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Replies to post #213794 on Biotech Values
12/03/18 8:18 PM
December 3, 2018
Board of Directors
Novelion Therapeutics Inc.
c/o Norton Rose Fulbright
1800 - 510 West Georgia Street
Vancouver, BC V6B 0M3 Canada
Dear Ladies and Gentlemen:
Our fund, Healthcare Value Partners, L.P., has been a significant and supportive shareholder of Novelion Therapeutics Inc. and its affiliates ("Novelion") and its predecessor QLT Inc. for nearly eight years. We are among the largest owners of common stock, with 1.8 million shares held by our fund or 9.52% of currently outstanding shares, and we take pride in being value-added, long-term partners of Novelion and our fellow shareholders.
We have worked hard to provide practical, constructive advice to you and your various management teams, during the term of our ownership, based on our extensive knowledge of the industry and similarly situated issuers. Our principals have been actively engaged in advising and sponsoring drug and other healthcare companies for more than 40 years.
Your and your predecessors' oversight of the core commercial business, which is contained in your subsidiary Aegerion Pharmaceuticals, Inc. (“Aegerion”), has been consistently poor spanning many years. You have allowed Novelion's costs, in particular SG&A and R&D, to run completely out of control, far exceeding all reasonable benchmarks and control limits for emerging growth biotech firms.
For example, through the first 9 months of 2018, SG&A expense was $65.8 million, or 73% of revenue. This is in sharp contrast to pharmaceutical industry averages in the 20 – 30% range. Similarly, R&D expense during this same period was $31.1 million, or 35% of revenue. This compares to industry averages in the 10 – 20% range and is especially indefensible given the poor productivity in advancing existing leads and the void of any apparent new product candidates in the pipeline.
These enormously high spending levels, of course, led to the endless realization of net operating losses and the recurring need to raise multiple stop-gap financings in order to avoid insolvency and a disruption of the core Juxtapid and Myalept franchises. Novelion has realized more than $135 million of cumulative cash operating losses since the merger with Aegerion in November 2016, despite having core businesses that yield very high gross margins. Chronic mismanagement and poor oversight by the Board have induced severe financial distress, which has irreparably harmed shareholder confidence as evidenced by the progressive collapse of the stock price.
Further, in the face of extreme projected cash burn rates, you inexplicably waited until 3Q18 to attempt to normalize this unsustainable cost structure. The prior restructurings of 1Q16, 3Q16, 1Q-2Q17, and 1Q18 were wholly inadequate. The stop-gap bridge financings, all expensive and dilutive to equity claims, have simply created runways to the next crisis.
You have now taken the additional step of installing Novelion’s General Counsel, Benjamin Harshbarger, as the interim CEO, replacing Jeffrey Hackman. After several discussions with Mr. Hackman, we believed he was motivated and well-positioned, with the advice of restructuring expert AlixPartners, to assure a transition, however difficult, to a new state and capital structure that would have permitted Novelion to remain independent and build its business without the cost and distraction of financial distress.
By putting a lawyer, and not an operations expert, in charge of Novelion, we are concerned you are sending a clear signal that you intend to sell or even liquidate Novelion, perhaps at an extreme discount to fair value in order to repay principal to the creditors that have funded a bridge loan and a substantial portion of a convertible bond instrument. This signal was further reinforced by the recent 8-K filing on November 26, 2018, describing a “retention plan” for key executives through a “transaction event”.
You have indicated that Novelion will likely generate $120 million in cash gross profit from revenue of $145 – $160 million in 2019 and that further restructuring will enable Novelion to become cash flow positive in 2Q19. At present, the universe of publicly-traded orphan drug companies trades at an average ratio of enterprise value to 2019E (projected) gross profit of 8.7x. This multiple applied to Novelion’s expected 2019 gross profit implies a fair value of $34 per fully-diluted common share. Large-capitalization firms in the pharmaceutical and biotech sectors, both of which are growing more slowly than Novelion, trade at average ratios of enterprise value to 2019E (projected) revenue of 4.0x and 6.0x, respectively. Applying those multiples to Novelion’s 2019 revenue guidance suggests a fair value range of $10 – $30 per share.
Relative to its peers, Novelion’s inferred enterprise value is in the range of $600 – $1,200 million. As such, we believe the pro forma intrinsic value of Novelion, as a standalone entity (without a change of control), far exceeds $600 million under distressed conditions.
You were each elected and are paid by the owners of Novelion to govern vigilantly on the shareholders’ behalf and hold management and fellow directors accountable. Your primary obligation, as overseers and fiduciaries, is to protect the shareholders, whose risk capital, in part, has permitted Novelion to exist and endure.
We fully expect you to represent us as shareholders and protect our interests during this ongoing crisis and ensure an outcome that maximizes the value of our economic claim. Notably, we expect you to faithfully and thoroughly explore all strategic alternatives and not simply choose the most expedient solution for the debt-holders at the expense of the equity-holders. In so doing, you will preserve an important, life-saving business that serves severely-ill patients around the world as well as the claims of all other stakeholders.
We would welcome the opportunity to meet with you and management to discuss our thoughts on an immediate program to decisively and permanently normalize costs as well as the relative merits, timing, and terms for the strategic alternatives available to Novelion.
Sincerely,
Joseph P. Riccardo
Managing Member
Healthcare Value Capital, LLC
01/03/20 12:12 PM
