Tuesday, June 11, 2024

Vanda Pharmaceuticals: 2 Bidders, Entrenched Management, Upcoming Business Catalysts

Vanda Pharmaceuticals (VNDA) (~$365MM market cap) is a biopharma company with a number of drugs either already being commercialized, on the cusp of commercialization or in late stage trials.  I have no idea if any of these are valuable franchises (as always, if you have any insights, please share them):

  • Hetlioz -- commercial treatment for the treatment of Non-24-Hour Sleep-Wake Disorder in the U.S., it is facing generic competition as of December 2022 and has a few legal battles in its attempt to get additional approved indications
  • Fanapt -- recently approved for biopolar disorder, launching commercialization in Q3 2024
  • Ponvory -- recently acquired from Johnson & Johnson (this came from Actelion Pharmaceuticals) for $100MM, treatment for multiple sclerosis, launching commercialization in Q3 2024
  • Tradipitant -- treatment for gastroparesis, PDUFA date set for 9/18/24
  • Misaperidone -- treatment for schizophrenia and bipolar disorder, new drug application expected to be submitted in early 2025
On top of that grab bag of drugs (to my untrained eye, they don't appear to have a coherent strategy), Vanda has approximately $5.40/share of net cash and marketable securities on the balance sheet after subtracting out all liabilities (shares currently trade under $6/share).  Where things get a bit interesting, Vanda has received two unsolicited bids from potential buyers, both of which have received the cold shoulder from the board, as a result the buyers went public trying to get shareholders to exert pressure:

5/7/2024: Vanda Pharmaceuticals Confirms Receipt of Revised Unsolicited Takeover Proposal from Future Pak -- offer was for $7.25-$7.75 in cash per share, plus a CVR.  Future Pak seems like an odd buyer as the company is a privately held pharma contract manufacturer and packaging business that has the financial backing of private credit provider Colbeck Capital Management.  The board rejected the proposal:

Vanda Pharmaceuticals Inc. (Vanda) (Nasdaq: VNDA) today announced that the Company’s Board of Directors (the “Board”) carefully reviewed the revised unsolicited proposal from Future Pak, LLC (“FP”) to acquire the Company for $7.25 to $7.75 per share in cash plus certain Contingent Value Rights (“CVRs”) and, after having consulted with the Company’s independent financial and legal advisors, unanimously concluded that the proposal substantially undervalues the Company, creates significant risk and uncertainty and is not in the best interests of the Company and its shareholders. Accordingly, the Board has rejected the proposal.
In reaching its conclusion, the Board evaluated all aspects of Vanda’s business, including its clinical development pipeline, expanding commercial presence and significant cash balance, as well as the speculative nature of the CVRs given the uncertainty surrounding the achievement of the commercial milestones under FP’s management. The Board believes the revised unsolicited proposal is yet another opportunistic attempt to purchase the Company’s shares at a discount to Vanda’s intrinsic value.
The Board and management team remain confident that Vanda’s robust revenue, strong cash position and efficient operations position the Company well for significant long-term growth and value creation far in excess of the consideration offered by FP.
6/6/2024: Vanda Pharmaceuticals Confirms Receipt of Unsolicited, Non-Binding Indication of Interest from Cycle Group Holdings -- offer is for $8 in cash per share with no CVR component.  Cycle seems a little more credible than Future Pak, they have a few commercial drugs in the market already, in their press release, they included the following explanation for making their bid public:

Cycle issued the following statement regarding its proposal:

“Our proposal for Vanda delivers immediate, compelling and certain cash value for Vanda shareholders with a highly attractive premium. Cycle’s proposal represents a better outcome for shareholders, who would receive all-cash upfront value exceeding that of Future Pak’s cash portion of its latest offer announced May 7, 2024. It would also benefit patients, as Cycle has a proven commercial strategy in the U.S., a strong distribution footprint and an established track record of delivering medicines and individualized support to patients suffering from conditions with high unmet medical need.

While we would have preferred to reach an agreement privately, Cycle is publicly disclosing our proposal for the benefit of Vanda shareholders and to encourage Vanda shareholders to express their views on this proposal to the independent directors of the Vanda Board of Directors.

Given our familiarity with Vanda, its brands and our extensive knowledge of the industry, we believe we can efficiently and quickly complete our diligence. Once we receive access to the required information, we believe that we can complete our due diligence within 2-3 weeks and reach a definitive agreement shortly thereafter.

We stand ready to work immediately with Vanda’s Board and management team to reach an agreement that would provide a compelling premium and certain cash value today for all Vanda shareholders.”

Vanda has acknowledged receipt of the offer, but as of this writing haven't rejected it yet.

Why isn't the board engaging?  Management seems very entrenched here, the co-founder (Mihael Polymeropoulos) is the CEO and Chairman of the Board.  He employs a number of family members at Vanda and does own 3+% of the stock.  Given the near term regulatory catalysts, it could be argued that these are opportunistic bids, but if they run a full a process, maybe they can get an even higher number or Polymeropoulos could partner with a firm that would back a bid for him to take it private.  I've sized this relatively small, it could be more attractive at a higher price if VNDA's board does the right thing and engages with the bidders.

Disclosure: I own shares of VNDA

18 comments:

  1. They also have a rights plan in place to protect them from hostile takeovers:
    "If any person, entity, or group acquires 10% or more of the common stock without the Board's approval, the Rights Plan allows existing stockholders to purchase additional shares at a discounted price."

    The NEOs don't own significant equity. They keep dumping their stock grant after every vest and draw a 500k+ annual base salary. Maybe they just really don't want to give the piggybank up?

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    1. Yes, forgot to mention the rights plan. That's the risk here, well said.

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  2. https://www.prnewswire.com/news-releases/vanda-pharmaceuticals-confirms-receipt-of-revised-unsolicited-takeover-proposal-from-future-pak-302172066.html

    Future Pak bumped their bid to $8.50-$9.00 plus a CVR

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  3. I would imagine a full process has begun or will shortly, maybe no news from VNDA is good news?

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    1. Hopefully that's the case here soon. I would think the board risks legal action for a breach of fiduciary duty if they don't, but doesn't mean they won't come up with a reason to set an unnecessarily high bar for a deal.

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  4. With $300 net cash and $150 in annual gross profit, the equity is selling for about $400 million. Real shame shareholders are not benefitting.

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  5. This has been one of my larger positions for about a year, I think. Not much of a value-add from me, but some thoughts:

    Hetlioz is a very marginal drug, limited efficacy and IP. The company has somewhat irrationally tried to defend their franchise here through an endless series of fruitless lawsuits vs the FDA. Yuck.

    Ponvory is interesting as an already-marketed drug that was a rounding error for the large co they bought it from (Janssen/J&J). Lotsa competition, but VNDA has a rep for competent and somewhat aggressive commercialization, so they may be able to boost revenues from its current indication (the launch is just a relaunch under their full control; there was a transition period post-acquisition) and plan to possibly trial it in additional indications. It's a little worrisome to see them spend a large chunk of cash on a new drug like this--smacks of empire-building--but my expectation is that it will be at least modestly profitable for them.

    Tradipitant--first new drug for this indication in like 40 years, I think? Could be a moderately big deal for them. Peak annual sales pegged at $900 million for gastro by an analyst 6 years ago; obv must be taken with much salt but it could definitely be a needle-mover. No opinion on whether it gets approved, but it's not vaporware like Hetlioz.

    No real opinion on the other drugs/indications; seem kinda meh to me, but they are real.

    Hard to gauge management. On the one hand, their ego, greed, and indifference to shareholders are on full display: the rejection of any meaningful engagement with potential acquiring parties, the fact that they recently refused to accept the "tentative resignation" of a board member who received a majority of no votes, so now she'll serve for another 3 years, against shareholders' wish. On the other hand, they built a successful company that actually managed to turn a profit, and they did so with modest-for-a-biotech dilution, which has only been minor once they turned profitable. They've also kept an excellent balance sheet, for good (safety) or ill (cash piles stink).

    At this and last year's sub-$4 lows it was a no-brainer: heads you win, tails you're buying a dollar in cash for 50 cents, with a slightly-profitable biotech thrown in for free. No longer the case, but I still like it. If trad for gastro is approved, that's a major upside catalyst. And, entrenchment aside, the loss of one vote means others can be lost, so there is at least a little implicit pressure on management.

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  6. You sized this one small. Is now the time to scale it up?

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    1. Maybe a little more, but management/board still hasn't really engaged yet. But this was good to see:

      https://www.globenewswire.com/news-release/2024/06/17/2899655/0/en/Butler-Hall-Capital-LLC-has-issued-an-open-letter-to-VNDA-s-board-of-directors-urging-the-company-to-run-a-full-sales-process-to-maximize-shareholder-value.html

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  7. https://www.biospace.com/article/releases/vanda-pharmaceuticals-board-of-directors-determines-that-recent-unsolicited-takeover-proposals-are-not-in-the-best-interests-of-the-company-and-its-shareholders/

    BoD rejected the proposal without any negotiation, so poor.

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    1. Does this imply the upcoming tadipitant approval is likely and likely to make a big financial impact? What better options does the board see here?

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    2. Three options:

      1) Management absolutely doesn't care about fiduciary duty and just wants to keep its job

      2) Trad approval is a potential game-changer for Vanda, with decent shot at approval and larger market potential than their other products; they have the cash to commercialize it and to support their other lines (including new indications) and research, so why sell now at a price below where they traded 2013-22?

      3) Both of the above.

      So I guess September is the crucial month. If they get approval and go up, great. If they get approval and don't go up, or don't get approval, we'll have our definitive answer about their intentions toward outsiders.

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  8. They must really, really like their job (and pay). Good to see that share price decline is contained. Fundamental downside is not that high or market is banking on continued activist pressure.

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  9. Future just withdrew their offer

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    1. Let us resist the crime of Insider Trading!

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  10. Hey thanks for this idea. Have you looked at SILA?

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  11. Will you be publishing H1? Looking forward to it!

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