FWP - Forward Pharma A/S

[writser]

Anybody familiar with this company?

 

As part of a settlement with Biogen Forward Pharma received a non-refundable $1250m settlement amount. According to their latest presentation FWP has pro-forma ~$1093m in cash, net of taxes. Shares outstanding are ~47.15m plus 1.8m strike $1 warrants, some warrants with significantly higher strikes and 350k deferred shares, so diluted sharecount is roughly 50m. The company wants to return to shareholders a 'substantial portion' of the $1250m and "plans to finish its remaining research and development efforts and pursue an organizational realignment to reduce personnel and operating expenses by mid-year 2017". They are scaling down to less than seven employees. The CFO and a few others already left the company.

 

What else has the company got to offer us apart from the cash on the balance sheet? Well, they still have a patent portfolio and could receive future royalties. According to the company, there are three pillars of value for FWP: 1) the current cash balance, and, pending lawsuits, 2) potential US royalties and 3) potential non-US royalties.

 

“We maintain a clear focus on our appeal of the US PTAB interference decision to the Federal Circuit, along with the upcoming opposition proceeding in November for our European ‘355 patent,” said Dr. Claus Bo Svendsen, CEO and principal financial officer of Forward.

 

We believe our intellectual property portfolio, combined with the clinical data we have independently obtained and the discussions we have had with the FDA provide us with the opportunity to pursue the development of FP187 for the treatment of relapsing forms of MS in the U.S. We are finishing the research and development work that was in process prior to the effective date of the License Agreement and thereafter plan to suspend further development of FP187 pending the outcome of the Interference Proceeding, including any appeals to the Federal Circuit, until we determine if Biogen will maintain a co-exclusive license under the License Agreement. If Biogen maintains a co-exclusive license, we expect to either assign our co-exclusive license rights to a single third party or reinitiate clinical development of FP187, or initiate development of another DMF Formulation, in anticipation of a regulatory submission to the FDA. However, if Biogen prevails in the Interference Proceeding and IPR, after any appeals to the Federal Circuit, we may be prevented from commercializing our lead product candidate, FP187, for MS in the U.S. at a 480 mg per day dose.

 

My assumption is that the company needs $100m to restructure the company, finish current research and to go to court for a few years. Doesn't sound unreasonable, especially given that the chairman, Florian Schonharting (seems to be a savvy Nordic biotech fund manager) owns ~55% of the company through his own fund. I would expect the company to make a reasonably effort to conserve as much cash as possible.

 

If the $100m for operations is ballpark correct they can still pay out roughly $993m or $20 per share, slightly more than todays price. I would presume that a self-tender offer is the most tax-efficient way to do so (either through a Dutch auction or at a fixed price of $25 or something.). The company intends to announce a definitive plan for returning capital in the second quarter of 2017, so I guess we know for sure in a few weeks.

 

I'm no expert in biotech but it seems like the downside is reasonably well covered by the cash balance so I bought some shares, mostly with the intention of trying to sell them back to the company in a few weeks (adding value to society!). Main risk is that the company is not going to return as much cash to shareholders as I'd like. To me it looks unlikely that a company with a $160m balance sheet that is going into hibernation suddenly needs $300m in cash to fund operations - and even if they do that still leaves ~$16 to be distributed per share.

[clutch]

Thanks for the idea.

 

Is there any reason for the recent sell-off (after the spike earlier in the year, which I presume was reaction to the settlement)?

[writser]

First they struck the licensing agreement with Biogen, got paid $1250m and would receive royalties in the future. All was good and the stock skyrocketed. Then a few months later a judge sided with Biogen in a patent proceeding. Biogen wouldn't have to pay royalty payments anymore. FWP is going to the federal circuit to appeal that decision.

 

The ruling by the U.S. Patent Trial and Appeal Board (PTAP) frees Bigoen Inc from future royalty payments to Forward and sent the Danish firm's shares down nearly 20 percent. Biogen shares were up 1.4 percent.

 

The companies had been locked in a dispute over patents for dimethyl fumarate, the key active ingredient in Tecfidera, the leading oral MS treatment with sales of about $4 billion in 2016.

 

I'm no expert here but it looks like this royalty stream is worth a 9 digit figure. So the "bet" here is basically to buy the stock at $19, get (hopefully) $20 in cash back together with a free option on the lawsuits.

[clutch]

Got it.

 

Considering the stock price was ~19 last year before the payment of $1250m, and the price right now is still ~19 after the cash payment, was the market already expecting that settlement amount?

 

Or is the market somehow confused about the cash payment and the new patent ruling? (somehow thinking that FWP has to re-pay back the cash?)

 

If not, it does seem like a good one-sided bet.

[writser]

To be fair, I have no clue what the market was/is thinking. I just see that the company is priced below pro-forma net cash. Buy a share for $19, get $20 in cash and a free company attached with a potential royalty stream on a blockbuster drug and $100m in cash to keep the engines running. The stub is currently trading at a negative valuation and that will change after the return of capital.

 

My estimates could be too optimistic though. Operating loss in Q1, winding down R&D, severance payments, lawsuits, etc. all cost money. Nevertheless, as stated before, I find it hard to believe that the company would need more than $300m going forward, in which case  there would still be $16 per share to distribute (and the stub should be worth more than zero given the significant cash balance and potential royalty streams).

 

Famous last words: FWP looks like a (relatively) safe idea to store some excess cash for a few months. My best guess is that the stock will trade up a bit after the definitive plan to return capital is announced in a few weeks and then you can either cash out or take a gamble with the stub. Worst case the company requires more working capital than I expected, will continue to trade at a discount to net cash and you end up losing 10% or some.

 

Worst worst case I am completely wrong, they pay out a minimal amount and blow the rest trying to develop a new blockbuster drug and you lose all your money.

[clutch]

I like the odds.  ;)

[constala]

FWP is a decent proposal at $19.

 

my central scenario is

 

1) within 7 weeks FWP offers some form of tender at say $22.2 for 45m shares. That's $ 1bln capital back.

 

2) FWP becomes then essentially cash >$100m+ Biogen litigation and royalty IP play. Now remember US appeal is just to keep the pressure, close to zero proba of success as CEO acknowledged on the call; but a EU win in November 2017 or later has very decent probability.  Biogen should in all likelihood offer $30 or more to retire this liability.

 

[writser]

Now remember US appeal is just to keep the pressure, close to zero proba of success as CEO acknowledged on the call; but a EU win in November 2017 or later has very decent probability.

Thanks for your insights. Did you mean the DB healthcare conference call? I didn't explicitly understand that.

 

I agree that your scenario is likely. On the call they again reiterated that management & the board are looking for the most efficient way to return cash - can't imagine that would be something else than a tender offer around fair value, so $21-$25, depending on cash burn in 2017 and their valuation of their IP.

[maybe4less]

According to the initial press release, Forward Pharma will pay 22% Danish tax on the $1.25B payment.

 

http://ir.forward-pharma.com/mobile.view?c=253796&v=203&d=1&id=2237859

 

So they actually received $975M net of taxes. Not quite as much of a cushion based on the current price, but I think it still looks interesting.

[Hielko]

According to the initial press release, Forward Pharma will pay 22% Danish tax on the $1.25B payment.

 

http://ir.forward-pharma.com/mobile.view?c=253796&v=203&d=1&id=2237859

 

So they actually received $975M net of taxes. Not quite as much of a cushion based on the current price, but I think it still looks interesting.

I think people here were already accounting for the tax :). Besides the payment the company had already $170 million in net assets (mostly cash/available for sale financial assets)

[writser]

FWIW Baupost still holding ~12% of shares outstanding as of last quarter: link. For them it's a small position though. For me personally it is one of my larger positions currently (don't read too much into that because I'm a pussy, so < 10%). Low-risk cashbox with a little bit of upside. Beats your savings account.

[writser]

A good thing that hasn't been mentioned in this topic yet is that FWP converted the settlement amount into euro's at an ~1.07 exchange rate shortly after receival. Nice move in hindsight with EUR/USD at 1.12 now. Adds ~$50m in value.

 

On the flipside, some smart people pointed out that there are some tax risks as incentives of major holders are perhaps not aligned with minority holders. Substantial holders probably do not have to pay withholding taxes (I'm not expert on Danish tax law) so for them it could be beneficial to simply pay out a huge dividend, screwing over the retail holders who _do_ have to pay taxes (as happened with Sapec). Also, if they want to launch a tender offer for the ADR's, why would they convert all their cash into euro's first? I don't understand enough about Danish tax laws to completely understand the tax implications of a tender offer vs. a dividend. It is also hard for me to judge whether the board gives a shit about minority holders. Because of this I reduced my position slightly.

 

However, substantial holders don't have to pay capital gains taxes either as far as I understand so I wouldn't completely rule out a tender offer. Management seems shareholder friendly and I still think there is a decent chance of a good outcome. The fact that they are taking a bit of time might be a good thing. If they wanted to pay out a big dividend and screw over minority holders there wouldn't be much to think about and they could have put out a press release a few weeks ago.

[writser]

No clue what happened today but FWP is up significantly today on no news and no volume. I sold the majority of my position for a ~12% gain.

[maybe4less]

So they announced today that they are paying EUR19.45 per share as a "capital reduction."

 

https://www.sec.gov/Archives/edgar/data/1604924/000117184317004155/exh_991.htm

 

The ADS price is significantly below that amount, which puzzles me. My guess is that a "capital reduction" implies no tax withholding, but I haven't been able to confirm that. Am I missing something else?

[writser]

Not as far as I know. I think the price is where it is due to tax uncertainties. I would be surprised if the entire distribution is tax-free as paid-up capital is only 340m.

[maybe4less]

Not as far as I know. I think the price is where it is due to tax uncertainties. I would be surprised if the entire distribution is tax-free as paid-up capital is only 340m.

 

Good point, thanks.

[Jurgis]

Where is John Hjorth when you need him.  8)

 

Edit to clarify: so at least for US tax-deferred account holders the question is whether Danes will withhold taxes from the EUR19.45 per share "capital reduction" payment. Scenarios where US tax-deferred holders win: whole amount returned non taxable, whole amount returned taxable but no withholding. Scenario where US tax-deferred holders lose: there is withholding and it's more than 5% (depends price paid - I assumed in $21.XX area - and on residual value though!). So we need Danish expertise on what tax implications will be and how they will be handled: withholding or not?

[John Hjorth]

Hi all fellow board members in this topic,

 

Jurgis has sent me a PM, and asked me to look at this topic. I'll do my very best to deliver a reply on the withholding tax question tomorrow to all of you. I think I need to do one or more calls, it's not totally trivial.

[_JJ_]

What do you guys estimate the remaining intrinsic value per share to be after the capital reduction?

[_JJ_]

Not as far as I know. I think the price is where it is due to tax uncertainties. I would be surprised if the entire distribution is tax-free as paid-up capital is only 340m.

 

Yes but the ADS's went public in 2014 for $ 21 a share. Maybe this makes things different for the ADS's under Danish tax law?

[Hielko]

Not as far as I know. I think the price is where it is due to tax uncertainties. I would be surprised if the entire distribution is tax-free as paid-up capital is only 340m.

 

Yes but the ADS's went public in 2014 for $ 21 a share. Maybe this makes things different for the ADS's under Danish tax law?

Would surprise me. Otherwise there would be a pretty big loophole in the tax rules.

[Jurgis]

I'm gonna wait what John digs up from Danish side. But assuming 340M is tax free, 577M taxable and something like 30% withholding on taxable part, you get ~Euro3.67 = ~$4.23 withholding. So then the question is really: what's the residual worth and is it more than $3 or so? I'd guess it depends on the value of remaining litigation and whatever rights they have, but this is quite murky for me.

[maybe4less]

Hi all fellow board members in this topic,

 

Jurgis has sent me a PM, and asked me to look at this topic. I'll do my very best to deliver a reply on the withholding tax question tomorrow to all of you. I think I need to do one or more calls, it's not totally trivial.

 

Thanks in advance!

[John Hjorth]

As promised yesterday, I have looked at this tax situation for Forward Pharma today. It is so complicated, that I'm in way over my head on a professional level with regard to tax.

 

To me, and to the best of my recollection, I have never seen a case like this here in Denmark, in the meaning I'm not aware any cases that statute precedense. [To me, very fascinating!]

 

So it became clear to me, that it would be in vain to try make a call to the Danish IRS [in Danish called "SKAT", translated back to English, it becomes "darling", "treasure" or "tax", btw.]

 

- - -  o 0 o - - -

 

So I decided to call the company directly at its HQ adress in Copenhagen, the point here is:

 

1. The company is not in any way obligated to give tax advise to its shareholders [holders of ordinary shares not listed anywhere, or holders of the US  ADSs, listed on NasDAQ.]

2. It's the company, that have the obligation to correctly withhold dividend taxes, for both ordinary shares not listed anywhere, and for holders of the US ADSs.

 

So while making the call, one has to stay away from #1, and strictly focus only on #2 in the communication, or one will get a canned response to #1 after which one will get wiped off the line.

 

So I called the main number, got the secretary at the desk, and she redirected me - to my surprise - directly to CEO Claus Bo Svendsen. He was very friendly, polite and acommodating.

 

I presented my self by name, and he asked me what he could do for me. I answered that I had a question about dividend withholding taxes on the capital decrease to take place in September. He then asked in which capacity I was asking. I answered, that I was asking as a representative of some foreign holders af US ADSs, whom I'm in contact with, and who I would do the favour of asking to the situation.

 

He then got very explanatory to me, I interrupted him politely by stating my professional background, and kindly asked him to just be specific on the situation so he knew he could cut directly to the bone, which he did.

 

The answer from him was: "We don't know - yet. The auditors EY and another of the Big Four are on it."

 

- When we're talking about Denmark, it's most likely DeLoitte or PwC , most likely with dotted lines to the respective Tax Departments in New York, and to the depositary bank/administrator of the ADSs [bNYM].

It's formal answer. ref. the filing. Naturally the company has more than the contours of how to do this, otherwise there would not have been a filing yesterday about it.

<Edit 1 begin>

 

Most likely, the two tax advisers have requested a binding advance tax ruling from the Danish IRS on this. We have such system in place here in Denmark, to preserve equality for the law, and legal security for all, for a nominal fee. My guess is, that the company has received a formal but oral advance expression on the ruling to come.

 

<Edit 1 end>

 

Underway in the telephone conversation and the details in it from him, I got the impression of a person with zero ns ping time, talking at very high speed, and at the same time not cutting off any word while speaking, and the same time expressing himself with maximum precision. Very efficient, and clear in his spit. He is a doctor and researcher of original profession [from Novo Nordisk A/S], and now he knows his sh!te/stuff with taxes also.

 

I ended with a quite clear impression, that the company is doing this, because it's aware of the tax situation for the ADS holders. What does a few million DKK in fees mean in importance, compared to this capital transaction, and compared to the taxes for the holders af the ADSs? - Not much.

 

The company is on your side, gents. However, that does not totally eliminate the tax risk.

 

My advice would be to get in contact with BNYM and get an appointment to get notified, when some memo/instruction flow from the company to BNYM about dividend withholding taxes on this transaction. I sense that will happen soon.

 

<Edit 2 begin>

 

- - - o 0 o - - -

 

My subjective guess on the dividend withholding tax [27%] outcome after the telephone conversation is : No: 95% - Yes: 5%

 

<Edit 2 end>

[Jurgis]

Thanks a lot John!  8)