This has certainly been an eventful few months for Immunomedics and its largest shareholder, venBio.  In case you haven’t been following, below is a brief replay:

• Towards the end of last year, venBio, the beneficial owner of approximately 9.9% of the outstanding shares of Immunomedics and its largest stockholder, initiated a proxy contest to nominate 4 of its own directors to the 7-member board, effectively seeking control of the company.
• On January 26, venBio distributed a scathing presentation to Immunomedics’ shareholders, detailing its views on how the current board mismanaged the development of its lead asset, IMMU-132, and destroyed value. venBio details why its proposed directors would be best suited to achieve a high-value transaction for the company.
• On January 30, the company filed its own counter-presentation with the SEC, laying out both its defense against claims made by venBio about mismanagement and its own case for its strategy to lead the company forward, including accusing venBio of seeking Board control without paying other stockholders any control premium.
• On February 10, a few days before the Annual Meeting, Immunomedics announced a strategic transaction for IMMU-132 with Seattle Genetics consisting of $250M upfront with additional milestone payments of up to ~$2B plus royalties, as well as up to $57M in equity investment into Immunomedics priced at a 10% premium to the current stock price of the company. In addition, Immumedics retained rights to co-promote IMMU-132 in the US.  The deal included a 6-day go shop period where Immunomedics could seek a superior proposal.  The company made clear that the deal followed a 13 months-long process during which it also engaged a transaction advisor to help secure a partner or acquirer.
• On February 13, venBio sued Immunomedics alleging the proposed deal is an attempt at manipulating the outcome of the upcoming Annual Meeting and further alleging the deal undervalues IMMU-132 and the company as a whole. Immunomedics continues to make public statements defending the deal with Seattle Genetics and its actions.  The Annual Meeting has been postponed while the lawsuit moved forward.

Yeesh.

Activist investors are still somewhat new to biotech/pharma.  The most high-profile example to date is Bill Ackman’s Pershing Square Capital Management and its close involvement in the failed merger between Allergan and Valeant in 2014.  However, it makes sense that biotech companies would be susceptible to activism:

• Long development timelines with clear value-inflection points coupled with companies going public early in development
• Diverse skill sets required of management as companies progress from development to commercial stage
• High likelihood of multiple follow-on financings meaning additional float and ample opportunities for activist investors to acquire shares and silently build positions

Even so, a proxy fight like the one between Immunomedics and venBio is unusual even for activist investors, especially with the additional overlay of the Seattle Genetics transaction.  At its foundation, the argument in favor of shareholder activism assumes that in pursuing its own selfish interests the other shareholders will share in the spoils of the activist’s actions.  If, however, the activist shareholder is pursuing a course that does not provide the necessary benefits to the other shareholders, the non-activists can be harmed.  In the case of Immunomedics, the company is claiming venBio’s actions benefit only itself and is not in the interest of all shareholders of the company.

What matters then is whether or not the transaction with Seattle Genetics was a “good” deal.  Allegations that a board is not fulfilling its fiduciary duties are serious, but courts have long deferred to the board’s business judgement and a presumption that the directors acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company.

So was the IMMU-132 deal a good one?  As always, it is impossible to know completely since we can only rely on public information.  However, we can glean some insights based on what is available.

• The $250M upfront with milestones up to $2B appears a little light given there have been three other I-O deals in the past year with upfronts greater than $200M and milestones above $2B and all three of those were for preclinical programs. While it is true each of those other deals covered multiple targets, IMMU-132 has shown promise in multiple indications.  The exact nature and timing of the other milestones is not public, so it is possible there are significant additional amounts to be paid on near-term milestones like the BLA filing/approval that make the immediate cash more attractive.
• Immunomedics highlighted that Seattle Genetics is investing into the future of the company by taking an equity position. However, the premium on that equity is only 10% of the current stock price.  In fact, this is one of the key points in venBio’s argument that the deal is bad for Immunomedics’ stockholders since it dilutes them of some of the anticipated stock appreciation upside from the deal.  However, since Seattle Genetics is taking over the IMMU-132 program going forward, the investment is also a bet on Immunomedics’ ability to develop other products.
• The 6-day go shop is a very short amount of time to find another deal. If venBio is correct and it is limited to only finding another license and not a M&A transaction, then it is not a serious opportunity to get competing offers.  However, the company has been seeking a strategic partner/acquirer for over a year so you would imagine the board would be well aware of what alternatives are out there for a transaction.  To announce the Seattle Genetics transaction means this was the best they felt they could do.
• The goals of the transaction are therefore paramount. venBio is seeking an exit via a sale transaction.  The company instead is signaling that there is more value for shareholders by continuing as an independent company.  This explains why it chose to keep a right to co-promote IMMU-132 when it is approved and pursued a transaction that allowed them to continue to develop other products in its pipeline.

The company may have received other takeover offers (which venBio would likely have known about) but it chose to remain independent and explains why it did a deal with Seattle Genetics.  Does venBio’s lawsuit have no merit as Immunomedics claims?  Probably not.  But, is the deal with Seattle Genetics the best course of action for the company’s shareholders?  Possibly not.

Hiring an independent transaction advisory firm to run a robust process to determine what strategic alternatives would be available to the board is the company’s best defense against venBio’s claims that board violated the business judgement rule.  In fact, courts have agreed that the engagement of a transaction advisor is evidence that a board is seeking to fulfill its fiduciary duties, which is why the hiring of an independent transaction advisor, such as Locust Walk, is a good idea for any company seeking to partner or sell any of its primary assets.

It will be interesting to watch how this plays out and the impact it will have on similarly-situated biotech companies in the future.

 Written by Andy Meyerson