PhaseBio Pharmaceuticals (PHASQ) – Emergence From Bankruptcy – Mutibagger Upside

Current Price: $0.017

Target Price: $0.15+

Upside: multibagger

Expiration Date: H1 2023

This idea was shared by JESQ.

Disclosure: I am currently long PHASQ. Not legal advice. Consult your own attorney as needed.

 

Bullet Points

• PhaseBio Pharmaceuticals has been left for dead by the market after declaring bankruptcy in October, dwindling to a market cap of just a few million dollars — even as its bentracimab drug heads to the FDA soon for approval.
• A recent bankruptcy court settlement with development partner-turned-bitter-enemy SFJ Pharmaceuticals will generate much-needed cash for the estate and, most importantly, a royalty pot of 2.5% of worldwide bentracimab sales over $300 million.
• With SFJ further set to assume and cure some portion of PhaseBio’s unsecured trade debt, there is a reasonable path to paying off unsecured creditors in full, leaving the royalty pot to the shareholders.
• Analysts see bentracimab as a potential multi-billion dollar drug, and the company recently estimated in court that the royalty could be worth “at least $80 million.”
• This a high-risk, high-reward play that could easily go to zero…or 20-40x.

 

Introduction

Would you spend a couple of million bucks to buy 2.5% of a potentially multi-billion dollar drug? That’s essentially the opportunity in the all-but-abandoned-and-now-bankrupt PhaseBio Pharmaceuticals. Following a recent bankruptcy court settlement with co-development partner SFJ, there is a reasonable — but by no means assured — path to pay off unsecured creditors in full, leaving a royalty pot on bentracimab to the shareholders. In court, the company estimated the pot could be worth at least $80M.

That’s versus a PHASQ total market cap of just $2 million at last week’s average daily closing price.

This is a high-risk, speculative play that could easily go to zero…or 20-40x.

Let me unpack.

 

PhaseBio History, Bentracimab, and the SFJ Co-Development Agreement

PhaseBio is a clinical-stage biopharmaceutical focused on cardiovascular drugs. It went public in 2018 and hit a market cap of some $400 million in 2019. Its lead product candidate, bentracimab, is a reversal agent for the antiplatelet drug ticagrelor, meaning it is used on ticagrelor patients who sustain major bleeding or need urgent surgery. With ticagrelor going generic in 2024, management and analysts believe there is a $1-2 billion addressable market for bentracimab. The science, mechanism, and market for bentracimab are aptly summarized in their most recent investor presentation.

Bentracimab showed strong initial Phase III safety and efficacy data and, just prior to bankruptcy in October 2022, PhaseBio was on the verge of submitting its Biologics License Application to the FDA. Analysts predicted smooth approval and peak worldwide annual sales of bentracimab approaching a billion dollars. (More on that in a bit).

In 2020, PhaseBio entered a co-development agreement with SFJ Pharmaceuticals, and therein lay the roots of today’s troubles. The SFJ deal provided much-needed up-front development capital but at the cost of an onerous “going concern” clause that allowed SFJ to take full possession of bentracimab if PhaseBio failed certain financial metrics. The clause was triggered by PhaseBio’s year-end 2021 financial statements, and SFJ and PhaseBio spent most of 2022 in hardball negotiations for a path forward. Ultimately, SFJ insisted on its rights under the agreement, so PhaseBio declared bankruptcy on October 23, 2022.

On the petition date, PhaseBio reported just half a million dollars of cash on hand. But it did manage to roll its prepetition debt into a $15M DIP facility, of which it has tapped about $11M. It also reported some $36M in trade debt — it’s only other debt.

After filing for bankruptcy, PhaseBio commenced a bitter legal fight with SFJ over bentracimab in the bankruptcy court.

That litigation has now been settled with the blessing of the bankruptcy court received on December 31, 2022, and it is the terms of that settlement that set the stage for the current opportunity. In brief, the settlement agreement (at PDF p. 33 of the final sale order) provides in relevant part:

• SFJ will take over the bentracimab program.
• SFJ will pay $32.9 million to PhaseBio, to be used to pay off the DIP, pay a stalking horse break-up fee, and then pay other creditor and administrative expenses as needed.
• In addition to the $32.9 million, SFJ shall pay all vendor bills “essential” to the bentracimab program going forward in 2023, and, within sixty days of closing, designate which additional bentracimab-related contracts it will assume and cure (i.e., pay off). As discussed in detail below, this assumption process can and should reduce the trade debt significantly, since the vast majority of unsecured claims are from bentracimab consultants, vendors, and suppliers. (See PDF p. 132 of the final sale order for the cure list).
• BioVectra is PhaseBio’s key clinical supplier of bentracimab product and the largest unsecured creditor, with (disputed) claims of some $15-$30M. SFJ will attempt to negotiate a new supply agreement with BioVectra that, if consummated, may reduce the BioVectra claim significantly, as with the other bentracimab trade debt. (Regardless of any new deal, BioVectra also receives $5.8M from SFJ when the FDA accepts the BLA).
• SFJ will pay PhaseBio 2.5% of all worldwide sales of bentracimab that exceed $300 million in any calendar year.

What’s the potential value of that royalty pot? Some analysts have been quite bullish on bentracimab’s potential. Cowen and Company, for example, forecasts peak worldwide sales of $735M by 2029, which would generate $10.9M for the royalty pot for just one year. Perhaps more importantly, the company has also worked on scenarios for the royalty for the bankruptcy process and stated recently in court that, assuming regulatory success, the royalty pot “could exceed $80 million.” (See Perkins Declaration at Paragraph 22). The company also noted that, since the royalty is freely assignable, it is “common in the life sciences industry [for such] royalty streams [to] be monetized in advance of any or full receipt of the cash flows.”

If that pot belongs to the shareholders, any significant royalty payments would represent a potential multi-x return at current PHASQ share prices.

Two big questions will determine whether that consideration flows to shareholders: Is there enough cash from the SFJ settlement to pay off the unsecured trade creditors? And how much additional cash will PhaseBio generate from sales of its remaining non-bentracimab IP and hard-lab assets?

 

Estimating The Trade Debt Numbers and the BioVectra Elephant

The good news is that with the prepetition debt rolled into a soon-to-be-paid-off DIP, the unsecured creditor pool consists almost entirely of trade debt — the bills of the myriad vendors, suppliers, and consultants who support the company’s clinical pipeline, particularly bentracimab.

That’s also the bad news. It can be tricky to get a hard fix on trade debt numbers, and therefore just how much cash is needed to pay off the unsecured pool. The bills of suppliers are constantly maturing and ripening from future obligations into current payables, and the agreements with suppliers can run for years, so the company and the supplier may dispute the total value of the unsecured claim. (For example, the UCC has complained hat the company’s proposed cure amounts don’t include future vendor bills yet to be invoiced. But of course, creditors are not necessarily entitled to such future amounts in the event a debtor rejects a supply or consulting agreement; it becomes a question of law of contract damages).

But what makes this situation so unusual is that some portion of that trade debt will be paid off not by the cash in the debtor’s estate, but by SFJ assuming and curing the supplier agreements as it takes full control of the bentracimab program. That is the heart of the opportunity. Below I sketch out the contours of the trade debt and then attempt a little back-of-the-envelope math.

 

BioVectra

The elephant in the unsecured creditor room is BioVectra. In early 2021, anticipating regulatory approval for bentracimab and a long commercial life, PhaseBio inked a multi-year agreement with BioVectra to supply bulk drug substance for bentracimab for commercial distribution. The agreement includes minimum purchase commitments by PhaseBio, and contains various redacted termination clauses and fees.

BioVectra represents by far the largest — if not the majority — unsecured creditor, but exactly how much it is entitled to is disputed and contingent.

For example, as of the October 23, 2022 petition date, the company’s Schedule of Assets and Liabilities reports that PhaseBio owes BioVectra $5.9M, out of $14.2M in total unsecured claims. (That number roughly matches the $15.4 million in accounts payable listed in the company’s monthly operating report for October 31, 2022).

BioVectra represents an even larger portion of the “cure costs” filed in the same Schedule — a term of art roughly connoting what it takes to bring a contract fully current or pay it off. There, the company stated it would owe BioVectra $22.7M out of $29.3M in total cure costs. (A total not too far off the estimated $36 million in trade debt reported in the first-day declaration.)

BioVectra disputes these amounts and claims it is owed $15.4M as of the petition date, and an additional $15.9M that will become due “as of December 31, 2002” for “bentracimab product supplied from and after the Petition Date.”

Complicating matters — but in a good way — is that, as noted above, the SFJ settlement contemplates that SFJ and BioVectra will enter into a new supply agreement. Such a deal could reduce or even eliminate the BioVectra unsecured claim. And a new deal would certainly seem to make business sense: SFJ would have every incentive to preserve continuity in its bentracimab supply, and BioVectra would presumably prefer a continued profitable business relationship versus a bankruptcy fight.

But plenty of questions and what-ifs remain.

If SFJ and BioVectra reach a new deal, does that completely eliminate the BioVectra unsecured claim? Or will BioVectra be left with a “stub” claim if it takes a haircut on a new deal with SFJ? What would be the value of that stub claim? Or does a new BioVectra deal only eliminate the “going forward” portion of the claim, leaving the prepetition bills ($5.9M per the company, $15.4M per BioVectra) to the estate?

Worse, does BioVectra try to “double dip:” ink a happy new deal with SFJ, but still attempt to press its full $30M claim in bankruptcy court, to try to seize the royalty pot for itself? (One troubling sign: BioVectra’s representative on the UCC is a managing director at  H.I.G Capital, a $50B Miami-based fund with experience in distressed debt. Did BioVectra sell some or all of its claims to a fund? Unclear.)

Conversely, if PhaseBio is forced to dispute and litigate the BioVectra claim — either because SFJ and BioVectra fail to reach a new deal, or BioVectra tries to double dip — how does that shake out legally? As noted above, BioVectra says it is owed $15.9M for the future products; where does that number come from? Is it the value of all products to be delivered in 2023, BioVectra’s profit on such deliveries, a liquidated damage provision, a termination fee, or a minimum purchase commitment? Can PhaseBio beat that number down by rejecting the contract and litigating the contract claim? (As a very rough rule, when a debtor breaks a supply contract, the supplier is entitled to an unsecured claim for its lost profits on the deal — not total lost revenue.)

And then the meta question: If necessary, will the company play hardball with BioVectra to protect shareholders — or roll over for the UCC and gift BioVectra a sweetheart deal on the royalty pot?

 

The Rest of the Trade Debt

Although some objections from other unsecured creditors have trickled in on the cure amounts, the company looks to have roughly $8-10 million in additional trade debt.

But there is further good news for shareholders: The vast majority of that trade debt relates to bentracimab development. Per the settlement agreement, SFJ will be assuming and curing some portion of that debt as well, reducing claims on the estate. That assumption process should come to fruition in late February or early March. (SFJ has sixty days from settlement closing to decide on its assumed contracts; closing is expected any day now.)

How many of the clinical and vendor agreements will SFJ agree to assume and cure? Again, we don’t know yet, but consider the business case: SFJ and PhaseBio have been engaged in co-development efforts for some time with these suppliers. In fact, SFJ was paying the bills of dozens of them, and even contracting directly in some cases. It would seem to be in SFJ’s interest to assume the bulk of the contracts to facilitate the continued development of the bentracimab program, rather than rebuild a clinical supply chain from scratch.

 

A Little Math

Since so many of these trade debt numbers are fuzzy, contingent, and/or subject to SFJ’s discretion in the assumption and cure process, it’s tough to build a hard model of the finances of the estate — but we can still do a little math based on the settlement document and the most recent monthly operating statement.

Under a variety of reasonable assumptions, there’s a good chance the unsecured trade creditors are paid off in full, leaving the royalty to the shareholders.

Our best, most recent look at the numbers is the November monthly operating report (MOR), against which we can cross-reference some creditor lists and statements, and thus “spend” the $32.9M in settlement cash from SFJ.  Here’s the balance sheet:

First, let’s net out the $1.5M in cash and the “right of use” asset (which relates to the lease) against the payroll and lease obligations. (The deferred sublicense revenue is not a true liability, and the “development derivative” is how PhaseBio characterized the SFJ relationship.)

So we’re crediting the $32.9M SFJ money against three big liabilities: the JMB loan (the DIP), accounts payable, and “Accrued clinical and MFG, and Other.” Those latter two categories encompass potential trade debt of up to $41.4 million — though accounts payable is presumably a “harder” number than accrued clinical, since the latter likely includes contingent and disputed claims like BioVectra.  (In comparing the October and November MORs, we can also see that accounts payable ticked up and accrued clinical ticked down, presumably as some of the accrued clinical matured into actively due invoices. Accrued clinical also now includes bankruptcy professional fees).

So how much of that total trade debt number gets paid down, assumed, or discharged? Can the company eat it all up — leaving the royalty pot for shareholders?

The SFJ consideration is $32.9M. Subtracting $11.1M to pay off the DIP and $2.75M to the failed stalking horse leaves $19.1M. How about the further estate, professional, and payroll expenses? Payroll expenses should drop in the new year, even as professional fees mount. Also, PhaseBio negotiated to quickly receive $2.5M of the $32.9M in “interim funding” to keep the estate going through January. Let’s double that number and say $5M in additional debtor expenses to get to a confirmed plan.

That leaves $14M in settlement cash against potential trade debt of $41.4M. Seems like a lot. But now we start whittling.

About $8-$10M of the trade debt is non-BioVectra bentracimab development costs — some portion of which SFJ will be assuming and curing as it takes over the supply agreements. Let’s say SFJ assumes and cures just half that number. We’re down to $36.4M. (And I am not even including whatever portion of the remaining claims are disputable by the company).

The company also has $5.5M in “prepaid” assets, which presumably sets off against the vendor debt (at least the “accrued clinical” portion) fairly one-for-one. Now we’re at $30.9M.

Necessarily, a good portion of that remaining number — if not most of it — is the BioVectra claim.

But remember that BioVectra will receive $5.8M from SFJ as soon as the FDA accepts the BLA submission — regardless of whether it inks a new supply deal with SFJ. So now we’re down to $25.1M in remaining (mostly BioVectra) trade debt against $14M in settlement cash.

Not a bad delta! And none of our assumptions are too wild.

Will SFJ and BioVectra ink a new supply agreement and reduce that BioVectra claim to fifteen million, or five, or zero? That would be terrific news.

Or, conversely, if SFJ and BioVectra fail to reach a deal, does the company have legal defenses to the full amount of BioVectra’s stated claim — particularly the $15.9M it says it is owed for “future product”? Is BioVectra adding up all future revenue it was due and calling that its claim, even though it may not be entitled to that amount under contract law? Can PhaseBio reject the agreement and litigate the claim down to a more manageable number?

We don’t know the answers to these questions just yet. But the key point is: under a reasonable set of assumptions, we’re now down to just a $11M unsecured “hole” before any potential SFJ-BioVectra deal, and based solely on settlement cash received.

But wait, there’s more.

 

Wild Card: Additional Asset Sales

Although the clinical focus of PhaseBio has been bentracimab, the company has additional drug candidates under development, which will go up for auction on January 17, 2023, including:

• • PB6440, a drug for treatment-resistant hypertension for which PhasioBio was preparing an early-2023 Investigational New Drug application and concomitant in-human trials.
• • PB1046, a pulmonary arterial hypertension drug that advanced to Phase 2b trials before the cash crunch and COVID forced the company to halt the trial in late 2021; it remains a viable drug candidate.
• • Additional pre-clinical molecules for short bowel syndrome and achondroplasia, as well as its “elastin-like polypeptide” technology that the company hopes will allow for longer-lasting injectables across a variety of drug candidates.

The company also has some $8M in lab and office equipment, some small portion of which (perhaps 10-40 cents on the dollar) is recoverable from an auction or other sales.

I don’t have an estimate for the value of the non-bentracimab assets. But in a base case scenario, whatever cash those assets generate can help shore up any remaining trade debt “hole” and put shareholders closer to being in the money.

And if the auction numbers are high enough — and a new BioVectra-SFJ deal cures much of the remaining trade debt —  there could even be some potential cash returned to shareholders before the royalty pot — perhaps as soon as this year, which would be a nice cherry on top.

 

Conclusion

The above number-crunching is all back-of-the-envelope math that could easily spin out in one direction or the other, making PHASQ a highly risky, speculative bet that could easily go to zero. But there’s also a reasonable chance that PhaseBio pays off the unsecureds in full, leaving shareholders a potential multi-x return on the royalty pot. Here’s how I conceive of the scenarios with PHASQ at a roughly $2M market cap currently:

Base Case: Cash from the SFJ settlement, plus IP and asset sales, plus SFJ assuming and curing a decent portion of the trade debt adds up to just enough to pay off the unsecured creditors, leaving the royalty pot to shareholders. The drug is approved and hits reasonable sales metrics sufficient to generate $20M in lifetime royalties (just 25% of the company’s forecast of the value of the royalties: equivalent to four years of $500M worldwide sales), paid out over 3-7 years. That’s a roughly 10x return before time discounting.

Bear Case (Near-Term): BioVectra can’t reach a new deal with SFJ, or plays hardball on its claim, or PhaseBio rolls over and gives BioVectra and the UCC a sweetheart deal on the royalty pot just the same, leaving shareholders out of the money (or at most entitled to distant waterfall royalty payments if the drug is a miracle cure).

Bear Case (Long-Term): The drug is a regulatory failure or does not meet sales expectations, leaving no royalty pot even if shareholders were entitled to one.

Obviously, the bear case in both scenarios is that any PHASQ investment goes to zero.

Bull case: BioVectra and other trade debtors are tied off completely with new SFJ deals and/or cash from the settlement, so the IP and asset sales — no matter how much — create near-term cash to be distributed to shareholders within the year. That distribution de-risks the investment and makes the royalty pot gravy. The drug hits all expectations and generates the company’s forecasted $80M for the royalty pot — a 20-40x return.

At the end of the day, you can play with the math all day, but given the potential for multi-x returns on just a few contingencies being realized, I like PHASQ at its current basement bankruptcy price.

 

Some additional questions and answers

Below you can find JESQ’s response to several additional questions/issues in our e-mail exchange on the PHASQ situation:

– Is anyone here fighting for equity holder interests? Who is now running this show, is it mainly SFJ?

The company itself is still fighting pretty hard — it’s PHASQ that negotiated the settlement agreement with SFJ, and the UCC went so far as to file an emergency motion (#308) to delay the settlement approval, claiming the company was stonewalling them (“the terms of [the agreement] were negotiated and agreed to without the involvement of or agreement from the Committee”).

So the company must see something of value in the settlement. Moreover, the major officers and directors hold about 11% of the shares:

That aligns the executives’ interests with shareholders rather nicely. And there’s no indication any of these senior folks are moving to SFJ — the key-employee retention list (i.e., the people running the program day to day, who SFJ is presumably most interested in keeping) doesn’t include any of these folks. (Appendix 1). So for the senior officers and directors, their only hope for any remuneration is to recover something as shareholders.

Also, SFJ isn’t on the UCC, so it doesn’t control anything — it’s just a (much disliked) contractual counterparty that will now take over the asset, but not the PHASQ estate.

Finally, I agree it would be nice to see some heavyweight outside shareholders come in. But of course that could be…us, right? Along with fellow members of the SSI community?

I’ve avoided reaching out to the U.S. Trustee or the company in order to be “clean” to build a position. But now that I’m just about done, I’m happy to be a part of a shareholder team, and sophisticated enough legally to communicate with the Trustee and Court as needed.

– A lot will depend on what kind of agreement will be reached between SFJ and BioVectra and how much of BioVectra claims will be left with PHASQ. SFJ is clearly more interested in making BioVectra happy than PhaseBio equity holders. So why wouldn’t it arrange the matters so that the royalty pot and PHASQ estate gets passed to BioVectra.

I agree they may try, but there are limits to how much SFJ and BioVectra can collude to give BioVectra a sweetheart unsecured claim.

For one, BioVectra has now admitted in its latest filing (#364) that $16M of its unsecured claim is for product to be supplied in *2023*. That product will be going to SFJ now (assuming a new deal), so SFJ needs to pay for it. Could SFJ and BioVectra agree to pay say $10M for product in 2023, and then SFJ comes back and says, “We therefore have an unsecured claim for $6M now”? Sure. But now we’re whittling away again — and SFJ presumably wants cash for supply, not a contingent royalty interest.

Moreover, if SFJ and BioVectra don’t reach a new deal, the estate can and should litigate that claim down (or be forced to, if need be). As I mentioned in my note, when a debtor breaks a supply contract, in general, the supplier (SFJ) is not entitled to lost revenue ($16M) on the termination, only lost profits (much less than $16M necessarily). Now, there could be termination fees and such that come into play — but again, BioVectra can’t just claim a big number and automatically get a big number for its unsecured claim.

So the $16M for 2023 product comes down necessarily by hook or by crook — how much is TBD. That leaves the pre-petition bills — BioVectra says that’s $12M, PHASQ says it’s $6M, also TBD. But the math may well pencil just the same.

(That math is a little different today though: I was a little under on the DIP bill — it’s $15M to pay off the DIP, not $11M, per today’s numbers. On the other hand, they’re also getting almost $2M in an unexpected legal settlement with a 3P per a filing last week, and the $2.75M to the stalking horse may drop to just $750k — that was the subject of a hearing today).

– What management was/is expecting with the bankruptcy filing and then with the recent settlement agreement. Are they just trying to preserve their jobs and expect to run the company with 2.5% royalty asset? Can it really exit bankruptcy as a public company?

No, I think the positive outcome here is what’s called a “bankruptcy distribution trust,” where the trust simply exists to collect and distribute cash from the royalty to shareholders. It’s not an uncommon corporate form when there is leftover money. As an example, I’m still getting checks as a shareholder from the 2017 bankruptcy trust of Ironclad Performance Wear (“the leader in high-performance task-specific work gloves”) — the trust is admin-light and has just one guy who administers things. (It was a similar situation insofar as I identified that money would be left for shareholders — particularly as legal settlements rolled in — and I was right.)

So management will not have new jobs but, as noted above, they do have shareholder interests that they presumably want to preserve and vindicate.

In fact, I think that’s why they negotiated the 2.5% royalty: they want “something, damnit!” for all the work they spent advancing this drug to the verge of clinical approval, and the royalty mechanism is likely how they get it.

– How will any of the potential litigation with the vendors, asset sales procedures, or company running expenses be financed going forward?

That’s going to come out of the $32.9M in cash from the SFJ settlement and any additional cash from the IP asset sales. In my envelope model below, I budget an additional $5M for this. It’s not exact, but it’s a rough guess based on having done a number of these bankruptcy plays myself.

– Even if the whole of 2.5% royalty pot is left with equity holders, there will probably be no income from the royalty at least for the next 5+ years (drug, needs to be approved >> commercialized >> reach $300m+ in sales), meaning NPV in any monetization of this royalty is probably only a fraction of the $80m potential value. Couple that with equity dilution to finance company operating expenses till this royalty gets monetized and then with final liquidation and severance expenses, and it does not seem like much will be left for equity holders even in an optimistic scenario.

There’s definitely the time issue, although as I note, PHASQ recently took care in a filing to state that money could come sooner:

I don’t think there’s any more equity financing to be had — not even sure how that’d work. The company will basically be paying remaining expenses out of the pot of cash from the SFJ settlement and the final asset sales. As I said, I think the math may pencil out to pay off GUCs in full. Or at least have a damn good shot at it, which would leave potential multi-x returns even with very, very modest royalty expectations.

Finally, of course, if I’m right and the market comes to agree that there’s at least a decent shot of shareholder recovery, there’s obviously a return to be had much sooner on the investment — even if you don’t want to hold onto this for 3+ years for the actual royalties to come in.

There is one final wrinkle today that came in while I was writing this: the company got moved to OTC Expert-Only this morning, which makes it harder to accumulate a position. (I think that’s why the bid fell off the bottom today). It seems they are late with formal 10Q reporting — although they filed a big 8k today updating shareholders on the bankruptcy process, so it’s not like they don’t know how to file SEC reports.

Not sure when or if it gets cleaned up. The company also filed a BK docket entry that the settlement is finalized, which starts a 60d clock for BioVectra to assume/reject.