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

13 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. 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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