Tabula Rasa stock fell and shareholders pushed back as CEO couple builds South Jersey mansion

Medical entrepreneurs Calvin and Orsula Knowlton founded Tabula Rasa HealthCare 12 years ago and built it into a national success story, with 1,600 employees and a growing business recommending drug combinations to health professionals whose patients take many medicines.

But six years after the Moorestown-based company went public on the stock market, it’s not yet profitable. Share values have fallen to less than one-tenth their peak — and Tabula Rasa’s largest investor, California-based Indaba Capital Management LP, says it’s time for the couple to go.

In a letter to directors last week, Indaba partners Derek Schrier and Alex Lerner said the founders were now “an ineffective husband-and-wife management team” not suited to running a growing, for-profit company that has shown “abysmal corporate governance” and “sustained underperformance.”

The couple has deep ties to the Philadelphia pharmacy community. Calvin Knowlton headed a department at the city’s historic pharmacy school, the University of the Sciences (now part of St. Joseph’s University), in the early 1990s, when Orsula Voltis Thomas was earning her doctorate. She went to work for his previous, Philadelphia-based medication management company, ExcelleRx, in 1996. They later married.

Knowlton sold ExcelleRx in 2005 to Omnicare Inc. for $270 million, and the couple started what is now Tabula Rasa, Latin for “blank slate,” the next year. Backed by venture capitalists including Philadelphia-based Rittenhouse Ventures, they took the company public in a $52 million initial public stock offering in 2016. Over the next two years, the stock rose, peaking above $80, giving the company a value of more than $1.5 billion. They bought a string of smaller firms. Sales topped $300 million last year.

As if to memorialize their success in a grand old Philadelphia tradition, the couple is finishing a 44,000-square-foot mansion on nine acres on the edge of Moorestown — almost as big as banker Vernon Hill’s sprawling Villa Collina on the other side of the wealthy South Jersey town.

But going public has brought Tabula Rasa scrutiny from outside investors. The share price, which peaked at more than $80 in 2015, fell below $3 in the stock market rout last spring. Shares have lately traded around $5.

In a June board election, only a minority of shareholders voted for Calvin Knowlton, 72, Orsula Knowlton, 54, or lead director A. Gordon Tunstall, a financing consultant, who had all run unopposed. The rest of the shareholders withheld votes or did not vote, a rare repudiation of veteran executives.

By a 3-1 ratio, shareholders in June also voted against the Knowltons’ pay package — he collected $6 million in cash and stock last year; she received $3.8 million.

Despite that lack of confidence from shareholders, the Knowltons are staying put, with a plan to restore the company’s battered image with investors.

They have announced they will sell smaller companies that Tabula Rasa picked up since it went public. The company is now focusing on “core businesses,” including its updated and expanded drug combination systems, along with added Medicare, plan management, and record services, Orsula Knowlton told investors in a conference call Aug. 5.

Revenues rose in the second quarter, as the company signed up more in-home care programs, though gross profit margins dropped compared with last year, even as the company cut costs.

The company “burned about $25 million” in cash during the spring quarter, Stifel Financial Corp. analyst David Grossman noted during the call. Chief financial officer Tom Cancro said Tabula Rasa had paid off its short-term debt, reducing financing costs. He said employment would drop by 600, to around 1,000, when it’s finished selling off the business units it bought in recent years.

Despite shareholders’ thumbs down on the executive pay package, the board has since approved new executive share grants. Even after these grants are exercised in future years, the Knowltons would own less than 3% of the company. In April 2021, they owned more than 7% but have since sold shares to pay loans they took out using their stock as collateral.

Tabula Rasa president Brian Adams defended these “long-term incentive grants” to investors during the conference call, saying they had been delayed from earlier in the year but were “typical” for Tabula Rasa.

Indaba has tried to step up the pressure. In a July 20 letter to Tabula Rasa’s independent board members (those who don’t work directly for the company), Schrier and Lerner blamed the Knowltons for buying businesses that failed to boost profits while its best-known products suffered from “lack of focus.”

Noting that the board had not acted to shake up management even after shareholders made their concern clear in the annual votes, the Indaba partners said they were concerned that “the board is far more focused on protecting the Knowltons and Mr. Tunstall than facilitating long-overdue governance improvements sought by shareholders.”

Schrier added that Tunstall, who is supposed to represent shareholders as lead independent director, actually has “lengthy ties to the Knowltons,” having served as a director of their previous company, ExcelleRx, and as a paid consultant to Tabula Rasa.

And he urged the board to be vigilant to prevent the Knowltons from “quietly” arranging to sell the company, not for the best possible price as corporate law in most states requires, but under some arrangement “that disproportionally benefits them.”

Asked about Indaba’s complaints, company spokesman Anthony Mirenda said management “remains committed to acting in the best interest of our stockholders, clients, partners, and employees.”

Indaba has called the Knowltons unresponsive. But Mirenda said management expects to continue talking to what is, by far, the company’s largest shareholder, “as we would with any other stockholder.”

But Indaba’s recent public statements suggest things haven’t improved. In an Aug. 9 letter to the board, the partners complained about the founders’ “forced” sale of shares to satisfy loans in which they used their company stock as collateral.

“We suspect this selling may have been undertaken to finance the development” of the South Jersey home, the Indaba partners wrote. They noted the mansion has “six bedrooms, 12 bathrooms,” an elevator, golf simulator, indoor pool, and more.

Calvin Knowlton told an industry publication the couple planned the house for their “blended family” of eight children.

Indaba has also complained that the board, instead of forcing changes, has lately approved a shareholder rights plan that would effectively reduce Indaba’s vote in future power struggles. Tunstall issued a statement defending what Wall Street calls its “poison pill” defense, calling it a way to protect the “long-term value” of Tabula Rasa by blocking “actions of third parties that the board determines are not in the best interest of the company and its stockholders.”

The vote against the management pay plan “is a warning sign,” said Charles Elson, the former head of the University of Delaware’s corporate governance center. “You want your comp plan approved with 90% and up. If you get way below that, you have a potential rebellion on your hands next year.“

For all its criticism, Indaba has yet to publicize a detailed plan of how Tabula Rasa should change its operations.

Meanwhile, the Knowltons need to boost the share price and satisfy investors if they hope to avoid a bigger battle at next year’s annual meeting, Elson said. “They got a lot of work to do.”