Tuesday, February 9, 2021

Aptevo Therapeutics: Positive Trial Results, Tang Capital Offer, Proxy Fight

This write-up is incomplete, it is a strange situation I don't fully understand but figured it was worth sharing in case any readers have a better idea of what's going on here, please comment.

Aptevo Therapeutics (APVO) is an early clinical stage biotechnology company (~$165MM market cap) that was originally a spinoff of Emergent Biosolutions (EBS) in 2016, which is how it came on my watchlist.  Aptevo was spun with a few commercial assets that were designed to provide a source of funding to pursue their primary platform, called ADAPTIR, I won't pretend to know much about it, but Aptevo has since mostly monetized any legacy assets and focused on developing cancer treatments utilizing their ADAPTIR technology.

An interesting series of events happened in a two week timeframe back in November for Aptevo:

  • On 11/3/20, Aptevo announced positive news on their primary asset's (APVO436) ongoing phase 1 clinical trial, a patient went into complete remission.
  • On the same day, 11/3/20, Tang Capital Partners started from zero and began buying stock indiscrimately at prices from $9.65 to $23.87, not stopping until they had purchased 42.5% the company in the span of 4 trading days.
  • On 11/8/20, Aptevo adopted a poison pill plan (too late!).
  • On 11/9/20, Aptevo announced a second complete remission in the same APVO436 phase 1 trial.
  • Then on 11/18/20, Tang Capital Partners offers $50/share for the remainder of the company they hadn't bought up the previous week, wild stuff.  Aptevo acknowledged the offer but has been mostly silent since then.
  • In December, they did update their shelf registration that includes an at-the-money issuance program, the stock took that news negatively as a sign management might pursue a go-it-alone strategy, or it could be negotiating tactics.
Tang Capital and their founder Kevin Tang are life-science focused investors, Kevin Tang is the CEO of Odonate Therapeutics (ODT) and chairman of La Jolla Pharamceuticals (LJPC), and those are only a couple of his current roles, he's had a long history of investing in, building, and running biotech companies both publicly and privately.  Clearly he has some expertise in the field and thought enough of Aptevo's positive clinical news to rush in and swoop it up (again, on the same day results were announced).

Today (2/9/21), news came out that Tang Capital is going to run a proxy contest to add Kevin Tang and one of his lieutenants to the board of directors and get the company to run a sales process.  

TCP is seeking to: (i) nominate, and hereby nominates, each of Kevin Tang and Thomas Wei (together, the “Nominees”) as directors for election at the 2021 annual meeting of stockholders of Aptevo, and at any other meeting of stockholders held in lieu thereof, and at any adjournments, postponements, reschedulings or continuations thereof (the “Annual Meeting”); and (ii) put forward the following advisory proposal for stockholder approval at the Annual Meeting (the “Sale Process Proposal”):

 

RESOLVED, that Stockholders of Aptevo Therapeutics Inc. (“Aptevo”) request that, in light of the pending offer to acquire the outstanding stock of Aptevo for $50 per share, the Aptevo Board of Directors immediately commence a process to sell Aptevo to the highest bidder, consistent with its fiduciary duty to maximize stockholder value.

Management owns about 5% of the company, they did re-strike their options earlier in 2020 and $50 would put all of those in the money.  Clearly, Tang thinks it is worth more than $50, I doubt he could get out of the position without crushing the stock and thus his investment, pot committed at this point and isn't going away.  There's a lot of execution and financing risk if management tries to go it alone, but I can see the view that if you've spent the last 4+ years getting to this point, you want to see it through on your own terms.  But then again, you're a public company and have a fiduciary duty to your shareholders.  This one is worth following, it's highly speculative with considerable downside, but I started a small position in it recently.

**2/10/20 Edit
I asked for some feedback and got it (thank you!), couple things I missed in the write-up as I thought they weren't material but potentially are very material to the APVO story:
  • Aptevo has a 7-year 2.5% royalty on the Pfizer's sales of Ruxience (in the US, Europe and Japan), a biosimilar drug of Roche's cancer drug Rituxan (top 10 selling drug of all time), sales just begun in Q2 2020, and have the potential to be quite significant.  Some light Googling and some expect peak sales of Ruxience to hit $1B by 2026 (towards the end of Aptevo's royalty agreement), depending how you think of the ramp to that point (or if that's realistic at all) the NPV of that royalty stream could be substantial.
  • Aptevo also has a 15-year royalty on the Medexus Pharmaceuticals' sales of IXINITY, a hemophilia treatment, in the United States and Canada.  The company received $30MM upfront and estimates the total proceeds (inclusive of the $30MM) will be $100MM.  Again, depending how you run a scenario analysis on the NPV of those milestones/royalty fee streams, could be quite significant to a company the size of Aptevo.
  • Aptevo has 436,844 remaining warrants with a strike price of $18.20, which if exercised would raise the ~$8MM in cash, and put the share count at ~4.8 million shares assuming the company hasn't raised additional capital through their ATM.  Tang's ownership percentage would then be approximately 37%.
Disclosure: I own shares of APVO

55 comments:

  1. Well you certainly move markets sir

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    1. Yeah - I should have added my recent disclosure that this is another illiquid idea, but thought that was getting old. But like CMCT, my previous write-up, that's trading below my cost basis today, so these kind of ideas do move around a fair amount.

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  2. What percent does he need to get on the board and when is the vote?

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  3. Anyone have any familiarity with RTW Investments LP? They hold 288,236 shares (6.6%) based on 13G filing as of 2/12/21 (https://aptevotherapeutics.gcs-web.com/static-files/779c5683-28f7-43b8-bce9-7667a0fe0bae). It looks like they acquired their position around 11/16/20, which would have been in the mid-$40s per share (https://aptevotherapeutics.gcs-web.com/static-files/55a45aed-5afc-4d14-81bc-f1e2039c3a92). Just curious if they have been involved at all with Tang Capital in the past and how they might look to play this.

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  4. Seems like they make similar investments to Tang Capital. Also noting their head Roderick Wong got his BS from Duke University, which is the same as Kevin Tang. Not sure if there is any overlap there or if just coincidental.

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    1. Also looks like they hold overlapping positions in at least two companies - Rocket Pharmaceuticals and La Jolla Pharmaceutical. Although Looks like APVO is a tiny investment for RTW (~$12 million and looks like they manage $5 billion+) (https://whalewisdom.com/filer/rtw-investments-llc#tabholdings_tab_link)

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    2. I don't know anything about RTW, but given the timing as you suggested, seems like they would at least be sided with Tang.

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  5. IXINITY is growing strong in the medexus portfolio, 40% growth yoy expected by the management. if that helps...

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    1. Thanks, yeah potentially APVO is waiting for more clarity around their royalty/milestone sales process before engaging more with Tang? Hopefully we'll find out before too long.

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  6. Hi - Can you tell me why the 11/8/20 poison pill is "too late"?

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    1. You would generally want to implement them before someone takes a near controlling stake, but here it happened so quickly in the span of a few days that the company was potentially caught off guard.

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  7. Would you know when their shareholder's meeting is scheduled?

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    1. No, it hasn't been scheduled yet.

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    2. June 25th. The definitive proxy statement came out today (May 11th).

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  8. https://ir.odonate.com/press-releases/2021-03-22-odonate-therapeutics-announces-discontinuation-of-development-of-tesetaxel-2e41c819-7a23-4b21-9f17-5205204b674c

    ODT, the company where Kevin Tang serves as CEO, announced after meeting with the FDA on their New Drug Application, the reception was so bad they are shutting the company down and liquidating. Sent ODT stock down 80%, how this might impact APVO, ODT made up 40% of Tang Capital's public holdings. There is some asset value here with the milestone/royalty payments being shopped around, but not great news for the $50 Tang offer. Still hold my position as of today.

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    1. Any thoughts on ODT as a liquidation play? It's under NCAV (barely) but I don't know the costs to liquidate or what their other assets are worth - if anything.

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    2. I've been kicking it around the last two days, might step in if gets a little cheaper. The cash burn is likely minimal now, G&A was just $10MM in 2020 and Kevin Tang didn't take a salary or incentive options, I don't think he's a risk for dragging this out to collect a few more paychecks. A reverse merger seems like a better option here than a liquidation with the NOLs and cash position that would be attractive for someone looking to come public. So maybe its an invest based on a liquidation but secretly hope for a reverse merger or some tweet that drives the stock higher.

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    3. That's roughly where I'm at. I don't know if all of the available SPACs make reverse mergers more or less enticing though. I guess more because you don't have to pay a promote but still a lot of capital out there for those type of deals. I'm also waiting a bit; would like to see it at a bit bigger of a discount.

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    4. I think it's actually more attractive versus a SPAC than a few weeks/months ago, because the cash on ODT's balance sheet is certain, shareholders can't redeem like they can in a SPAC that's trading below trust value.

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  9. It might make sense to merge ODT and APVO

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    1. Interesting thought, hadn't occurred to me, but would eliminate the worry about Tang not being able to close on the $50 price tag.

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  10. Also right now Tang has no way to get out of APVO. A merger will also offer some liquidity to his shares APVO shares. Besides if the APVO shares catch a bid after the merger, he can quickly issue some shares at higher prices and mitigate his risk.

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    1. Yes, sounded crazy to me at first, but has some logic to it.

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  11. It is strange that the company and Tang Capital couldn't agree on non-disclosure agreement.

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    1. I imagine it's just part of the ongoing negotiation between the two parties. Each side looking to gain whatever leverage they can going into a potential proxy contest or other resolution. The company doesn't want to give Tang more information than they need to and Tang doesn't want to agree to conditions that narrow his optionality. Same thing with the ATM issuance program (and potentially the royalty sale) which gives the company more leverage in terms of being able to go it alone. But interested to hear other peoples' takes.

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  12. Since it is unlikely that Tang Capital reps can get on the board without signing a non-disclosure agreement, the whole thing looks a bit suspicious. Is it possible that Tang changed his mind about buying the company either because of doubts about the product (2nd patient was no more in remission) or due to funding issues but does not want the information public as it would damage his investment in APVO if the reason is former and in other companies if the reason is later and therefore came up with this weird reason. Or am I off.

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    1. Hard to speculate, but I don't see why the NDA issue would preclude Tang from being elected to the board. It was probably a negotiating tactic or just an issue stemming from Tang being the CEO of another cancer biotech in ODT, APVO not wanting to give Tang a peek inside.

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  13. I don't agree - my take is above. I don't see how the NDA not being signed limits the ability for Tang reps to get on the board. Regardless of whether an NDA is signed, the proposals for two new directors and for a sale process to commence still stand.

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  14. Don't you need a pretty expansive NDA to be on the board of a (biotech) company?

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    1. Probably but this NDA was in connection with the indication of interest Tang submitted, not in connection with Tang's proposal for two new directors. If the proposal were to be approved then sure the new directors might need to sign NDAs (or maybe the non disclosure would be part of their contracts with the company in their roles as directors).

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  15. Exactly, if and when Tang becomes a director, he would have to sign an NDA. If that is acceptable, why does he not want to sign one to do DD for purchase of the company? No comment from Tang Capital about if the NDA is onerous and beyond norm. If the talks failed because of that, wouldn't he say that? May be the cynic in me is talking, but the reason provided for failure of talks does not seem legit.

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  16. Any thoughts on this and the recent slide down? You hanging on or moving on?

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    1. I'm continuing to hold, sized it small and just waiting to see what happens with the proxy contest.

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  17. What do you make of the latest statement?

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  18. What do you make of the latest statement?

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    1. Reading the background, I don't know if its customary in these situations but looks like APVO tried to tie a standstill provision to the NDA, Tang probably didn't want to give up his option to launch a proxy contest and thus they couldn't come to agreement on the NDA. Seems to take out that concern someone raised earlier that if he couldn't come to an agreement on this NDA then he couldn't come to terms on an NDA with regards to being a board member.

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  19. By my math, Tang needs 176,532 yes votes in order to control more than 50% of Aptevo.

    4,449,535 - shares outstanding as of 4/26/21
    2,224,767.5 - 50% of shares outstanding
    2,048,236 - Tang (1,760,000) + RTW Investments (288,236)
    176,532 - additional Yes votes to reach 50.00001%

    It could happen.

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  20. The whole situation seems to have the makings of a good medical/financial drama film. I'll tell my Hollywood writer friend about it and see what's said...

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  21. Is there a proxy fight that I should be voting in? I haven't gotten anything from Interactive Brokers and I don't see anything mentioned on Seeking Alpha. I only have 3k shares but by Patrick's math that might actually matter.

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    1. Found this by searching "tang proxy apvo" https://sec.report/Document/0001564590-21-021377/

      Looks like a place keeper or something, as dates aren't filled/shown.

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  22. For what it's worth, there is a rumor on Twitter (Marc Keiser, @BearBull_Trader) that APVO may be trying to buy out Tang in the $25-30 range and take the whole thing private. The annual meeting has been pushed to June 25th, about a month later than in the past.

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    1. That seems very unlikely, their cash is fairly precious and they need access to the public markets for further capital raises, I would think the settlement discussions with Tang are more around either running a process or adding him to the board.

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  23. Are you sure the APVO royalty is 2.5%.

    I don't believe the royalty percentage has been made public by either Pfizer or emergent or aptevo.

    There is a significant chance the royalty is significantly more than 2.5% given what healthcare royalty paid for just the first 3 years at 100% and last 4 years at 50% of the royalty (the 1st 3 years are the least profitable and her paid 35M for them, if ruxiance is a 300M drug by year 3 the royalty would only be get them about 12M by year 3 at 2.5%.... it is much more likely the royalty is high single digits to low-mid double digits based on industry norms)

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  24. https://ir.revivapharma.com/static-files/d94c51b1-1317-474a-8cb2-15b80147df1d
    TANG CAPITAL MANAGEMENT, LLC
    Tang Capital Partners. Tang Capital Partners beneficially owns 1,350,180 shares of the Issuer’s Common Stock, which consists of: (i)
    1,200,000 shares of the Issuer’s Common Stock and (ii) 150,180 shares currently issuable upon exercise of Warrants (as defined below).
    Tang Capital Partners owns 4,533,300 of the Issuer’s Investor Warrants and 3,333,300 of the Issuer’s Pre-Funded Warrants (together, the
    “Warrants,” each as defined in the Issuer's Prospectus filed pursuant to Rule 424(b)(4) with the Securities and Exchange Commission on
    May 28, 2021).
    Each Investor Warrant is exercisable for 0.75 of a share of the Issuer’s Common Stock. The Investor Warrants are immediately exercisable
    and expire five years from the date of issuance. Tang Capital Partners may not exercise any portion of the Investor Warrants for shares of
    Common Stock if, as a result of the exercise, Tang Capital Partners, together with its affiliates and any other person or entity acting as a
    group, would own more than 9.99% of the Issuer’s outstanding shares of Common Stock after exercise. However, Tang Capital Partners
    may increase such percentage to any other percentage, not in excess of 19.99% (to the extent such limit is required under applicable
    Nasdaq rules), by providing written notice to the Issuer, provided that any increase in such percentage shall not be effective until 61 days
    after notice is provided to the Issuer.

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  25. Hi MDC

    Thank you for your great blog and investment process.

    Are you going to vote the proposal 4 of Aptevo Therapeutics Inc.- BLUE CARD Annual Meeting : "FOR" ?

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  26. Hi

    Tang have withdrawn the acquisition proposal.
    "We very much appreciate your decision to add to Aptevo’s proxy statement Tang Capital Partners’ advisory proposal seeking shareholder approval to commence a process to sell Aptevo to the highest bidder. In light of this decision, we hereby withdraw our nomination of Thomas Wei and myself as directors for election at the 2021 annual meeting. Additionally, since the Company is unwilling to enter into a confidentiality agreement without a standstill provision, we hereby withdraw our acquisition proposal. Should the Company be willing to enter into a confidentiality agreement without a standstill provision, we would be happy to consider a new acquisition proposal"

    What are your thoughts on that. If the proposal 4 of the proxy have green light do you thing that they will be force to negociate with Tang again?

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    1. I don't know if it matters too much, if they run a full/complete process then there should be enough bidders other than Tang, but I'm unsure if they run the process that they'll actually sell. Given how aggressive Tang was, hard to fully believe they're interested in selling the company. Still holding, but again, its small, maybe my smallest position.

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  27. I don't know about legal terms, but the proposal 4 (Tang Stockholder proposal) of the AGM says "RESOLVED, that Stockholders of Aptevo Therapeutics Inc. (“Aptevo”) request that, in light of the pending offer to acquire the outstanding stock of Aptevo for $50 per share, the Aptevo Board of Directors immediately commence a process to sell Aptevo to the highest bidder, consistent with its fiduciary duty to maximize stockholder value."

    My doubt is that Tang withdraw the 50$ offer, so this kind of invalid the proposal 4, because right now there are not 50$ offer...

    So the proposal is to ask shareholder if we want that management commence the process to sell, but this is based on the Tang proposal that begins with "RESOLVED, that Stockholders of Aptevo Therapeutics Inc. (“Aptevo”) request that, in light of the pending offer to acquire the outstanding stock of Aptevo for $50 per share" but this 50$ doesn't exist anymore so maybe is invalid the proxy proposal 4. But I am not sure about that. Do you have any thoughts or knoledge about this legal proxies?

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    1. Not knowledgeable, but I would assume Tang wouldn't removed the offer if it would have invalidated proposal 4, but crazier things have happened.

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    2. Yeah, that makes sense. Good point.

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  28. Non-binding proposal to sell the company passed, but APVO made sure to include this in the results:

    "The Company’s proxy solicitor, Okapi Partners LLC, has informed the Company that a majority of the votes cast by the holders of all of the shares of common stock present or represented by proxy at the Annual Meeting and voting on such proposal, other than those cast by Tang Capital Management, LP and Aptevo’s Board and management, voted against this proposal."

    Doesn't sound like a management team that intends on following through here.

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  29. Resurrecting this post...

    Tang's 1,760,000 shares may or may not be under water. I didn't realize he owned 323,325 shares prior to the big purchase in Nov 2020.

    1,436,675 @ $17.30 (purchased on Nov 4-6, 2020)
    0,323,325 @ ??? (owned prior to Nov 2020)

    8/16/2021 - SEC 13F-HR holding report
    https://sec.report/Document/0001214659-21-008646/

    11/04/2020 - SEC Form 3 showing Tang already owned 323,325 shares
    https://sec.report/Document/0001209191-20-057303/

    Any thoughts on what might happen next?

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    1. It doesn't sound like the company is going to put itself up for sale until they have a clearer picture of their APVO436 asset, disappointing as a special situations investor, but if it works, I guess the payoff could be even bigger? Tough seeing the $50 offer where the stock is trading now, but also hard to know if Tang could actually execute on it? Just a puzzling situation as someone who knows nothing about biotech.

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    2. Should mention that I've sold my position (I'm a pretty active tax loss harvester) for now, may look at it again if the facts change.

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