Company likes to speak of the
growth of this area in percentage terms, the truth is that even
if international grows substantially it is not going to make a material
difference any time soon given its relatively small contribution in dollar
terms to overall revenues of approximately $120 million. Mr. Hummel also
boasted that "I have a lot of background in terms of product development"6
and trumpeted Obagi's R&D pipeline as another growth pillar. He promised
"two to three additions to the product line in 2012"7 and
recently predicted "three additional products between now and the first
half of ."8 Those products that have made it to market
so far haven't even been doubles or singles, but more like bunts. Mr.
Hummel also spoke of leveraging the distribution with in-licensing of
other products, a sensible idea, but none of it has materialized.9
Mr. Hummel thus appears to have concocted the internet scheme due to his
inability to deliver upon his many different promises to grow organic
revenues. Despite his track record of over-promising and
under-delivering, we are now asked to believe that Mr. Hummel can create
and run a consumer-facing, vertically-integrated ecommerce business. We
are told it will be supported by cutting edge social media and
marketing; operate in a multi-state regulatory environment; and deliver
world-class logistics and fulfillment. With the Board's approval, Mr.
Hummel rushed ahead with a plan to spend $11 million in just the first
year on it, and he's well on his way (it's unfortunately one of the few
commitments he has kept as CEO). Even before finalizing the business
plan, meeting with customers or obtaining a single state pharmacy
license, the Company began construction of a 32,000 square foot
distribution center. Today it sits empty. Surely there were more capital
efficient means of launching such a test through partnerships or
Moreover, the plan's execution to date has been shockingly inept. In
November of 2011, Mr. Hummel committed that the internet business was
going "to be active by the middle of 2012."10 The meter began
running but the timing slipped, and in May of 2012 he promised Obagi was
then "on track to launch our eCommerce platform later this year."11
By August of 2012 he acknowledged that the physical facility itself
wouldn't even be completed until October, implying further delays.12
Finally, on the most recent earnings call Mr. Hummel was forced to admit
just how astray his plan had gone:
[O]ur timelines have shifted and initial physician launch will now
occur in Q2 2013 as opposed to Q4  timeframe we have
previously discussed with you. However, we felt it critical that all
elements necessary to ensure success are in place prior to launch,
namely a fully developed platform that would preserve the physician
patient relationship, be legally compliant and have the best
opportunity for a high adoption rate by our existing base business.13
With a "beta" launch in 2Q13 there are unlikely to be any material
revenues from this plan until sometime in 2014 at the earliest, a point
which Mr. Hummel conceded in response to an analyst's question later
during the call. The second part of his statement is in some ways even
more troubling, because it demonstrates that the Company had no clue
what it was getting itself into when it began this experiment last year.
"In September, [we] went to a large physician group of some of our top
providers and talked to them, and they want to put tweaks in. . . . Interestingly
enough, they have a slightly different perspective on our e-commerce
platform than other people would have."14 Yes, that is
interesting. Wouldn't it have been good to find that out by speaking to
customers before spending several million dollars and misdirecting more
than a year of the Company's strategic focus
The elliptical references to "physician patient relationship" and
"legally compliant" in Mr. Hummel's script are shorthand for the
regulatory complexities involved in securing 50 state pharmacy licenses
and the significant unresolved business model questions that remain. In
many states, for example, there are criminal statutes that
prohibit physicians from receiving compensation from third parties for
writing prescriptions.15 Apparently unaware of this until
recently, Mr. Hummel initially explained that the products "will be sent
by Obagi directly to the end-user" and then "the physician will be
compensated and it will be tied into the purchase from the end-user."16
Now that he has figured out that this is illegal, he has changed course
and floated the idea that Obagi will ship the box to the doctor, who
will then unpack and re-box the product, affix a new label and then
re-ship it to the patient in order to try to circumvent these laws. We
are waiting to hear how excited physicians will be about moonlighting as
There are plenty of other examples but the conclusion is inescapable.
The Company has poured an enormous amount of time and money into a
high-risk strategy that it hasn't validated and that it doesn't
understand. No one in this Company has the competence to build an
internet-based consumer business. Certainly not Mr. Hummel, who earned
his stripes as the CFO of Watson Pharmaceuticals and at Merrill Lynch in
the 1970s - hardly the qualifications needed for such an undertaking.
The Company appears to have simply made it up as it went along.
Where does this leave Obagi and its shareholders The Company has burned
through almost $7 million of shareholder capital in less than nine
months, and there is no end in sight. Other than an empty warehouse in
Utah, it has nothing to show for it. It has unsettled its core physician
customers, who question whether the plan will reduce the profitability
of Obagi to them and curtail the office visits that drive cross-selling
of other high margin products and services. The changing justifications
and explanations have damaged the Company's brand and image. The
operational missteps and sliding timetable have also decimated what had
remained of Mr. Hummel's credibility. Recall again his confidence at the
beginning of 2012 that he could grow revenues 15-20% over the next four
years (i.e., 2012-2016). Based on the Company's most recent guidance,
2012 revenues will grow approximately 5%; analysts currently forecast
revenue growth of 6.5% in 2013 (and even that assumes some one-time
benefit from the reintroduction of product in Texas). The residual
growth required to deliver upon Mr. Hummel's lofty goals seems wishful
This anemic growth is particularly inexcusable given the impressive
results of many other aesthetics players. It's worth revisiting
SkinMedica, Allergan's recent acquisition. SkinMedica has compounded its
skin care revenues in excess of 25% per year over the last ten years.
SkinMedica's revenues are currently running at about a $90 million
annual rate and are expected to reach $120 million in 2013. To put that
in perspective, when Mr. Hummel took over as Obagi CEO in 2010
SkinMedica was approximately 1/3 of Obagi's size (at about $42 million)
and by the end of 2013 it is forecast to draw dead even with Obagi. How
is it possible that SkinMedica will have nearly tripled its sales in the
three years since Mr. Hummel assumed the reins, while during the same
period Obagi will have grown its revenues by less than 5% per year Mr.
Hummel has not only allowed what was a small private company to steal a
march on Obagi, but he has stood idly by while the largest and most
successful player in aesthetics, Allergan, has now placed Obagi squarely
in its competitive sights. His blithe comments at an investor conference
last week about this latter development strike us as dangerously naïve.
The internet plan has been the linchpin of the Company's strategy, the
justification for the Board's and CEO's continued employment and
presumably the basis on which they have convinced themselves that they
do not need to entertain the offers they have received to buy the
Company. Incredibly, after all of these blunders the Company now asks
shareholders to give it another two years to see whether this inchoate
concept will finally bear fruit. We refuse to do so. The risks are too
high and the probability of success too low to indulge this any further.
From inception it has been marked by delays, extravagant spending and ad
hoc decision making. There is no reason to believe this will change and
every reason to believe that it will continue to disappoint. We return
to the Board's role in this: How in good conscience could you have
gambled on this unproven lark - going all in financially before even
attaining proof of concept - while running the risk of irreparably
damaging the Company
* * *
Your failings as a Board are many and varied. But they all stem from a
common flaw: Your incentives are misaligned with, and in many ways
adverse to, those of shareholders. You have but a de minimis economic
stake in Obagi's success and it appears to us that your paramount
objective is perpetuating your control over the Company at all costs. As
a result of Stonington Partners engulfing influence, none of the normal
checks and balances exist to hold you accountable or to keep you honest.
Accordingly, we have concluded that the only way to fix Obagi - indeed,
to save it - is with the replacement of the Board with new,
We therefore intend to nominate the following six independent Director
candidates at the 2013 annual meeting:
James B. Hickey, Jr., 59, is currently President and Chief
Executive Officer of Phraxis, a privately held medical device company.
Mr. Hickey was the Chairman of the Board of Directors of Vital Images,
which was acquired by Toshiba Medical Systems in June 2011. From
December 2005 to November 2008, Mr. Hickey was CEO and a Director of
Myocor, a privately held medical device company. He was previously CEO
and a Director of Pulmonetic Systems, a privately held manufacturer of
medical devices; CEO and a Director of Angeion, a publicly traded
medical device company; and CEO of Aequitron Medical, a publicly traded
manufacturer of medical devices. Prior to that, Mr. Hickey spent 15
years with American Hospital Supply Corporation/Baxter Healthcare,
including serving as President of their Hospitex and
Respiratory/Anesthesia Divisions. Mr. Hickey also previously served as a
Director of Allied Healthcare Products.
Dr. George M. Lasezkay, Pharm.D, J.D., 61, is the President of
Horizon Pharma Group, a consultancy to life science companies on
strategy and business development. He is the former Vice President for
Corporate Development of Allergan, where he was a member of Allergan's
Executive Committee and had global responsibility for corporate
strategic planning and business development including product licensing,
major marketing collaborations, mergers and acquisitions and strategic
alliances; prior to this position, he served as Assistant General
Counsel for Allergan. Dr. Lasezkay previously was an assistant professor
of pharmacy at the State University of New York at Buffalo School of
Pharmacy and has over ten years' experience in clinical pharmacy
practice and research. Dr. Lasezkay currently serves on the Board of
Directors of Amakem Therapeutics, a privately held Belgian ophthalmology
company. He has previously served as a Director of various public and
private companies including Novagali Pharma, a publicly traded French
biopharmaceutical company, where he served as Vice Chairman of the
Supervisory Board until its acquisition by Santen Pharmaceutical Co.
Ltd. in 2012 for $139 million; CollaGenex Pharmaceuticals, which was
acquired by Galderma Laboratories in 2008 for $420 million; Urigen
Pharmaceuticals; Sucampo Pharmaceuticals; Acuity Pharmaceuticals; and
ISTA Pharmaceuticals. Dr. Lasezkay is an active member of the State Bar
of California and the District of Columbia and holds non-active pharmacy
licenses in the states of California and New York.
Joseph V. Lash, 50, has been the Managing Member of VT Capital, a
private equity investment firm, since November 2010. Prior to that, he
was a senior executive with Tontine Associates, a private investment
partnership, beginning in July 2005. Prior to Tontine, Mr. Lash held a
number of senior positions in the mergers and acquisitions departments
of leading Wall Street firms, including JPMorgan Chase and Kidder
Peabody. Mr. Lash has previously served as a Director of Exide
Technologies; Integrated Electrical Services; Neenah Enterprises, where
he served as Chairman of the Board of Directors; and Grand Union. Mr.
Lash previously served as a member of the Board of Trustees of Ohio
Kristin McDonnell, 49, has been the Managing Director of M33
Partners, a digital media strategy consultancy, since she founded the
firm in 2010. From 2004 to 2010, Ms. McDonnell was the CEO, Chairman of
the Board and Co-Founder of LimeLife, a mobile software and digital
media company, which served the largest audience of mobile U.S. female
consumers at the time it was acquired by Total Beauty Media in 2010. Ms.
McDonnell has previously held senior marketing positions in a variety of
digital media and consumer-oriented companies, including Xfire, a social
networking service; There.com, a 3D virtual world; HearMe/Mpath, an
early online community; and AT&T's (News - Alert) The Imagination Network. Ms.
McDonnell has also held positions at Electronic Arts, Lante Corporation,
McKinsey & Company and IBM. Ms. McDonnell sits on the Advisory Boards of
Northwestern University's Center for Entrepreneurship and Innovation and
aisle411, a mobile commerce company.
J. Daniel Plants, 45, has been the Managing Partner of Voce
Capital Management since founding the firm in 2010. Prior to Voce, he
served as a Managing Director and Head of Communications Technology and
Media for Needham & Company LLC from July 2007 through May 2009. Prior
to that, Mr. Plants held a number of positions in leading Wall Street
firms, including executive positions in investment banking at Goldman
Sachs and JPMorgan Chase and as a corporate attorney with Sullivan &
Cromwell. He has previously served as a Director of Volunteers of
America - Greater New York and the Bay Area Urban Debate League, which
he co-founded and where he served as Vice Chairman.
Joseph E. Whitters, 54, has been an advisor to Frazier Health
Care, a venture capital and private equity firm, since 2005. From 1986
to January 2005, Mr. Whitters was employed in various capacities with
First Health Group, a nearly $2 billion market capitalization managed
healthcare company, including as Chief Financial Officer and Executive
Vice President. He currently serves as a Director of Omnicell (News - Alert), a
medication automation and analytics company, and of InfuSystem Holdings,
an oncology-focused medical device company. Previously, he served on the
Boards of Directors and the Audit Committees of various public companies
including Mentor Corporation; Solexa; and Luminent Mortgage.
This slate of nominees is everything that the current Board is not.
First and foremost, they are independent in the fullest sense of
the word. Unlike the current Board, our nominees have no business ties
to one another or (with the exception of Voce's sole representative, Mr.
Plants) to Voce.17 They will represent the interests of all
Obagi shareholders. None of them will ascend to the Board with any
commitment to anyone, tacit or otherwise, to make any decisions or take
any actions once elected. We would also emphasize that the contents of
this letter represent the views of the undersigned only and do not
necessarily reflect the opinions or intentions of any Director nominees,
who played no part in its drafting.
Second, they bring highly relevant industry expertise: Three of them
have extensive operating experience in life sciences and two of those
three have specific experience in the aesthetics industry. Dr. Lasezkay
previously oversaw all corporate strategy and business development
activities at Allergan, and he is a licensed clinical pharmacist; Mr.
Whitters served as Chairman of the Board of Mentor, which was acquired
by Johnson & Johnson for $1.0 billion in 2009. Mr. Hickey has led no
fewer than six medical device companies and recently served as Chairman
of the Board of another. And Ms. McDonnell brings extensive experience
in the internet, social media and ecommerce spaces, having recently been
CEO of a company centered on exactly that with a specific demographic
focus on females, Obagi's primary user base.
Third, our nominees offer significant credibility on issues of corporate
governance, public company reporting and compliance. As a group they
have wide and deep service on a number of public and private company
Boards, including leadership of audit, compensation and other key
committees; two of them are also former corporate attorneys. Finally,
they bring unsurpassed experience evaluating corporate strategy and
executing transactions to enhance shareholder value.
* * *
We recognize it is somewhat odd to be discussing the June 2013 annual
meeting in December of 2012. However, this is a result of the advance
notice provision contained in Obagi's by-laws, which requires
shareholders wishing to nominate directors to give the Company notice
90-120 days from the anniversary of the mailing of last year's proxy
materials. Since proxy materials are typically mailed one or two
months prior to the meeting, the practical result of this requirement is
that shareholders must notify the Company some five or six months in
advance of the annual meeting at which they intend to nominate directors.18
If necessary we will comply with this unreasonable, extended advance
notice requirement. However, there is no practical reason to delay the
resolution of these issues. The six members of the Board we seek to
replace have an average tenure of seven years on the Board, the newest
one having been first elected in 2007. These Directors are famously
known to shareholders - some might say infamously - and they hardly need
more time to make the case for their continued service. The vote on the
poison pill was, as we stated at the time, a referendum on the Company's
leadership and strategy and we believe that most of the shareholders
remain fully informed on the Company's myriad issues. Quite simply,
there is no need to wait until next June to resolve these long-simmering
At the same time, waiting until June to hold the annual meeting will
likely result in the further deterioration of Obagi's franchise value.
The Company simply cannot afford another six months of reckless
leadership and wasteful spending on the Board and CEO's internet dream.
And while we don't believe a protracted, months-long proxy contest will
alter the outcome of the vote, what it will do is compound the expense
and distraction to the Company at the expense of shareholders. The only
people that stand to benefit from dragging this on through next June are
you, the incumbent Directors, who would of course continue to warm your
Board seats and collect your stipends in the interim.
We have retained a full team of advisors to represent us in this
process, and we gather that you have already done so as well. As we both
appear to be prepared to commence this process immediately, let's get on
with it. Accordingly, we call upon the Obagi Board to hold the 2013
annual meeting no later than February 28, 2013.
* * *
VOCE CAPITAL MANAGEMENT LLC
/s/ J. Daniel Plants
J. Daniel Plants
1 While the Company has not granted our request to meet Ms.
Leslie, her professional accomplishments are much more impressive than
was implied by Mr. Hummel's patronizing description of her as a "capable
young lady" upon her appointment to the Board (earnings call August 2,
2012). She appears to stand alone as the only Obagi Director not linked
in some way to Stonington Partners. Accordingly, we are inclined to give
Ms. Leslie the benefit of the doubt and do not currently intend to
challenge her reelection.
2 It is striking that the Board decided to go all-in on share
repurchases at this time, passing up several opportunities in the past
two years alone when there was ample cash available and when the stock
traded at much lower prices.
3 Obagi press release dated October 11, 2010.
4 Obagi Press Release March 8, 2012.
5 Earnings call August 2, 2012.
6 Earnings call November 4, 2010.
7 Earnings call August 4, 2011.
8 Earnings call November 1, 2012.
9 Earnings call March 10, 2011.
10 Earnings call November 9, 2011.
11 Earnings call May 3, 2012.
12 Earnings call August 2, 2012.
13 Earnings call November 1, 2012.
14 Earnings call November 1, 2012 (emphasis added).
15 California, Florida and Texas, which represent almost 50%
of Obagi's revenues, prohibit such practices, and we believe other
states do as well. Such arrangements also run afoul of physicians'
ethical and professional obligations, such as those set forth by the
American Medical Association.
16 Earnings call November 9, 2011.
17 Messrs. Lash and Plants overlapped in the mergers and
acquisitions department of JPMorgan Chase for approximately 18 months
more than a decade ago. They have had no subsequent business
18 The perversity of this provision was illustrated at the
2012 meeting, when the quiet enactment of the poison pill in late
December 2011 left concerned shareholders with little time to organize a
slate of nominees, allowing the incumbent Board to coast to its sixth
straight uncontested election.
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