Response to this post
There are two primary reasons why many of the Biotechs sitting with large amounts of NOLs do not go down the path of P10.
1. Previous Ownership Change of the Company under Section 382 (see my previous posts for more details on what constitutes an Ownership Change)
Most simplistically, in order for the Company NOLs to be used effectively (and not subject to limitations), the Company must not have undergone an Ownership Change in the past or in the process of raising capital to fund the acquisition of a profitable target.
In most cases biotech companies with undergo one or more Ownership Changes after a drug fails and larger shareholders bail out. Once this happens, it is almost impossible to remedy the NOL usage limitation.
Further, the possibility of raising the substantial capital necessary to fund an acquisition and provide that investor with enough of an equity stake to make them interested in the opportunity, will in most cases create another Ownership Change.
Why did these things work with P10? - They had no Ownership Change prior to the Bankruptcy (rare) and investment from 210 Capital fell under a Section 382 exemption which allows one Ownership Change during the process of Chapter 11 if certain conditions are met (which they were)
2. Residual Liabilities
Absent a full sale of assets and operating business with an indemnity or going thru the bankruptcy process the Company will not be clear of potential legacy liabilities and that overhang is not something large investors are typically comfortable with.
Why did these things work with P10? Thru the sale to Langley, all liabilities were assumed by Langley and P10 was fully indemnified - Further P10 went thru the bankruptcy process which further cleaned up the past.
All of that said, P10 was a unique target because it did not have a past Ownership Change, Langley assumed all past liabilities and provided an indemnification (and their indemnification has value), and it had a business reason to go thru the bankruptcy process (the Braker Facility Lease) which allowed the 210 Capital investment and also cleaned up any other potential residual liabilities. Maybe several Biotechs could fit this fact pattern, but it would not be that likely.
-BioHunter
Twitter: @TheBio_Hunter
