Aptevo Therapeutics (APVO): Special situation; spin-off

Hi there fellow value investors,

After listening to the recent mastermind discussion where Toby Carlisle discussed 'special situations' investing I've been on the look out for some investment propositions that might fit the bill.

I came across a great write-up on APVO by 'Stock Spinoff Investing Guy' over at http://stockspinoffinvesting.com/

Here's the write-up and and I'd like to thank him for his blog post on the company;

http://stockspinoffinvesting.com/aptevo-therapeutics-an-orphaned-spinoff/


The basic thesis is as follows;

APVO was recently spun off from Emergent Biosolutions (EBS). EBS is a bio-defence company that develops bio-defence drugs for the military and wider public and it's main product is an anti-anthrax vaccine called BIOTHRAX. It has also allocated resources to developing a pipeline of oncology and immunology drugs. Long story short, EBS felt that it's development portfolio was being buried amongst it's wider operations and decided to unlock the value by spinning this part of the business off and rendering APVO a stand alone company,

As it stands APVO has four commercial products in hematology/immunology that are due to pull in $40mm in sales in 2016. In addition, APVO has a pipeline of other therapeutic products pertaining to oncology/autoimmune disorders.

I won't bother to go into detail on the company's products as you can read about it in the research conducted by 'Stock Spinoff Investing Guy' in the link above. It will give you an excuse to check out his site which is worth looking at!

When APVO was spun-off around late July it was trading at around $8 and has since fallen to $2:40 a share aggregating to a market cap of $48.6 Mil. It appears that the sell off is a result of Shareholders in the EBS who received the stock not seeing it's value, Indexes(Which owned approx. 25% of stock) who were forced to sell as APVO wasn't listed on any indexes and institutional investors who don't wish to hold micro-caps which aren't currently turning a profit.

Taking a look at APVO's recent amendment to it's 10-Q we find the following;

'Liquidity and Capital Resources

Sources of Liquidity

At the closing of the spin-off of Aptevo from Emergent, Emergent provided Aptevo cash of $45.0 million, along with a commitment in the form of a promissory note to provide another $20.0 million within six to 12 months after the separation.

In addition, on August 4, 2016, we entered into a $35.0 million Credit and Security Agreement, or the Credit Agreement, by and among us and certain our subsidiaries as borrowers, MidCap Financial Trust, as agent, and the lenders from time to time party thereto. The Credit Agreement provides us with up to $35.0 million of available borrowing capacity, which will be available (subject to certain conditions) to the borrowers in two tranches of $20.0 million and $15.0 million, respectively, through August 31, 2017 and which, once drawn, will amortize on a monthly basis commencing in August 2018 and will mature on February 1, 2021. Amounts drawn under the Credit Agreement bear interest at a rate of LIBOR plus 7.60% per annum. The first tranche of $20.0 million was made available to us on the closing date of the Credit Agreement and the second tranche of $15.0 million will be available (subject to certain conditions) following the date we and our subsidiaries (1) achieve net commercial product revenue of $40.0 million on a trailing twelve (12) month basis and (2) receive an additional $20.0 million in cash from Emergent. Emergent’s promise to pay such $20.0 million in cash is evidenced by a non-negotiable, unsecured promissory note issued to us from Emergent.

We expect this initial cash funding from Emergent, along with the proceeds from our Credit Agreement will support Aptevo’s operations for at least 12 months, based on current operating plans and financial forecasts. Prior to the spin-off, the development-based biosciences business of Emergent was funded entirely by Emergent.'

http://ir.aptevotherapeutics.com/phoenix.zhtml?c=254374&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExMTQ4NjYzJkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3


APVO thus has cash of $45 Mil and a promissory note from EBS for a further $20.0 Mil.

In terms of valuation I'll again point you to the above link as 'Stock Spinoff Investing Guy' runs through a series of valuation methods with his most conservative estimate of IV coming in at around $6.58 based upon the cash, the promissory note and a 1.7 EV/Revenue multiple on $40 Mil which is in line with the multiple EBS paid for Calgene(APVO’s CFO, CMO and Vice President of Commercial Operations all came from Calgene and all APVO’s revenues came from Calgene too).


To my mind this looks like an investment opportunity with decent upside considering the potential for a partnership being struck up with one of the bigger pharma companies, the pipeline of products and the fact that the company has a decent chunk of cash, credit to draw on and projections on increasing revenues.

I'm going to continue to do some digging on the company and see if they may be any other pertinent information to glean. As for downsides, there's always the possibility that the company could burn through it's cash and not secure a bispecific partnership with one of the majors, revenue targets could be missed or regulatory approval could impede products under development getting to market. I need to read through the 10-Q in full to see what else I can find out.


All in all it definitely looks worthy of a deeper inspection, let me know what you think!

Regards,

Anaximander





Comments

  • Hello there Anaximander,

    Are you still looking at this company? I find it very interesting too...specially since there are big names running the company and actually owning and increasing shares. It reminds me of Joel's Greenblatt rule of looking what insiders are doing during spinoffs. Would like to know your thoughts on this!
  • edited August 19
    Hi there Yoshi,

    I haven't initiated a position in APVO but have been keeping an eye on it. Their latest 10-Q can be viewed here;

    http://ir.aptevotherapeutics.com/phoenix.zhtml?c=254374&p=irol-SECText&TEXT=aHR0cDovL2FwaS50ZW5rd2l6YXJkLmNvbS9maWxpbmcueG1sP2lwYWdlPTExNzQyMTY2JkRTRVE9MCZTRVE9MCZTUURFU0M9U0VDVElPTl9FTlRJUkUmc3Vic2lkPTU3

    A few things to report. Their R+D spending decreased by 11% and 19% relatively to previous year's 3 and 6 month ending points, basically their burn-rate has somewhat declined and losses have narrowed. They've also entered into an agreement with another biotech firm, Alligator Bioscience (AB)

    "On July 20, 2017, our wholly owned subsidiary, Aptevo entered into a collaboration and option agreement with Alligator Bioscience AB, or Alligator, pursuant to which Aptevo and Alligator will collaboratively develop ALG.APV-527, a lead bispecific antibody candidate simultaneously targeting 4-1BB (CD137), a member of the TNFR superfamily of a costimulatory receptor found on activated T cells, and an undisclosed tumor antigen widely overexpressed in a number of different types of cancer. This product candidate is built on our novel ADAPTIR platform, which is designed to expand on the utility and effectiveness of therapeutic antibodies. Under this collaboration agreement, Alligator also granted to Aptevo a time-limited option to enter into a second agreement with Alligator for the joint development of a separate bispecific antibody candidate simultaneously targeting 4-1BB (CD137) and an undisclosed tumor antigen that Aptevo and Alligator will collaboratively select.



    In accordance with the terms of this collaboration agreement, the parties intend to develop the lead bispecific antibody candidate targeting 4-1BB (CD137) through the completion of Phase II clinical trials in accordance with an agreed upon development plan and budget. Subject to certain exceptions for Aptevo’s manufacturing and platform technologies, the parties will jointly own intellectual property generated in the performance of the development activities under this collaboration agreement."


    One of the hedgefunds which owned some shares sold out of their position, see here;

    https://whalewisdom.com/filer/perceptive-advisors-llc#/tabholdings_tab_link


    It was, however, a tiny position in their overall portfolio so not sure what to make of this, their investment record is very impressive mind so perhaps they had a good reason for doing so. I've also been watching to see if there has been any insider buying of late but none has occured, I'd like to see some given managment have expressed their view that the company is undervalued. They do however hold ownership in the company and have bought in the past, as I mentioned in my first post.

    For now I'm going to watch from the sidelines to see how things progress. I'd rather fall prey to an error of omission than an error of comission. If you want to get more detail on the company I suggest you have a read throught the thread over at COBF;

    http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/apvo-aptevo-therapeutics/10/


    Regards,

    Anaximander



  • Good point on the sell out from the hedge fund. However there is this guy John Petry who worked for Gotham Capital from 1997 to 2010, and now he runs his own hedge fund, SESSA capital that owns shares in APVO. Although not a significant amount of shares in his portfolio, I think its interesting that the guy who worked for Greenblatt has a position in this company. He has not added shares nor sell, so there might be something in there.

    Also I was reading some comments before about a production problem with one of their products call Ixinity, which management said it was going to be solved by the beginning of the year and they did, is that a good sign of good management? Time can only tell but this company really looks interesting.

    Let's see if we can dig more info on this.

    Yoshi
  • edited September 1
    Opened a small position this morning. They've got almost $4.50/share of net cash courtesy of the break-up deal. Pretty tough to not get in when it's trading for low $2s. They could make zero money for the next 2 years and still be fine at their current burn rate. Bargain.
  • Did you get in before the recent news was announced and the stock rallied?, I was sucking my thumb on this and didn't open a position yet, hopefully the stock pulls back so I can get in though the current price still appears to offer good value.

    Regards,

    Anaximander
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