Boston Hedge Fund Lashes Northstar Neuroscience, Urges Liquidation

12/15/08Follow @xconomy

Pressure is mounting once again on Northstar Neuroscience to fold up its tent and go home. The Seattle-based medical device company got hit today with an angry letter from one of its largest shareholders, Boston-based RA Capital, which urges the board to shut down the company and distribute all of its remaining cash and assets among the shareholders.

“Although you have refused to return capital to shareholders, you have put forth no viable business plan for the company. It would seem that some of you remain content to pay yourselves salaries from cash that belongs to stockholders while contributing nothing of any positive value in return,” said Peter Kolchinsky, managing member of RA Capital, in a letter to the company’s board disclosed today with the Securities and Exchange Commission.

The lack of faith Wall Street has in this company would be hard to overstate. Northstar was developing an electrical stimulation device to help stroke survivors to recover some degree of arm movement, until the device failed in a pivotal clinical trial in January. The stock crashed more than 80 percent that day.

Since then, things have gotten worse. Northstar chose to soldier on, by cutting costs, and trying to develop its device for a different use, among patients with severe depression.

RA Capital, which owns 2.5 million shares, or about 9.7 percent of Northstar, was one of the shareholders that squawked in disapproval, saying the company would be better off liquidating and giving shareholders the cash. But Northstar resisted. It still had $70.2 million in cash and investments at the end of September, and said its cost savings plan should enable the company to still have $53 million left at the end of 2009. Wall Street essentially gives this strategy less than a zero chance of success. It gives the company a market value of just a shade under $27 million-a breathtaking 60 percent less than the cash it has in the bank.

In his letter, RA’s Kolchinsky urges the company to call a special meeting of the board to ask shareholders what to do. If he doesn’t hear a response from the board by Dec. 19 about its plans for a special shareholder meeting, then RA says it will submit proposals for the next annual meeting about whether to distribute the company’s cash to shareholders, or do a share buyback.

Since July, RA Capital says it has gotten “a complete lack of response” from Northstar for its ideas. But judging from the tone of the letter, it doesn’t sound like RA is going to just sell its shares at a loss in frustration and move on.

“The only asset of value that the Company possesses is its cash; this asset should not be wasted and ought to be returned to shareholders as soon as possible that they might invest it more profitably,” Kolchinsky wrote.

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