Friday, January 7, 2022

Odonate Therapeutics: Cash Shell, Delisting, Forced Selling, Possible Liquidation

Quick one today, this idea has been mentioned sporadically in my comment sections.  Odonate Therapeutics (ODT) is a failed biotech, it was a one shot on goal lottery ticket, their only asset was texetaxel, a oral/pill form of chemotherapy.  Last March, the company announced they were discontinuing development and would "wind down the operations of the company".  Since then they've eliminated most of their staff, settled a shareholder lawsuit and brought their cash burn rate down to a minimal amount.  

As of 9/30/21, the company had cash of $95MM and a book value of $71MM, ~$1.85/share.  This is where the story gets a bit weird, the CEO of ODT is our old friend Kevin Tang (he is the one that offered $50/share for APVO, which now trades for $7.45), on November 17th the company announced a share buyback of 20 million shares, oddly the buyback plan specified a share amount and not a dollar amount.  Prior to the buyback announcement, the shares were trading at ~$3.20/share, maybe the market was assigning some value to the company's $290MM in NOLs and possibility of a reverse merger (there was meme/speculative fever around these last year, CATB was an example), after the buyback news it dropped below $2.00/share.  Suspiciously, Tang Capital Management sold about 2.7 million shares into the buyback news at prices above the book value.

Then today, the company announced that NASDAQ would be delisting them due to their cash shell status and ODT will suspend their reporting obligations (meaning they'll likely end up in that dark/expert market status making it uninvestable for many), the stock dropped 30% at the open to ~$0.90/share, again against a book value of ~$1.85 as of last reporting.  Cash burn should be minimal, and if the company didn't run through their buyback in the first few days after their announcement, then the buybacks should be accretive to book value, potentially offsetting any additional cash burn.

From here, the company either straight liquidates and returns the cash to shareholders as the initial "wind down operations" suggests, or it does a reverse merger to try to monetize the NOLs.  I'd be fine with either, most of the time a biotech has an initial pop on a reverse merger, Tang still owns a third of the company and may want to reverse merger another investment into the ODT shell.  There's some ugliness here and questionable governance (nothing new for this blog!), at half of book value which is primarily all cash, I couldn't help but add small position on today's forced selling.  But please do your own research, and make sure you're comfortable owning stock in a non-reporting company.

Disclosure: I own shares of ODT

33 comments:

  1. Thanks for the post. Special situations in biotechs are one of my favorite areas to invest in.

    Some interesting ideas:
    CBL (post reorg),
    SEAC (cash/notes merger at $2.04 (at par value of note)),
    GTBAF (CVR merger),
    HSBI (merger with upward adjustment as time goes by),
    THS (activist involved/ strategic alternatives announced),
    RENN (risky but derivative action theoretically should be approved on appeal $26),
    MBI (Puerto Rico bankruptcy wraps up and its worth $25+)

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    1. Thanks for the idea dump, I'll add them to my research list.

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    2. What's the endgame for MBI? Looks like big discount to adj. book value but unsure how that value gets realized

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    3. Once the Puerto Rico bankruptcy has completed they'll be able to recover a substantial amount of money. Reserves will be taken down substantially which will allow them to pay out a huge special dividend. The management team has announced that they're basically going to evaluate strategic alternatives upon completing the restructuring. It's possible they are sold to a competitor for $25-30/share or they could pay out a special dividend for ~$15-20 with the remainco being worth $5-10+ but trading at $3-5.

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    4. This seems to be an interesting situation. Just to clarify, how much in reserves are being released? And is all debt except for HTA taken care for Puerto Rico? Many thx.

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    5. The recoverable amount is about $17/share before discounts. Page 17 of the 3rd quarter 2021 10q lays out the recoverable amount. They list a discount which, while conservative, appears to probably not be the case as the claims are recovered.

      HTA question: There is also still the PREPA restructuring to be taken care of. But PREPA bonds trade at par. MBIA has already sold over $400m worth of PREPA claims in the past few months probably around their stated value or a slight discount to.

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    6. I agree that MBIA is interesting, I have some experience with these, appreciate you flagging it.

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    7. What's the thesis on CBL? Looks optically cheap on AFFO - any sense of where their operating performance is going / if their efforts to diversify away from retail anchors is going to work?

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    8. CBL trades at less than half the P/AFFO of other major mall REITS. Coming out of bankruptcy they are way less levered than before. Eventually NOI will return to ~2019 levels. They'll refinance some short term debt/mortgages and an expensive 10% loan and then they could pay between $3.5-6 in dividends per year. The stock will likely at least double if not more. Unless Brookfield steps in to buy them out at a ridiculously low price or something like that.

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  2. Where are you seeing that cash burn has stabilized?

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    1. G&A was $11.1MM in Q3, $10MM of that was lawsuit settlement, so only $1.1MM of cash burn, they did still have some R&D in Q3, but that should presumably be gone. Tang doesn't take a salary, maybe I'm take a leap of faith with that statement, but now that they're also going dark, seems like it should be minimal from here.

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  3. Openinsider shows that funds and Tang unloaded about 9.2 million shares just after the buyback announcements at $1.65-2.09.

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    1. Yes, Tang was 2.7m of that, but other 10+% holders sold as well.

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  4. Idk but something feels fishy, please debunk my conspiracy theory.

    They announce in March 22 that they will wind down the operations of the company. They know that they will be seen as a "public shell" and have to delist eventually. November 17, they announce a 20 million share repurchase program which majority owners takes advantage of since they know that the price will decline and they would destroy the stock price if they sold in the open market. And finally, they announce that they've bought back all 20 million shares which would result in the BV being far lower than $1.85/share.

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    1. The stock traded far below book value apart from the two days after the buyback announcement. If the company actually has bought back 20m shares book value per share would actually be up significantly.

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    2. I agree with all but that last piece, writser has it correct, if they've bought back shares (we don't know to what extent they have) it has likely been very accretive to book value and book value might be higher than $1.85.

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    3. Thanks guys, you guys are correct, my brain must have frozen or something. I somehow forgot that buying back shares would decrease the shares outstanding.

      This sure feels like a good deal, I'll have to read up on Tang though. Do you have any impressions of him? good/bad?


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    4. I have a very narrow focus on biotech, usually only look at ones like these that are in the liquidation or reverse merger decision tree, so I don't know much about him. But ODT was far and away the largest position in his portfolio heading into last year, he participated in a secondary in late 2020 in the teens, only to have it be a complete bust a few months later. And then his pursuit of APVO has been a disaster too for him, set on fire millions there, but I'm guessing he's had big wins over the years too in order to get to this place. But I would say overall impression, negative, seems a bit irrational and probably not looking out for minority shareholders. But again, this is like a 50 or 60 cent dollar, all cash/current assets, takes a lot of the risk out of it.

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  5. Thanks! How do you see risks of them taking (more) advantage of minority holders now that they will not have reporting ogligations? for instance, doing a capital increase at 1 cent / share that the minority holders have little way of being aware of

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    1. I agree with the spirit of your comment, not sure Tang would do a capital raise like that, it would likely negate the NOLs, but sure, this hasn't been a minority shareholder friendly last year for ODT. The going dark with the share buyback in place makes me think he's doing that to create forced selling and transfer value to himself (plus others who are willing to hold a dark stock), but you're right, might try something else once it is dark.

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  6. Hi MDC, did you take a look at ODP? YAVB just has a good write up about ODP. Looks attractive. Maybe you can study ODP.

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    1. Thanks, that's funny, we obviously overlap a lot and I've been looking at ODP too. Thanks for the heads up.

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  7. Hello & happy new year, a bit late! Have been laying low, trying to rationalize/concentrate my portfolio, long way to go but figured I'd circle back to something I mentioned last year.

    DHC has major knocks against it:

    1) RMR
    2) Grab bag of assets of varying types and quality--med office (w/some life science, etc.), senior housing, a rounding error of other
    3) Historically very high payout w/no margin for downturn; it was a retail yield play where the yield represented, as it often does, a ceiling rather than a floor on returns
    4) Downturn began in their properties pre-COVID; COVID absolutely wrecked them

    1) Still applies, though I am slightly more constructive on the "new blood" in RMR (also, in this entity shareholders have not been too horribly diluted)

    2) Still applies; recent portfolio/JV sell-down doesn't really reduce complexity & actually represents a downgrading of the remaining assets, albeit at good prices

    3) Company retains a token yield now as redirect $ to liquidity; reinstatement of a higher payout is the catalyst for rerating of the stock

    4) RMR actually transitioned DHC's SHOP portfolio to mgmt other than FVE (another RMR entity); TBD whether that's to improve performance (the reason given) or to reposition FVE. I'm far from ready to call for radically improving conditions in senior housing, but it does seem like it’s bottomed. Also, the office portfolio is office, and as such suspect.

    The downturn in SHOP occupancy, combined w/the cost of ~$1 billion 9.75% notes they issued to keep afloat, has reduced NOI & turned FFO negative. They’re also fully drawn on their inexpensive but restrictive revolver.

    They have alleged POST-DEPRECIATION equity of just under $10/share, generating less than $0/share for shareholders.

    To their credit, they got the notes offering done and didn't engage in a fire sale of properties or equity. And, recently, they’ve:

    Sold 35% of the JV that owns the Vertex Pharmaceuticals HQ for $378 million; they retain 20%, worth $216 million. This is a good valuation; the property (inc $620 million mortgage) worth $1.7 billion, up ~55% since its 2014 purchase and ~40% since they sold a stake in 2017.

    Sold an 80% stake in a ~1 million sf medical office portfolio for $653 million. DHC retains a 20% equity stake worth $40 million at the sale valuation (the JV took out mortgages). This price was also a little surprising to me: a ~5% NOI yield. These properties are ~97% occupied, whereas the overall office portfolio is ~91% (“real” occupancy lower still).

    Adding the proceeds from these to cash on its balance sheet, DHC has a touch over $1.8 billion in cash. This is ALMOST enough to pay down the revolver in full and to call the 9.75% notes when it becomes possible to do so in June of this year at ~105. They do have a few minor mortgages due this year, as well as a $200 million liquidity covenant (I gotta check the definition they're using), so they may need to arrange another JV or sale if they want to clear these liabilities and have some cash in the bank. If they sell the remaining JV equity, that would get them there.

    If I assume a sale of the remaining JV equity (or a roughly equivalent transaction), removal of the Vertex JV liability (which I believe is nonrecourse), paydown of the revolver and minor property mortgages due 2022, and call of the 9.75% notes, DHC would lose very roughly $55 million in rent and reduce its interest expense by ~$125 million. It would have ~$1.85 billion of notes (blended interest cost of ~$92 million/year), ~$200 million of cash, ~8 million square feet of office space, ~25K SHOP units, and misc other assets & liabilities.

    (strangely, continued)

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  8. Annualizing Q3 reported office NOI and removing sold properties, office generates ~$180 million, and I'd guess heading down.

    The SHOP portfolio is basically treading water right now, generating a minimal NOI.

    The other assets--wellness centers, NNN SH--generate $40 million annualized based on 3Q.

    In the above scenario, EV of DHC would be around $2.4 billion. Valuing remaining office portfolio at $300/sf gets you there, and that's a ~7.5% NOI yield vs. ~5% for the higher-quality sold properties. Obviously it's dumb to do this bc of moving parts and overhead, but a dumb-guy plug-in gets interest minus NOI of ~$90 million, or a roughly 12% yield to equity. But I'd guess the direction of rents and occupancy for this remaining portfolio is heading down rather than up.

    Still, if you are semi-comfortable with office selling at a 50% higher yield and half the price of the assets sold into the JV, you are getting the rest for free.

    The undepreciated cost of office assets, ex-Vertex, is around $260/sf, so maybe the better figure is a haircut to this. $200/sf covers the net debt; to get equity value you need to figure out how much the SHOP and other assets are worth.

    These have about $4.5 billion undepreciated book value; they generated over $300 million in 2017 and 2018 NOI (adjusting somewhat for portfolio changes), ~$250 million in 2019 portfolio), $140 million in 2020, $50 million annualizing 3Q 2021.

    The above tells the story of both COVID and deteriorating operating performance. If you believe these will both subside, use an optimistic return to '17/'18 "normal-year" NOI and an 8% cap rate on NOI, then you get to the undepreciated book value per share, the ~$16ish/share it traded at, on average between, 2002-2018. If you assume higher costs and lower occupancy, haircut appropriately.

    The last trade was under $3/share. It seems to me there is a decent opportunity here with probable 9.75% notes call, likely greater freedom resulting from revolver paydown, a moderately improving operating environment, and possibly-improving management that traditionally likes a high payout.

    I am sort of thinking out loud here, pulling from various notes and not checking math and assumptions. I haven't modeled the remaining office assets in other than extremely cursory fashion, or completed my own worksheet to derive "real" FFO. DHC is scary and hairy; you could say that right now it's an asset play with terrible assets. But I think it's a good opportunity with some near-term catalysts that's been left for dead.

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  9. I'm not even going to mention TUP, GCI, ADMA, EOLS, NRP, PBI, BDSI, LNSR and all the rest!

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    1. Dare i ask what the thesis on TUP is?

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    2. It's a cash-generative business that MAY have fixed its balance sheet and MAY be a reopening beneficiary. I like how they are rationalizing their business lines and getting rid of excess property. I like how they are modernizing their systems, though there's always a risk that they are just screwing everything up. Their body language regarding further buybacks and other capital returns is promising, though the counter to that is that it's proof their capital allocation is questionable.

      Basically, a fantastically bad operating environment and balance sheet didn't sink them; modest improvements in either of these will accrue to shareholders. They are not a growth biz--the opposite--and while recent discipline might be enforced, if they are done with their empire-building a full-bore buyback and/or dividend reinstatement will result in further rerating (at which point it'll be time to sell).

      That is the story of a whole lot of what I own--dumb reversion to mean. Same with QUAD.

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    3. Just getting to this list, congrats on BDSI!

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    4. Thanks; even a blind squirrel finds a weird opioid company every so often!

      Bought a bunch more HIMS today before earnings. I liked their numbers today (we'll see what the market thinks), though I am still not sure how to think about their steady-state margins and CAC. I think it's a real business with a real growth plan, and might be a little stickier than it's getting credit for too. Will take a few years to see whether I'm right, maybe less to see whether I'm wrong.

      Bought some more QUAD, which seems to be chugging along with its endless festival of adjustments. They hit their leverage range, more or less, and say the business is inflecting toward growth in '22. The two signposts they put out for capital returns were a stable operating environment and leverage under 2.5x, so that might be on the table. On the one hand, I am sure the Quadracci family would appreciate dividend income again; on the other, things still look a little dicey. Maybe they'll revisit mid-year, after they pay off/refi their May notes. I'd personally wait longer, but...

      Also, I see Moody's downgraded DHC debt. I don't blame them!

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  10. So a brief look back to when I started looking at DHC, looks like revolver availability counts for liquidity. So they have to pay off the revolver and then they can likely call the 9.75 notes without any more sales (doesn't move NOI needle much), though I still have to work through just what their ratios will be then and whether they'll be in compliance with everything on a non-waiver basis (I assume they can get another waiver but that would restrict divs). I think a dividend ramping could start as early as this fall, but I suspect they'll want to look into the possibility of refinancing well before the clifflet of 2024. Increasing occupancy will help, but that's a slow project, and I'm sure they're as nervous about rates as anyone. All-in, I'd think they'd want to push the dividend as high as it can get so that they can push up the stock price to do an equity offering in conjunction with any refi activity.

    And that's more than enough outta me!

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    1. Thanks! Gave me a lot to think about and look through. Here’s another one of the RMR REITs that’s interesting too:

      https://diligent-dollar.com/2022/02/09/service-properties-trust-a-special-situation-with-a-catalyst-svc/

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  11. Thanks--never heard of Diligent Dollar and will certainly read this. It's funny; I was looking at SVC right before I clicked over here!

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  12. If anyone is still following ODTC, I have sold my shares for ~$1.40. Since it has gone dark it will be expert market only soon, limiting liquidity further, capital is pretty dear right now and I don't really trust Kevin Tang enough to be a minority shareholder in a dark stock he's running.

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