Shareholders of small-cap biotech Immunomedics (NASDAQ: IMMU) have been through a rollercoaster ride so far in 2017. Activist hedge fund VenBio has been stirring the pot over a perceived "shameful" deal between Immunomedics and Seattle Genetics (NASDAQ: SGEN). So as the boardroom brawl continues, will this red hot biotech be able to climb higher? I for one, don't believe so, but let's dig deeper.
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A promising new cancer therapy
Immunomedics is a clinical-stage biotech developing treatments for various forms of cancer. Immunomedics' most advanced product is IMMU-132 or sacituzumab govitecan. In early 2016, this product was granted Breakthrough Therapy Designation on the back of strong phase 2 data for the treatment of patients with relapsed/refractory triple-negative breast cancer (TNBC).
Following the release of highly positive phase 2 data, the company announced that they plan to submit a Biological License Application (BLA) for IMMU-132 to the FDA as atreatment for metastatic TNBC in mid-2017. In addition, while the company believes the phase 2 data alone should be sufficient for approval, the company is also planning to initiate a phase 3 confirmatory trial for IMMU-132 in TNBC later on this year.
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But who will pay for the study?
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Unfortunately, phase 3 trials are expensive. Long-term cancer studies can often run into the hundreds of million of dollars to run. IMMU-132's breakthrough designation means that the FDA will allow Immunomedics to submit a BLA on phase 2 data alone, but the company will still need to run a phase 3 confirmatory trial. As Immunogen ended 2016 with only $5 million in cash and cash equivalents, the company has been looking for a licensing partnership in order to fund the continuing trials of this drug.
Last month, it seems that partnership came in the form of Seattle Genetics (NASDAQ: SGEN), which agreed to pay $250 million upfront for the rights to IMMU-132 plus a series of milestone payments which could bring to total payout to $2 billion. This deal would put Seattle Genetics in the driver's seat in terms of progressing IMMU-132 through clinical trials for both TNBC as well as several other forms of cancer. If all goes well, IMMU-132 could be ready for commercialization within the next 12 months.
Sounds like a great deal right? Apparently, VenBio, a biotech-focused hedge fund which owns roughly 10% of Immunomedics, does not think so.
As part of the agreement between the two companies, Seattle Genetics has agreed to purchase a 2.8% share in Immunomedics. However, Seattle Genetics also has the option of increasing its stake to 9.9% at a cost basis of $4.90 per share. VenBio has calculated the intrinsic value of Immunomedics at around $9.40 per share, and shares currently trade at $6.90. Giving Seattle Genetics the option to purchase up to 9.9% of the company at $4.90 per share would represent a 52% discount to VenBio's intrinsic valuation of the company. This would have the net effect of destroying value for shareholders other than Seattle Genetics.
As Dr. Aghazadeh, managing partner of VenBio, said in a press release, "Immunomedics' announcement of a deal with Seattle Genetics is a blatant and shameful maneuver by the current Board and management to... entrench themselves at the expense of stockholders' best interests."
Halting the deal
In order to combat this deal, on March 3, during Immunomedics' annual shareholder meeting, VenBio was able to successfully nominate and vote in four VenBio representatives onto the Immunomedic's board of advisors. At the time, it was the assumption that VenBio would use its newfound influence to unwind the agreement between Immunomedics and Seattle Genetics.
It appeared VenBio was temporarily successful in their efforts when, on March 9, it was announced that VenBio brought a legal injunction in order to postpone the deal between Immunomedics and Seattle Genetics. On the day of the announcement, shares of Immunomedics jumped almost 20% -- suggesting that the market believes a higher bid may come in the future. As for the deal, according to the ruling, the partnership agreement between Immunomedics and Seattle Genetics cannot proceed for 30 days following the ruling.
Divining the future
While Immunomedics has made it clear that they are looking to license out the rights to IMMU-132, and IMMU-132 did demonstrate promising results in phase 2, this is no guarantee that a higher bid will be coming for this product in the future. As of now, the market appears to believe that VenBio may be able to negotiate a higher bid. However, in the world of biotech, a bird in hand is always preferable to two in the bush. For me, I'd say there are too many unknowns to invest. I'd stay away from Immunomedics for now.
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