Last week on August 28th we suggested a buy on Fusion Telecommunications International, Inc. (FSNN) when it was trading a little over $2.00 upon news of the purchase of most of the operations of Birch Communications. Over the next several days, the stock rose briefly past $3.50, nearing the fair value of the deal at $3.85. While we think FSNN could be worth much more, we suggested that it was a good idea to take some money off the table after a strong 50%+ winner for our readers. If you like our picks make sure to follow our blog by clicking the follow button on the top of the left hand panel. We are up to 281 followers despite not giving out a lot of alerts, a fact that we think is indicative of a diligent and prudent stock picking history. If you would like to share this blog, make sure to use the URL "nasdaqnewsreports.blogspot.mx" as certain spam filters on social media don't let you post blogspot.com addresses.
FSNN was a winner from $2.00 driven by news that made it unambiguously undervalued and Aptevo Therapeutics Inc. (APVO) is a biotech stock in the exact same position. On the afternoon of August 31st, APVO announced the sale of one of its subsidiaries:
"On August 31, 2017, Aptevo Therapeutics Inc. (“ATI”), Aptevo BioTherapeutics LLC (“Aptevo BioT”), a wholly owned subsidiary of ATI, and Venus BioTherapeutics Sub LLC, a wholly owned subsidiary of Aptevo BioT (collectively, the “Company”), entered into an LLC purchase agreement with Saol International Limited (“Saol”).
Pursuant to the terms of the LLC purchase agreement, on the terms and subject to the conditions thereof, Saol will acquire all of the equity interests in Venus BioTherapeutics Sub LLC. As a result of the acquisition, Saol will acquire the three hyperimmune products currently marketed by the Company: WinRho® SDF for autoimmune platelet disorder and hemolytic disease of the newborn; HepaGam B® for the prevention of Hepatitis B following liver transplantation and for treatment following hepatitis B exposure; and VARIZIG® for treatment following exposure to varicella zoster virus for individuals with compromised immune systems (the “Hyperimmune Products”). The purchase price is up to $74.5 million, including an upfront payment of $65.0 million and an additional potential milestone payment totaling up to $7.5 million related to the achievement of certain gross profit milestones. In addition, Aptevo BioT may receive up to $2.0 million related to collection of certain accounts receivable after the closing. The closing of the transactions contemplated under the LLC purchase agreement is subject to certain customary closing conditions."
As a result, APVO rose 59% on September 1st to $2.11, but still closed below its open price of $2.42. This was similar behavior to FSNN on August 28th when it opened at $2.32, raced to $2.59 in early trading and then sold off to the low $2.00's before ending the day slightly below its open price at $2.29. Just like with FSNN, dumb day traders and shorters don't understand that APVO is unambiguously undervalued thanks to this news. Those type of people blindly short a stock because it went up over 50% without any regards to the reasons why. This gives us and all of our readers a second chance in a week to scalp another 50% or more as APVO heads to its true value over $3.00 just like FSNN did and squeezes out a bunch of silly shorts.
However, unlike FSNN which is undervalued thanks to what basically leads to a reverse takeover from Birch (and is therefore unlikely to have another M&A deal any time soon), APVO has become a hostile takeover target. The minimum cash payment to be received from the sale of the subsidiary is $65 million. Based on 21.42 million shares outstanding, that is $3.03 per share. The $7.5 million milestone payment would be worth up to an additional $0.35 per share, though the timing of that payment in unknown and not guaranteed so there must be some discount factored in. As of June 30th, APVO had working capital less long term debt of $31.7 million, Assuming another quarter burn rate of about $10 million to the end of September, there is another $1.00 per share worth of net short-term assets less debt already existing on the balance sheet.
APVO's net cash position upon closure of this sale is worth somewhere in the neighborhood of $4.00 per share. Some biotech companies do trade at discount to cash if there is a heavy burn rate and no near-term prospects. However, APVO is trading at a nearly 50% discount to cash and still has one revenue-generating product in IXINITY.
The run on this good news may have been impacted by a second 8-K released on August 31st, one which disclosed the termination of a License and Co-Development Agreement for MOR209/ES414. There is obviously a fear that the cash will be used up by APVO to develop this drug and the rest of its pipeline on its own and that the company will eventually need to finance.
This is where we believe that APVO is a prime target for a hostile takeover or at least the target of an activist shareholder seeking to maximize returns in the quickest and easiest way possible. A hedge fund would be willing to pay $3.00 or more per share and do the following:
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FSNN was a winner from $2.00 driven by news that made it unambiguously undervalued and Aptevo Therapeutics Inc. (APVO) is a biotech stock in the exact same position. On the afternoon of August 31st, APVO announced the sale of one of its subsidiaries:
"On August 31, 2017, Aptevo Therapeutics Inc. (“ATI”), Aptevo BioTherapeutics LLC (“Aptevo BioT”), a wholly owned subsidiary of ATI, and Venus BioTherapeutics Sub LLC, a wholly owned subsidiary of Aptevo BioT (collectively, the “Company”), entered into an LLC purchase agreement with Saol International Limited (“Saol”).
Pursuant to the terms of the LLC purchase agreement, on the terms and subject to the conditions thereof, Saol will acquire all of the equity interests in Venus BioTherapeutics Sub LLC. As a result of the acquisition, Saol will acquire the three hyperimmune products currently marketed by the Company: WinRho® SDF for autoimmune platelet disorder and hemolytic disease of the newborn; HepaGam B® for the prevention of Hepatitis B following liver transplantation and for treatment following hepatitis B exposure; and VARIZIG® for treatment following exposure to varicella zoster virus for individuals with compromised immune systems (the “Hyperimmune Products”). The purchase price is up to $74.5 million, including an upfront payment of $65.0 million and an additional potential milestone payment totaling up to $7.5 million related to the achievement of certain gross profit milestones. In addition, Aptevo BioT may receive up to $2.0 million related to collection of certain accounts receivable after the closing. The closing of the transactions contemplated under the LLC purchase agreement is subject to certain customary closing conditions."
As a result, APVO rose 59% on September 1st to $2.11, but still closed below its open price of $2.42. This was similar behavior to FSNN on August 28th when it opened at $2.32, raced to $2.59 in early trading and then sold off to the low $2.00's before ending the day slightly below its open price at $2.29. Just like with FSNN, dumb day traders and shorters don't understand that APVO is unambiguously undervalued thanks to this news. Those type of people blindly short a stock because it went up over 50% without any regards to the reasons why. This gives us and all of our readers a second chance in a week to scalp another 50% or more as APVO heads to its true value over $3.00 just like FSNN did and squeezes out a bunch of silly shorts.
However, unlike FSNN which is undervalued thanks to what basically leads to a reverse takeover from Birch (and is therefore unlikely to have another M&A deal any time soon), APVO has become a hostile takeover target. The minimum cash payment to be received from the sale of the subsidiary is $65 million. Based on 21.42 million shares outstanding, that is $3.03 per share. The $7.5 million milestone payment would be worth up to an additional $0.35 per share, though the timing of that payment in unknown and not guaranteed so there must be some discount factored in. As of June 30th, APVO had working capital less long term debt of $31.7 million, Assuming another quarter burn rate of about $10 million to the end of September, there is another $1.00 per share worth of net short-term assets less debt already existing on the balance sheet.
APVO's net cash position upon closure of this sale is worth somewhere in the neighborhood of $4.00 per share. Some biotech companies do trade at discount to cash if there is a heavy burn rate and no near-term prospects. However, APVO is trading at a nearly 50% discount to cash and still has one revenue-generating product in IXINITY.
The run on this good news may have been impacted by a second 8-K released on August 31st, one which disclosed the termination of a License and Co-Development Agreement for MOR209/ES414. There is obviously a fear that the cash will be used up by APVO to develop this drug and the rest of its pipeline on its own and that the company will eventually need to finance.
This is where we believe that APVO is a prime target for a hostile takeover or at least the target of an activist shareholder seeking to maximize returns in the quickest and easiest way possible. A hedge fund would be willing to pay $3.00 or more per share and do the following:
- Accept the $4 per share in net cash and short term assets along with gaining title over the $7.5 million in milestone payments.
- Sell IXINITY.
- Sell the rest of the pipeline for whatever meager amount they can get and discontinue all R&D activities to eliminate the burn rate.
- Lay off whatever staff might be left after selling each division. APVO has no off-balance sheet agreements that would subject the company to future cash outflows.
The value of doing these things would likely approach $5 per share and wouldn't be that hard to do. If the stock price doesn't move to at least $3 soon, watch for activist funds to try to take over. The market has had the long weekend to absorb this news and think about how undervalued APVO has become. Don't expect APVO to stay low for long.
Disclosure: We are long APVO
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