APTEVO THERAPEUTICS INC APVO
December 29, 2016 - 1:55pm EST by
googie974
2016 2017
Price: 2.20 EPS 0 0
Shares Out. (in M): 20 P/E 0 0
Market Cap (in $M): 45 P/FCF 0 0
Net Debt (in $M): -65 EBIT 0 0
TEV ($): 0 TEV/EBIT 0 0

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Description

Aptevo Therapeutics is a nano-cap, cash-burning bio-tech spun from profitable billion dollar bio-defense
company Emergent Biosolutions (ticker EBS) on August 1st, 2016. Cash-burning bio-techs are perhaps
not for grandma’s account, but Aptevo is remarkably cheap for the more speculative investor. Trading
at $2.20, Aptevo was spun with $65 million ($3.25 a share) in cash and promised cash from the parent
net of debt that they have since taken on. Furthermore, three profitable drugs (Winrho, HepaGam B,
and Varizig) requiring little or no further investment were spun with Aptevo that the Aptevo CEO notes
are worth 2 times sales or about $3.50 a share. A fourth approved drug, Ixinity, began ramping sales in
2015 and has potential to grow to as much as $40 million in sales for a valuation at 2 times sales of $4 a
share if the company can work past current bulk production problems. Aptevo’s share price of $2.20
implies that the cash burning bi-specific drug candidate platform, Adaptir, has tremendous negative
value. Emergent Biosolutions acquired the Adaptir technology in 2010 for $78 million ($3.90 a share)
plus a contingent value right with a max value of $38.7 million. The pro-forma R&D spend since then
has been substantial. In 2014 & 2015, for example, the R&D spend on Adaptir and Adaptir drug
candidates totaled about $30 million and $20 million respectively for a total of $50 million ($2.50 a
share). The total investment in Adaptir and Adaptir drug candidates including the acquisition price and
R&D spend is perhaps in the $8 to $10 a share range.
 
It’s possible that Adaptir will just burn cash while producing little of value and Aptevo is definitely a
speculative investment. It doesn’t appear that Aptevo was spun exclusively to relieve the profitable
parent of the earnings drag, however. Significant assets including cash and profitable drugs were spun
with it and the Aptevo CEO sat on the Emergent Biosolutions board since 2010. He knew what he was
getting into. Further, the Chairman of the board owns 13.7% of the company and the officers and
directors are rather generously incentivized with options while drawing reasonable salaries. Also
encouraging is that a couple of successful investors have taken significant positions. John Petry, a
special situations investor formerly with Gotham Capital Management has taken an 8.4% position
through Sessa Capital Management. Perceptive Advisors, a very successful life sciences fund run by
biotech expert Joseph Edelman also bought nearly 5% of the company. Finally, the technicals have
turned positive recently after publication of phase 2 results showing effectiveness of their leukemia drug
drove a nearly 4 million share trading day. Perhaps Aptevo’s share price has already seen its bottom.
 
Emergent Biosolutions was a bio-defense company whose primary product was an anthrax vaccine. The
company diversified into bio-tech with a pair of acquistions. The Adaptir technology came with the $78
million (net of $19 million cash) plus CVR acquisition of Trubion in 2010. Aptevo’s four commercial
products came with the $222 million acquisitions of Cangene in February, 2014 although Cangene also
contributed bio-defense assets that stayed with the parent. The rationale for the spinoff is that both the
bio-defense and bio-tech businesses have opportunities that require capital. The shareholder base for a
profitable bio-defense and a cash-eating bio-tech are quite different. Separating them allows each to
raise capital from appropriate sources. Spinning rather than selling lets shareholders make up their own
mind whether they want to sell or hold the bio-tech assets. Most shareholders want to monetize but
the Aptevo COB perhaps wanted the option to continue to own. Aptevo intends to raise cash through
partnering individual drug candidates or perhaps the entire Adaptir platform with pharmaceutical
companies. The CEO also notes that they have worldwide rights to Ixinity and are open to partnering it
(perhaps by geography). The CEO expects partnering announcements and new drug candidates moving
into the clinic in the second half of 2017.He speculates in the Piper Jaffray Health Care Conference in
New York on November 30th that those announcements along with results from their two drugs
currently in the clinic will drive the stock price up “where it belongs”. He notes that where it belongs is
at least three times higher than the 40-45 million market cap it was trading at on that day.
 
Aptevo could clearly be liquidated for much more than the current trading price. The risk is that the
company intends to burn all their cash on Adaptir development. Even further, they will borrow against
the cash flow of their commercial drugs and burn through that too. So there is a risk that the stock
winds up at zero and one should consider this when sizing a position. Partnering drug candidates or
even the entire Adaptir platform is necessary for this company burning $50 million a year to continue to
operate. So prospects for partnering is perhaps the most important factor as to whether the stock
fizzles to zero or becomes a multi-bagger.
 
Bispecific antibodies recognize two different epitopes and are an emerging area in cancer
immunotherapy. The bispecific binds to a target that is on a tumor cell but not healthy cells. The
second antibody may activate a T-cell to attack the cancerous cell. Bispecifics have resulted in highly
potent antibodies. There are about 40 different bispecific platforms and there’s been a great number of
partnerships recently between pharmaceutical companies and biotechs. Recent partnering includes:
Novartis partnered with Xencor in June 2016, Monoclonal antibody company Kymab Limited partnered
with bispecific antibody company EpimAb Biotherapeutics in October, 2016, Japan-based Ono
Pharmaceuticals partnered with Netherlands based bispecific company Merus in April 2014, J&J signed
up with MacroGenics in Dec 2014 and expanded the partnership in May 2016. Aptevo’s chief scientist
notes that manufacturability is a key distinguishing advantage of Adaptir along with improved stability
and potency compared with other bispecifics. Aptevo’s two clinical bispecific candidates have shown
some effectiveness against prostate cancer and leukemia. The prostate cancer drug is already partnered
and the leukemia candidate will be seeking a partner following publication of phase II trials. The
business plan to finance operations by partnering seems plausible.
 
The company has had its problems recently. Their prostate cancer trials had to be modified after anti-
drug antibodies developed in many patients. The modified trial requiring continuous infusion, 24 hours
a day, seven days a week is ongoing. But the partner modified the agreement leaving more of the
financial risk with Aptevo. Also troublesome is the manufacturing problem with Ixinity. This drug whose
sales were ramping nicely in 2016 is now going out of production. The company’s proposed temporary
solution to the bulk manufacturing problem was rejected by the FDA. Aptevo believes they understand
the root cause and hope to be back in production soon but there’s definitely risk here. Despite the
problems I own a small position. If the $8 to $10 a share the company has invested in Adaptir turns out
to be worth just $2 or $3 rather than the negative value implied by the stock price, investors stand to
make multiples.
 

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Partnering agreements in 2017

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    Description

    Aptevo Therapeutics is a nano-cap, cash-burning bio-tech spun from profitable billion dollar bio-defense
    company Emergent Biosolutions (ticker EBS) on August 1st, 2016. Cash-burning bio-techs are perhaps
    not for grandma’s account, but Aptevo is remarkably cheap for the more speculative investor. Trading
    at $2.20, Aptevo was spun with $65 million ($3.25 a share) in cash and promised cash from the parent
    net of debt that they have since taken on. Furthermore, three profitable drugs (Winrho, HepaGam B,
    and Varizig) requiring little or no further investment were spun with Aptevo that the Aptevo CEO notes
    are worth 2 times sales or about $3.50 a share. A fourth approved drug, Ixinity, began ramping sales in
    2015 and has potential to grow to as much as $40 million in sales for a valuation at 2 times sales of $4 a
    share if the company can work past current bulk production problems. Aptevo’s share price of $2.20
    implies that the cash burning bi-specific drug candidate platform, Adaptir, has tremendous negative
    value. Emergent Biosolutions acquired the Adaptir technology in 2010 for $78 million ($3.90 a share)
    plus a contingent value right with a max value of $38.7 million. The pro-forma R&D spend since then
    has been substantial. In 2014 & 2015, for example, the R&D spend on Adaptir and Adaptir drug
    candidates totaled about $30 million and $20 million respectively for a total of $50 million ($2.50 a
    share). The total investment in Adaptir and Adaptir drug candidates including the acquisition price and
    R&D spend is perhaps in the $8 to $10 a share range.
     
    It’s possible that Adaptir will just burn cash while producing little of value and Aptevo is definitely a
    speculative investment. It doesn’t appear that Aptevo was spun exclusively to relieve the profitable
    parent of the earnings drag, however. Significant assets including cash and profitable drugs were spun
    with it and the Aptevo CEO sat on the Emergent Biosolutions board since 2010. He knew what he was
    getting into. Further, the Chairman of the board owns 13.7% of the company and the officers and
    directors are rather generously incentivized with options while drawing reasonable salaries. Also
    encouraging is that a couple of successful investors have taken significant positions. John Petry, a
    special situations investor formerly with Gotham Capital Management has taken an 8.4% position
    through Sessa Capital Management. Perceptive Advisors, a very successful life sciences fund run by
    biotech expert Joseph Edelman also bought nearly 5% of the company. Finally, the technicals have
    turned positive recently after publication of phase 2 results showing effectiveness of their leukemia drug
    drove a nearly 4 million share trading day. Perhaps Aptevo’s share price has already seen its bottom.
     
    Emergent Biosolutions was a bio-defense company whose primary product was an anthrax vaccine. The
    company diversified into bio-tech with a pair of acquistions. The Adaptir technology came with the $78
    million (net of $19 million cash) plus CVR acquisition of Trubion in 2010. Aptevo’s four commercial
    products came with the $222 million acquisitions of Cangene in February, 2014 although Cangene also
    contributed bio-defense assets that stayed with the parent. The rationale for the spinoff is that both the
    bio-defense and bio-tech businesses have opportunities that require capital. The shareholder base for a
    profitable bio-defense and a cash-eating bio-tech are quite different. Separating them allows each to
    raise capital from appropriate sources. Spinning rather than selling lets shareholders make up their own
    mind whether they want to sell or hold the bio-tech assets. Most shareholders want to monetize but
    the Aptevo COB perhaps wanted the option to continue to own. Aptevo intends to raise cash through
    partnering individual drug candidates or perhaps the entire Adaptir platform with pharmaceutical
    companies. The CEO also notes that they have worldwide rights to Ixinity and are open to partnering it
    (perhaps by geography). The CEO expects partnering announcements and new drug candidates moving
    into the clinic in the second half of 2017.He speculates in the Piper Jaffray Health Care Conference in
    New York on November 30th that those announcements along with results from their two drugs
    currently in the clinic will drive the stock price up “where it belongs”. He notes that where it belongs is
    at least three times higher than the 40-45 million market cap it was trading at on that day.
     
    Aptevo could clearly be liquidated for much more than the current trading price. The risk is that the
    company intends to burn all their cash on Adaptir development. Even further, they will borrow against
    the cash flow of their commercial drugs and burn through that too. So there is a risk that the stock
    winds up at zero and one should consider this when sizing a position. Partnering drug candidates or
    even the entire Adaptir platform is necessary for this company burning $50 million a year to continue to
    operate. So prospects for partnering is perhaps the most important factor as to whether the stock
    fizzles to zero or becomes a multi-bagger.
     
    Bispecific antibodies recognize two different epitopes and are an emerging area in cancer
    immunotherapy. The bispecific binds to a target that is on a tumor cell but not healthy cells. The
    second antibody may activate a T-cell to attack the cancerous cell. Bispecifics have resulted in highly
    potent antibodies. There are about 40 different bispecific platforms and there’s been a great number of
    partnerships recently between pharmaceutical companies and biotechs. Recent partnering includes:
    Novartis partnered with Xencor in June 2016, Monoclonal antibody company Kymab Limited partnered
    with bispecific antibody company EpimAb Biotherapeutics in October, 2016, Japan-based Ono
    Pharmaceuticals partnered with Netherlands based bispecific company Merus in April 2014, J&J signed
    up with MacroGenics in Dec 2014 and expanded the partnership in May 2016. Aptevo’s chief scientist
    notes that manufacturability is a key distinguishing advantage of Adaptir along with improved stability
    and potency compared with other bispecifics. Aptevo’s two clinical bispecific candidates have shown
    some effectiveness against prostate cancer and leukemia. The prostate cancer drug is already partnered
    and the leukemia candidate will be seeking a partner following publication of phase II trials. The
    business plan to finance operations by partnering seems plausible.
     
    The company has had its problems recently. Their prostate cancer trials had to be modified after anti-
    drug antibodies developed in many patients. The modified trial requiring continuous infusion, 24 hours
    a day, seven days a week is ongoing. But the partner modified the agreement leaving more of the
    financial risk with Aptevo. Also troublesome is the manufacturing problem with Ixinity. This drug whose
    sales were ramping nicely in 2016 is now going out of production. The company’s proposed temporary
    solution to the bulk manufacturing problem was rejected by the FDA. Aptevo believes they understand
    the root cause and hope to be back in production soon but there’s definitely risk here. Despite the
    problems I own a small position. If the $8 to $10 a share the company has invested in Adaptir turns out
    to be worth just $2 or $3 rather than the negative value implied by the stock price, investors stand to
    make multiples.
     

     

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Partnering agreements in 2017

    Messages


    SubjectEmergent BioSolutions Guidance
    Entry12/31/2016 08:37 PM
    MemberNapoleon

    googie974,

    Thanks for the write-up. We were investors in Emergent BioSolutions post the spin-off for a quick play on the re-contracting of BioThrax / awarding of NuThrax contract. Was wondering if you had any thoughts on Emergent as a standalone at the current levels (we sold out completely after the Company issued guidance in early December).

    Interestingly in this guidance update (12/08/16), Emergent actually guided for Aptevo's operations as well, implying $30m in EBITDA for FY'16 (and Aptevo stand-alone has not made similar estimates yet to our knowledge). https://www.bamsec.com/filing/136764416000084?cik=1367644

    We had cash burn for Aptevo in our model for EBS at around $45m (which was on the conservative side to underwrite an investment in EBS, APVO standalone estimates are more around $50-55m range). Based on the numbers provided, it seems EBS has given investors a hint into a significant bump-up in APVO operations in Q4 (since YTD revenues for APVO whole-co are only around $30m). Do you have any thoughts here? Clearly $30m of EBITDA would be incremental to EBS and not indicative of stand-alone APVO profitability, but given the diminutive actual revenues from Aptevo, this $30m of purported incremental EBITDA seemed fairly significant as a data point.

    We also like Aptevo and agree with the overall points made in the write-up. We are surprised that partnerships have not yet been announced (and by the lack of purchases by El-Hibri among other EBS insiders). 

     

     


    SubjectRe: Emergent BioSolutions Guidance
    Entry01/01/2017 01:17 PM
    Membershoobity

    Maybe I am reading this wrong but don't you mean negative 30m? Combined is 90-100 (including apvo) and continuing is 120-130 (excluding apvo). 


    SubjectRe: Re: Emergent BioSolutions Guidance
    Entry01/01/2017 02:08 PM
    MemberNapoleon

    Yes thanks for the clarification, I mean negative $30m ebitda attributable to Emergent from the Aptevo operations on a combined basis. Granted there will be some additional SG&A expense for Aptevo on a standalone basis (we had about $15m incremental opex in our model for APVO stand-alone), the delta they were showing in EBITDA on a combined vs ongoing basis for Emergent seemed too small for the 2016 guidance (given 2015 ebitda for APVO was ~-$58m and YTD 2016 -$38.5m for stand-alone APVO). Run-rating the current ebitda for 2016 would indicate around -$50m in ebitda for Aptevo stand-alone (or -$35m ebitda attributable to EBS on a combined basis if you use our $15m incremental SG&A stand-alone costs for Aptevo (which we believe are on the high end). We focused more on Emergent, but on these quick numbers, it would seem the Company is expecting a $5m pickup in Q4 (either on the cost side which is not likely or a bump-up in revenue by $5m for Q4, which would be fairly significant on a current ~$10m revenue per quarter). 

    Just another data point here, EBS originally estimated the ebitda pickup post spin to be around $40-50m (which was for FY15 which would explain the discrepency against the $30m ebitda delta shown in the 12/08/16 guidance – either way though this is indicative of improving operations at Aptevo). Seems like either way you look at this, managmenet expects an uptick in Q4. Maybe we are reading too much into this, but wanted to know thoughts from someone more tuned into Aptevo than us. 


    SubjectRe: Re: Re: Emergent BioSolutions Guidance
    Entry01/02/2017 11:40 AM
    Membergoogie974

    I'd expect that the Ixinity problems will drive costs unusually high in the fourth quarter as they try to resolve this serious problem.  And soon after, if not in the fourth quarter, Ixinity going out of production will hurt revenues.  Ixinity sales were ramping up through the year and is the only reason I can see that they would have anticipated a stronger fourth quarter than the prior ones.  Now it's turning into a problem.

    I didn't follow Emergent BioSolutions and only dug into it enough to see that the company has been a financial success.  That was important to me as El-Hibri remains chairman of Aptevo as well.


    SubjectRe: Re: Re: Re: Emergent BioSolutions Guidance
    Entry01/04/2017 10:30 AM
    Membergoogie974

    Ixinity bulk production problems are resolved and the drug should be available again in the second quarter.  Good news as sales were ramping well last year and hopefully will begin to ramp well again.

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