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Nabi/Biota Structure Fuses Merger, Liquidation Benefits

By Trista Morrison

When Nabi Biopharmaceuticals Inc. revealed its plans to serve as a public shell for a reverse merger with Aussie biotech Biota Holdings Ltd., Raafat Fahim knew he'd face some opposition from shareholders.

The biotech industry has a few trademark reverse merger success stories – like Cougar Biotechnology Inc., which saw its stock jump 150 percent in three years and secured a billion-dollar acquisition by Johnson & Johnson, and OncoGenex Pharmaceuticals Inc., which has gained 1,200 percent in market cap since its reverse merger. (See BioWorld Today, May 26, 2009, and Dec. 22, 2009.)

But the majority of biotechs fail to gain traction with investors after a reverse merger and find their future financing potential hobbled by low stock prices and limited liquidity. Some reverse mergers end up being a good deal for investors in the new merged entity, but most are a bad deal for investors of the public shell. (See BioWorld Insight, July 25, 2011.)

That's why, in recent years, investors in biotech shells have fought such transactions. Investor pressure put the kibosh on a proposed 2009 merger between Australian biotechs Progen Pharmaceuticals Ltd. and Avexa Ltd., while Deerfield Management prevented shell firm NitroMed Inc. from merging with Archemix Inc. Shareholders of VaxGen Inc. voted down two reverse merger proposals – one with Raven Biotechnologies Inc. and another with Oxigene Inc. – before finally agreeing to merge with diaDexus Inc. (See BioWorld Insight, Feb. 28, 2011.)

It's not that there's anything wrong with the reverse merger structure, but some private firms opt for a reverse merger because they aren't strong enough for an initial public offering, which creates a negative selection bias. Add to that the failure rates inherent in the biotech industry and you've got a recipe for risk that the shareholders of some shells won't tolerate.

And Nabi had an additional complication. When last year's Phase III failure of smoking cessation vaccine NicVAX turned the biotech into a shell, it had almost $100 million of cash remaining. So while the long-term, value-driven investors fled the stock, the arbitrage investors hoping to force a sale and wring that cash out of the firm rushed in. (See BioWorld Today, July 19, 2011.)

Fahim, Nabi's president and CEO, said it was clear this investor base had no interest in backing research and development, so the company halted that work. But Fahim noted that not all the investors in the company were arbitrage investors, and the board of directors felt they had a fiduciary duty to evaluate strategic alternatives.

The alternatives were simple: liquidate and return the cash to shareholders, merge, or sell. There were no suitors for a sale, so Nabi hired Piper Jaffray to explore a merger, which it felt might be more valuable in the long-term than liquidation.

Many management teams of biotech shells have felt that same way in the past and been proven wrong. Nabi's cash and Nasdaq listing attracted a lot of merger interest, but even having a bevy of candidates to choose from is no guarantee that you'll pick a winner. Novacea Inc. was in a similar situation in 2008: It chose Transcept Pharmaceuticals Inc. out of a rumored 100 suitors, and the merged company's stock price is still some 44 percent below Novacea's cash per share just after it became a shell.

In an effort to appease investors still smarting from that and other reverse merger failures, Nabi took two unusual steps. First, it decided to merge with a revenue-generating company, figuring that business model would be easier for investors to stomach than a money-losing, development-stage biotech. "We wanted lower risk because arbitrage investors have lower risk tolerance," Fahim explained.

Second, Nabi will give its shareholders a 26 percent stake in the merged firm, but they will also get $25 million to $30 million in cash back as well as contingent value rights (CVRs) tied to any future sale, transfer, license or similar transactions involving NicVAX. The structure is an attempt to offer the investors a bit of both the reverse merger and liquidation benefits. (See BioWorld Today, April 24, 2012.)

Biota CEO Peter Cook said his firm was willing to let Nabi keep some of its cash because "we didn't need it." While that might seem counterintuitive in the biotech world, Cook explained that the merged company will have upwards of $100 million, and Biota is paying a 19 percent premium on the cash it gets from Nabi so it didn't want to take too much. Also, Biota wanted to "strike a balance" between how much cash it took and how much it diluted its existing shareholders.

The combination merger/liquidation structure echoes a deal proposed by MediciNova Inc. back in 2008. MediciNova was trying to acquire cash shell Avigen Inc. mainly for an early stage program and associated intellectual property, and it offered Avigen's shareholders not only a small financing backed by MediciNova's equity, but the right to choose, after a year, whether they wanted more equity or a share in Avigen's remaining cash. (See BioWorld Today, Dec. 24, 2008.)

The MediciNova/Avigen deal eventually closed, despite initial reluctance from Avigen's management, shareholder pressure and lots of accusations and name-calling. (See BioWorld Today, Aug. 24, 2009.)

Fahim hopes Nabi's process will be less contentious. He and Cook are on the road together in New York, trying to convince investors to support the merger. Fahim emphasized that Biota is tremendously undervalued from being traded on the ASX; its stock price has languished under A$1 (US$1.03) despite having a revenue stream from two marketed flu products, a $231 million Biomedical Advanced Research and Development Authority contract and a pipeline of drugs for rhinovirus, respiratory syncytial virus and hepatitis C.

"Once they come to the U.S., they will flourish," Fahim said. His plan is to either convince the arbitrage investors to support the deal, or to get long-term investors back into the stock so the arbitrage investors can exit. Alternatively, Nabi might use its $25 million to $30 million in cash to repurchase stock from arbitrage investors who don't want to invest in the merged company, rather than paying out a cash dividend.