Biota 2008 AGM
This is part three in my Biota series. I attended the Biota AGM on Wednesday. The presentations can be viewed here and the results are available here.
Background. Biota is a small molecule drug development company which focuses on drug discovery. Their business model is to license early. To use a baseball analogy, Biota aim to get a lot of players on bases rather than swing for home runs like most biotech firms. Biota have one main revenue stream in the flu antiviral Relenza and three major products in development, LANI, RSV and HCV.
From the outset the meeting had the potential for fireworks and there was certainly a lot of disgruntled share holders attending. The Chairman, John Grant, appeared uncomfortable a lot of the time. He all but apologised for the mishandling of the Relenza trial; however, like Australia’s past Prime Minster he was unable to say SORRY. I fail to understand why people do not realise the magic and power of that simple expression. If John Grant had simply said “I’m sorry, we failed to achieve the best result, but we have learnt and will do better in the future” then he would have disarmed much of the hostility. He did in effect say the same, but dispersed amongst defensive statements.
Biota have four partnership with large pharma; GSK, AstraZeneca, Boehringer Ingelheim and Daiichi Sankyo. This displays a proven ability to partner.
Relenza trial. There were three prior offers for settlement. The original offer was for $11M for sale and no royalties. Then in 2005 $25M was offered dependent on best endeavours clause being removed. In 2006 $75M plus party to party costs and retained rights, the total benefit to Biota would have been $80M. Much changed over the following two years and with the vacating of the trial date and escalating costs the board accepted the $20M offer. With hindsight it is obvious they should have settled in 2006, but unfortunately the board was not endowed with clairvoyance. Their reasoning appeared sound, though perhaps tainted by greed. Chastising a board based on hindsight seemed like a waste of time to me.
Much of the meeting and most of the questions were rear view focused. Few participants seemed interested in looking forward or focusing on value instead of share price. When asked whether the board would consider extending the buy back, the reply from John Grant appeared to be unveil their fear. He cited current financial conditions as a reason not to buy back shares at 34 cents while they were happy to buy back at 2-3 times that amount a couple of months ago. While they may be able to direct and manage a company, it seems the board would not make successful investors.
It was noted the original deal with GSK was struck when Biota was in its infancy.
Dividends. There were calls for dividends to be instigated. John Grant explained this was not appropriate for a company with Net Operating Losses, NOLs, without franking credits and with only one profitable year. He explained that other capital management strategies such as buybacks and capital returns would be considered. Several participants seemed perplexed that they should consider selling shares to realise a profit.
Election of Michael Montalto. I intended to vote for his election as I considered the late redirection of proxies by John Grant as highly inappropriate adn perhaps immoral. However, during the meeting I changed my mind as Grant adequately the reaons for his actions and Montalto failed to express any reason why he should be elected or what he would bring to the party. I admire Montalto’s desire to effect change adn his willingness to put himself forward; however, despite those admirable qualities and the boards possible mistakes Montalto wasted his opporunity to sell himself to participants.
Option Grants. Peter Cook’s 2007 options were narrowly approved, while the 2008 options were voted down. I considered that a fair result. The board will now consider buying shares on market to hold in trust for Peter Cook. Perhaps when doing so they realise they should be buying significantly more shares. Jack Lowenstein from Hunter Hall spoke against the options grant and suggested Peter Cook withdraw the motion. He said the board were offering an unacceptable choice of vote for the package or else. He finally got John Grant to articulate the likely alternative of buying shares on market. Like me Lowenstein appeared concerned that the board was not buying shares back at current prices. He also spoke out against the long term incentive (LTI) plan, calling it a bad plan, particularly the yearly price reset. I could not have said it better and as I have expressed before, any LTI based on share price is outrageous. It is another example on the focus on price instead of value.
General comments. The body language and demeanour of the board was poor. I understand their annoyance at the focus on the past and non-core issues rather than the value they are creating and the many recent achievements; however, sometimes you just have to say sorry and take your lumps so everyone can move forward.
Biota offer excellent value at the moment. Shares can be bought for around the company’s cash of $0.34. There is substantial value in the pipeline and future revenues.
Article One: Biota Analysis and Valuation Part 1 Quick look, good value.
Two: Biota Analysis and Valuation Part 2 Closer at the down and upside with probabilities and catalysts.
Three: Biota 2008 AGM
Four: Biota under the microscope A closer look at the pipeline and management.
Five: Biota Analysis and Valuation
[Edit 3 Nov 08 - On top of the usual disclaimers I will soon list another disclaimer that could easily be misconstrued or claimed to be a conflict of interest and should have been declared. I am not yet at liberty to list the extra disclaimer. The to be announced disclaimer has only influenced my analysis in that it increased the priority and to a degree the depth of the analysis. Though the current analysis of four posts is an average level for any company I invest in. ]
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thanks for the info.
I’m a forward focused value orientated fusion investor. Big picture first and most important, with details acting like a breeze on a windsock. Valuation is like a gale, management quality is a breeze to a wind or at worst with maleficence a hurricane.
Big picture is BTA’s pipeline and product is an acceptable margin of safety at current prices. It not the largest MoS possible and management may be a risk as most management are. Great risk/reward profile. Buying around cash and close to cash flow positive is good value. Risks exist especially in Biotech and should be considered. What other risk do people see with BTA?
I’ll accept Peter Cook may not be a great CEO. I haven’t made an informed opinion yet. It is unlikely that he is a great CEO, as probabilities show us only 20% of CEOs will get close to great and I am yet to see any evidence that he deserves a place in the top 20%. As you highlight it is possible to conclude with hindsight that the management team have not made all the best decisions. While a great manager is a definite benefit, you simply do not get the chance the buy biotech around cash flow positive around cash in the bank with a top notch management team at the helm. Getting the first two with many possible upside catalysts is acceptable to me. If you ever see a biotech with all four please let me know.
Within biotech investing this is as close to a value buy as I’ve seen for a long time. BTA has a good reward to risk profile, several possible catalysts, and is the best value lowest risk it has been in years. I’m off to investigate BTA’s contracts with their other three partners. Who is funding LANI trial?
Has anyone compared BTA to other biotechs? I’ve been investing successfully in biotech for a decade now, buying undervalued biotech and selling overvalued isn’t too difficult. You only have to be right 60% of the time and with good risk/reward you kill the competitors.
Is there another biotech that people here prefer? I see BTA as better value than AMGN, which I was pounding the table on from early this year at $50 down to $40, then recommended trimming at around $63 back in August. I was recommending PBT.AX below $0.28, it went to $0.70, which was lower than I expected on their good PBT2 results and now sits around $0.40 with a binary event of pharma deal likely to be announced with a quarter or two. They should get a good deal, but logic suggests that a big pharma partner will get a better deal. The risk is Prana management may be desperate for a deal and agree on worse terms than already priced in. You have to weigh those risks.
I am not buying PBT, I am buying BTA. I recently trimmed AMGN in the low mid sixties and will reduce further as it becomes fully priced.
We all have different styles. Working collectively and positively enables outperformance.
things to consider:
- what price will BTA fetch on one good quarter of Relenza results? What is the likelihood of at least one good quarter?
- what price will BTA fetch if we get two more poor Relenza quarters? A failure in one of their pipeline compounds?
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