This part has considerable ground to cover prior to the upcoming auction. But first, investors need to feel reassured that we own this company and its assets. We are looking for a sale to maximize the value for all stakeholders. Pat is merely employed in our service, and if he dares to interfere with this objective there will be hell to pay. Let’s head into next week with the quiet confidence that we will find a good home for Clovis assets and get our investment returns.
(1) The tale of the two checkboxes
There may not be a better illustration of Pat’s corrupt intent than the two checkboxes in the BK filing. In one checkbox, the liabilities are claimed to be in the $500 mn to $1000 mn range, in another the total assets of the company are claimed to be in the $0 to $500 mn range. So let’s get this straight: the CEO with an FDA approved drug for TWO indications pulling in $120 mn annually, with additional first line approvals on the way, and two other oncology pipeline drugs has gone on the record with a valuation less than $500 mn??
Under oath, let him list out the dates and amounts of all previous expressions of interest in acquiring Clovis since the time of the prostate approval. The premise is that Pat declined those offers because those were UNDERVALUING the company. So then, how can he reconcile his valuation in the BK filing with rejecting those offers? Can he fully document the alleged impairment of the assets since the latest offer that supports his valuation? This line of questioning when pursued to its logical end will show us a CEO that has worked in direct opposition to his fiduciary duties and therefore subject to all civil and criminal convictions that follow.
(2) An attempted fence
When a work of art is stolen, it is typically not possible to find a buyer right-away. Things need to cool down and so the thief sells it to a fence, who will then find a buyer a few months or years later.
An opinion that was floated on the message boards was that Pat was somehow looking to get these assets into the hands of Sixth Street, with some hidden favor in return. This would be effected through a laughable ‘credit bid’ in which Rubraca would be picked off on the cheap. When the approvals would come in, Sixth street would pretend to be delighted that what they bought as a high school artwork turned out to be a Mona Lisa!!
Make no mistake, Clovis assets belong in the hands of one of the Big Pharmas that can extract the full potential. Sixth Street is not creating a biotech division staffed with Moe, Larry and Curly to take these drugs forward; they are just looking to sit on assets for a while. It is good to see that there is no longer any talk of a pathetic credit bid now that Big Pharma is at the table.
(3) The promise of Rubraca
It may be good to review the full scope of Rubraca’s potential:
Rubraca is already approved in later lines for two indications, Ovarian and Prostate. Phase three data has come out stellar, and first-line approvals are broadly expected. The Tesaro PARPi Zejula has already reached $500 mn in sales and that is not even the peak sales yet in view of the expected CAGR for this class of drug. There is no reason to doubt that Rubraca will at the very least replicate the same performance in the hands of a big Pharma considering that a comparison study concluded Rubraca to be best in class. Putting a modest 4x multiple gives us a floor Rubraca valuation of $2 bn.
There are other indications for which Rubraca has shown promising early results. Those need to be aggressively pursued with the resources of a BP. There is a likelihood that other indications like Breast and Pancreatic for which other PARPs have already won approval may be fertile opportunities for Rubraca as well.
Rubraca has shown the ability to potentiate other drugs like Opdivo in their mechanism of action. This is really key, because otherwise those drugs would not reach the efficacy needed for either approval or for market impact. There was another recent reference of Rubraca potentiating yet another drug as well. These kinds of combination treatments could be a game changer in the future.
PARPs are effective when there is an underlying BRCA mutation which limits the label. Studies have shown that BRCA-ness can be induced. If this pans out, for cancers that have a poor prognosis or no effective treatment options, it may be worthwhile to first induce BRCA-ness and then proceed with PARP therapy. While this is in the early stages, this could be yet another way to increase the TAM.
There was a study that indicated Rubraca’s effectiveness for the Covid virus. I wrote about it in a prior installment but Clovis as usual was completely silent on this. Considering that Corona viruses are projected to be a continuing concern into the future, this is one other use case for Rubraca.
The above is the full landscape for Rubraca prospects. Some are obviously more mature than others, but the key takeaway is that Rubraca has broad applicability and is also the last free-standing PARP. It needs to be valued accordingly.
(4) The motivation of Big Pharma
Big Pharma is constantly facing patent cliffs and the need to replenish revenue streams. BP is currently sitting on record levels of cash and in the hunt to deploy it productively. Business development teams are looking to snap up the next franchise that will add a lifetime value in the billions to their toplines. They are not looking to damage the interests of investors in other companies! Can you imagine a BP representative calling HQ after the auction saying, ‘Hey, guess what, we were outbid by our competitor and they have picked up Rubraca on the cheap. We will now face stronger competition in the market. But the good news is that by not bidding as high as we could have, we have ensured that Clovis investors don’t get a penny’. Just ridiculous!
The overriding objective for BP is to maximize value for their own stakeholders, not to cause suffering to the investors of a nanocap! Yes, Pat is singularly opposed to the investors in his own company, but it is incorrect to assume that any BP shares the same intent as Pat.
There will be a healthy bidding on auction day; we just need to ensure that Pat and his cronies do not find a way to tilt the scales. There is also a possibility that Clovis did not make the due effort in collecting bids and representing the assets fairly, and the recent BM motion will allow that to be contested.
(6) The all-important auction
It is a cause for concern that the auction will be conducted by the CLVS attorneys. We know that Pat has some agenda that is not aligned with shareholders, and he has lined up his bunch of attorneys that may be up to no good.
On the positive side, there is ample oversight that can help ensure they do not try to influence the auction. First, and most important, we must confirm that the US trustee will be present for the entire proceedings, ready to make note of anything untoward.
Second, we must ensure that the entire proceedings are video-recorded. The procedure document lists that the auction will be either transcribed or video recorded. Well, a transcription may not be accurate, and may not capture nuance. We should demand a video recording so that it is available for review if needed.
Third, we must all be aware that the only reason why creditors are in attendance is because they have priority in bankruptcy proceedings. However, if the outcome of the auction is such that one or more bids fully cover the debt, then they must IMMEDIATELY be struck off from having voting rights in the proceedings. Classes 1 through 5 only have their claims, and not a penny more. All the upside in the stock belongs ONLY TO THE INVESTORS and none else.
Pat has drawn up the consulting parties and voting rights under the assumption that classes 6 through 9 will be fully impaired. If that is not the case, and classes 1 thru 5 are made whole, then those classes must shut their trap and step aside. No creditor will have ANY input into choosing between bids that govern the upside of the stock; the ad-hoc committee will step into that role.
(7) The nature of the bids
If you were a BP and wanted to ensure the highest chance of your bid succeeding, you would want to make a straight flat-amount bid for Rubraca, without ANY CVRs at all.
The reason for this is that a full cash value in the present will always trump CVRs because by definition they are conditional, and therefore can also turn out to be zero. A flat out cash bid has a way of focusing attention and interest like no other.
CVRs make sense when a drug is in the early stages and has a lot of proving to do. FAP is a good example. However, Rubraca has been in the market for years now, and is a well known entity. It completely makes sense to dispense with ALL CVRs for Rubraca and just make a single dollar figure bid. The BP needs to know that such a bid will have a much higher chance of success than one that is muddled with CVRs.
We all know that Pat is aligned with the short-seller agenda. Consider two scenarios, Case 1, a BP makes a bid for $1 bn cash and $1.6 bn CVRs, with the potential outcome being a range from $1 bn to $2.6 bn. Case 2, a BP makes a flat bid of $ 2 bn. Notice that in both cases, the liabilities are fully covered. The question is which is the better bid?
Knowing the crook that Pat is, he will likely choose option 1 because the immediate reflection on the share price is marginal. Assuming $900 million in liabilities, the remaining $100 mn in case 1 will only support a $0.70 share price for 140 mn shares. Any additional share appreciation is conditional and out in the future.
We, on the other hand, would much prefer the immediate cash in hand of case 2. After clearing the liability, the remaining $1.1 bn would equate to a share price of $7.85.
This brings me to the final and most important point. If there are multiple such bids to choose from, Pat MUST NOT BE ALLOWED to independently announce the winning bid the following business day. He must consult with the equity committee first and follow our direction. Just to reiterate, any creditors have ZERO input into how the share upside will be captured, only the equity committee can speak to that.
Pat has always operated as though his investors are sheep and he will shaft them. Well, he is actually swimming with sharks and we are in the mood to leave bite-marks.
(8) Endnote
Pat needs to realize that all his actions are under the microscope and will be held to account if he dares to interfere with the value recovery for investors. We are going to come down like a ton of bricks on his retaliation against shareholders. In this part I have focused more on the value of Rubraca and auction related details. In another part to follow I will provide some more detail on how we need to hold Pat’s feet to the fire. As the BM filing has outlined, if the auction is found to be deficient or restrictive it will be fully contested.
