Avid Bioservices Inc (CDMO)

[masshysteria]

Thank you James for your response and, as always, challenging and critical thinking that you often share. I’ve been enjoying your discussions regarding GILD and general buyout – which in many ways drive some of my own exploration into what is and what could be.

I took a shot at responding to your questions with a mix of fact and opinion (hopefully not fiction ; )

At this point in time it would seem things are most definitely "clicking into place" - but now, as Jake recently mentioned, we need to accelerate the process to really take advantage of the breadth and depth of the IP franchise now becoming more evident almost daily - so would you concur that NOW is the time to bring in that Big Dollars partner and/or acquirer? And if so, do you think such a party has had sufficient time to complete their DD such that they would concur with your statement above that "the numbers thrown around are not at all overstated, and may be understated" as well as with your statements below?

{just as a quick and relevant reminder from the last CC - where Worsley referenced the "copious" amounts of data now available and SK termed the opportunities for Bavi to be "vast."}

That point on the continuum between scientific evidence and proof is the elusive sweet spot for striking a deal.

First – framing the assumptions:
• Bavi is a super molecule that has a broad range of impact and efficacy. That is not proven yet (in the full context of the word) – but it is widely believed by those who are closely familiar with the science
• Peregrine has not yet been able to generate a proof of the wide range and depth of efficacy on a large scale human set of trials (multiple cancer indications, multiple combos)
• Bavi does have significant translational and pre-clinical data, as well as a number of small samples of human data, that together point to a rich set of capabilities

My OPINION only that under ‘Traditional’ circumstances, this is not at the sweet spot for dropping $10’s of Billions without having the undisputed proof that it works, as advertised, in multiple sets of clinical data. I know that HCV and Pharmasset were used as equivalent examples of an early purchase at high value due to potential – but those are truly completely different circumstances which I will briefly explain.

Viral mechanism is much better understood, is easier to prove, and has significantly lower competitive pressure than Oncology products. Cycles for efficacy assessment are short, and one can get strong signals in in-vitro and pre-clinical that can build up confidence quite quickly.

Oncology products, and especially I/O class, are a whole different animal who’s fundamental characteristics are still being figured out. Cycles of evaluation are measured in months to a year+ at a minimum, competition is so intense and costs are so high to compete – that many companies will have their coffers emptied out to chase a dream and end up with nothing. You’re seeing the evidence with FDA’s stance on approving #3 and #4 etc. of the same class – and how the brakes are being put on to avoid flooding the market with me-too products once patients have one or two options that can provide all the benefit one is able to provide. For now.

So, based on that, spending one’s entire cash and credit line for what is yet to be fully clinically proven, in a competitive environment that can produce a better mouse trap in the same timeline it would take the product to be commercially viable, is not something that would ever traditionally happen at this point.

But, as you may have guessed… this is not a traditional situation, nor a traditional product. There are multiple large hungry BPs that are in desperate need to get into the game and, more so, make up for lost time and being near last. This is a situation where wrong move can cost $15B to $30B++ per year in lost potential revenue for any company making the wrong Oncology bet. GILD and AZN, to name two, are such companies among several others in a similar situation. AZN’s recent slap regarding Durvalumab, and GILD’s position of maxing HCV sales by 2020 but reaching growth rate limit as early as late 2016, are drivers for some sole searching. They need to play, but having another chemo or checkpoint combo won’t do. It will not be sufficient for Roche either. BMY and MRK already have those covered and, for the most part, will be out with combos in the major cancers and have SOC bagged. Again, under those conditions, AZN, GILD and even Roche will be fairly distant #3,4,5 etc. They will have a tough time recovering investments when considering future pressure on margins, having significantly smaller market share, and spending untold marketing $$ to make up for being less known and less mainstream.

Based on that – the circumstances are different and a deal can possibly happen now (soon…) but it will likely not be a traditional deal. If it happens sometime between now and 3Q 2016, I would expect a highly leveraged deal with the cash/stock mix we’ve been discussing, except with additional caveats. Some dependence on delivering the goods across multiple cancer types through conclusive clinical trials by some date (say 2Q 2017). The buyer has to protect themselves from spending a sum that can shut them down should it not work out. Some sort of time hedging to limit the loss may be a way to accomplish that. For offering a typically inordinate sum of money for what would be considered mid-development cycle product, the buyer would get full rights and commercialization capacity across any oncology targets, partnerships and other opportunities. Everyone would be happy – to say the least.

Based on Peregrine’s messages and subliminal innuendo – 1Q 2017 is the confluence of data epicenter. That looks like the timeframe where proof with multiple cancers and multiple treatment combinations will be in place to provide the ultimate proof. My opinion is they will go for multiple concurrent filings (weeks from one another) and receive accelerated approval for most/all. In place and in a big way by end of 2017 or 1Q 2018. While it may be more risk balanced for a buyer to wait until late 2016 to pull the trigger, after seeing more evidence, that to me will be very late for those that desperately need a boost right now, and the ability to leap into an arena to which they are currently 24+ months overdue. Waiting that long will also create a bidding war – never a good thing for the buyer.

So – do they have sufficient time for DD? There is significant amount of work going on at MSK (totally silent to the outside), UTSW, Peregrine, ISTs, KLs and other institutions. The potential buyer will have to take a lot of risk in terms of projecting a very wide swat of ‘shallow’ data points into a meaningful translation of commercial efficacy. They will need to have access to all these sources of data, and have trust in the rich set of individuals that now carry the banner for Bavi. They also need to know what they’re doing in the field of Oncology, or rely on someone that does – as is evidenced by so many combo investments that went bust over the past several weeks due to nonperformance. The early bird must strike before 3Q 2016. Post that point – all sorts of information can be available that will drive bargaining power down and price up.


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If this comes together as 'hoped' by those who believe this is a cornerstone molecule - it is very conceivable that across the cancer landscape and multiple therapy types, spending will be well in excess of $100B - $150B range (all therapies, all cancer types) by that timeframe, . . . . .
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A question - should a Big Dollar party become involved NOW - and assuming Bavi is indeed a Cornerstone Molecule - just how much would you think such a party's involvement could accelerate market acceptance in "all therapies, all cancer types . . . ?

Great question and this is where size and experience matters. Most other times it doesn’t. Or so I heard ;)

Accelerating acceptance requires huge uptick in clinical trial investments, market research and development, effective sales and marketing infrastructure, and access to key resources across all aspects of healthcare. This is all about concurrency – execute in parallel through a research, development and commercialization strategy that aims to reach end points for multiple channels within a similar timeframe. Go after 2-3 key cancer types, followed by the next 2-3 types within 12-18 months, covering >50% of all oncology volume (cancers that together total over 50% of treatment spend - Lung, Breast, etc.) within a relatively short time. Becoming a ‘standard’, a ‘household name’. None of this will happen by chance and it ALL depends on well thought out strategy and flawless execution. So – a proper party’s involvement is paramount to reaching that state of success.

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That can put Peregrine at $80B to $100B valuation without a sweat . . . . .
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A natural follow-up to the question above would then be - assume for a moment that GILD is our big dollar party - and their offer to acquire 100% of the world wide rights to Bavi et all of 1:1 stock plus cash is accepted - then what would you foresee the impact to their market cap likely being in the next three to five years?

If, and we have to assume for the sake of argument, Bavi works as advertised, sales can reach $20B to $30B for Bavi alone. Under those conditions, and provided Bavi is persistent (not replaced by better competitive product for at least 5+ years), this will more than double current 2016 sales projections for GILD. It would also justify trading at higher multiples due to the exotic nature and impact of the product. My best guess would be 2X to 2.5X current total company value by 2022. Perhaps $275B to $350B. Keeping in mind that HCV product sales will be a fraction of what they are today – which are the main drivers for current valuation.

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. . . . . and that is not considering any income from Viral or Imaging should those be pursued/reached.
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And then, as you raise the very important point above - to make our discussion even more interesting {with GILD's 24 billion on hand - and of course their unmatched expertise in the viral arena} - would you care to opine on how they might utilize Bavi within their existing viral camp - as well as how this might further impact our market cap discussion above?

And then of course imaging - and much more could also be discussed.

That is a sweet spot for GILD and they have a first class ability to discover the pathways and means/methods to get relevant activity out of Bavi in Viral indications. I don’t have a strong personal view about Bavi’s efficacy in Viral – mostly due to lack of actionable data and my lacking familiarity with the intricacies of dealing with fast progressing viral disease with Bavi. If it can be done, effectively, GILD will make it work.

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Bavi has some steps to take until it gets there but Peregrine is at the final stages of the game where value will quickly become visible - provided its there.
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Yes, Bavi does indeed have "some steps to take" - but right now it would appear that there is more than sufficient data available - particularly for a company such as GILD - to conclude - BASED ON THEIR OWN EXTENSIVE DD - that the value of Bavi - as a truly Transformational Cornerstone Molecule - is now quite visible. So the question is: In your opinion - Which entity in the very near term will be {or should be} controlling and bankrolling the velocity by which those "steps" are taken?

I put GILD and AZN as desirable partners in this context, as well as Roche. My preference sits somewhere between GILD and AZN. GILD for its aggressive nature and ability to bring game to the table. They take chances, are hungry, and can (and like to) challenge anyone. AZN, on the other hand, is more aligned with Oncology background/expertise and the know how in that space from a vertical perspective across product development and commercialization. One can buy experience, but one can not change corporate culture through augmentation of its workforce. Therefore – GILD may be the ultimate best choice. Whomever owns this, will have to be ‘open’ to sharing access for multiple clinical trials with other products/companies – primarily to assure patient’s interest is the heart of every decision and that all viable combination options are assessed and made available in an all-out effort to treat/cure cancer.

Best,

MH