Facet Biotech: Value Investing with a Catalyst

We are adding Facet Biotech Corporation to our ValueHuntr Portfolio. FACT is a company with a market cap of $239M ($9.72/share) with $295M ($12.00/share) of net-cash as of December 31, 2008. On December 18, 2008, Facet Biotech completed its spin-off from PDL BioPharma, Inc. (PDL). PDL capitalized Facet with $405 million in cash and cash equivalents and contributed to Facet its biotechnology operations and related assets, including four clinical-stage programs, research and development capabilities and protein engineering technology assets. We estimate FACT’s worth at a minimum $14/share, which is the rough value its assets would be worth at liquidation.

About the Company

FACT is a biotechnology company focused on developing therapeutics for cancer and immunologic diseases. Its products include Daclizumab, Volociximab, Elotuzumab, PDL192, and PDL241. Daclizumab is a humanized monoclonal antibody, with a potential in a range of inflammatory diseases, including multiple sclerosis. It can be used as a maintenance therapy for organ transplants.

Volociximab is a chimeric monoclonal antibody with a potential in treating a range of solid tumors, and its role in angiogenesis also aids the treatment of age-related macular degeneration [AMD]. Elotuzumab is a humanized monoclonal antibody used to treat multiple myeloma. PDL192 is a humanized monoclonal antibody used to treat tumor indications including pancreatic, colon, lung, renal, breast, head, and neck cancers. PDL241 is a humanized monoclonal antibody with a potential to treat immunologic diseases. In January, following the completion of a previously announced strategic business review, Facet announced that it would restructure its focus in the therapeutic area of oncology and significantly reduce its operating costs.

Valuation

On December 18, 2008, Facet Biotech completed its spin-off from PDL BioPharma, Inc. PDL capitalized Facet with $405 million in cash and cash equivalents. However, the company is burning cash at a very rapid rate. The company anticipates cash utilization of approximately $95 to $100 million for 2009, which is a reduction from the $110 million previously announced in January of 2008.

FACT management also anticipates 2009 total costs and expenses of $140 to $160 million, which includes $22 to $25 million of anticipated depreciation, amortization and stock-based compensation, as well as approximately $4 million in anticipated employee-related restructuring charges related to the company's previously announced restructuring activities. We estimate that the company is worth at least $14/share at liquidation, which indicates a potential 46% gain at liquidation relative to the company’s current market price.

Catalyst

In a conference call with Facet’s management on March 26, 2009, Roderick Wong expressed dissatisfaction with the company’s business plan and burn rate, and suggested dividend payment of up to $15 per share and the sale of the remaining assets of the company. Additionally, Wong proposed the appointment of an alternate slate of five directors, including Wong himself, Philip R. Broenniman, Robert L. Chapman, Jr., David Gale, and Bradd Gold. The five nominees collectively own 124,828 shares of Facet, or about 0.5% of the company, and would replace the entire 5-member board FACT currently has in place.

In an email to employees, Facet CEO Faheem Hasnain shared his views regarding Wong’s proposal and it is clear that he disagrees with Wong’s plans:

Dear Facet Team Members,

As you may have seen, a press release was issued by one of our stockholders yesterday. The stockholder proposed an alternate slate of directors for the Facet board, in advance of our annual stockholder’s meeting in May, and called for the company to issue a substantial cash dividend followed by a sale of the company.

Late last week, we also received a letter from this stockholder that included his alternate director slate. We issued a press release earlier this morning indicating we had received the nomination notice. It is our policy to listen to all of our stockholders and our Board is in the process of evaluating the notice. Although we thoughtfully evaluate stockholder input, we believe we are headed in the right direction strategically and do not believe these proposals are currently in the best interests of the company and our stockholders.

Given all that you have endured over the last couple of years, I realize that this information may be unsettling to many of you. But let me assure that we have a solid strategy in place — our goal for Facet is to build an oncology-focused biotech company that is committed to developing drugs to improve patient lives — and we have the support of our board of directors. The most important thing we can do is to continue to focus on our day-to-day responsibilities while working to achieve our goals.

FACT responded to Roderick Wong with the following letter:

Dear Dr. Wong,

We are in receipt of your letter dated March 26, 2009 and the accompanying notice of your intent to nominate directors at our 2009 Annual Meeting of Stockholders. We welcome the input of our stockholders, and our Board has considered the suggestions articulated in your letter and March 30, 2009 press release.

Our Board and management remain firmly committed to increasing the value of the Company to our stockholders. To this end, our Board has regularly evaluated the Company’s business plan as well as strategic alternatives to create value for our stockholders since the Company’s spin-off less than four months ago. In this regard, we note the following:

- Facet has undergone a rigorous analysis of its strategy, both in connection with our recent spin-off and subsequently.

- Our goal has been to focus on therapeutic areas that we believe hold the greatest opportunity for us to create meaningful value for our stockholders. As a result of our continued review and analysis, we are focusing our efforts on oncology.

- We believe our development programs and technology capabilities represent substantial potential value for our stockholders. Indeed, our collaborations with Bristol-Myers Squibb and Biogen Idec on certain of our development programs validate the value of these programs. We firmly believe that by continuing to advance these and other programs, as well as our proprietary protein engineering technology platform, we can enhance value for our stockholders.

- Furthermore, in an effort to maintain strict financial discipline, we have aggressively lowered our cost structure. In particular, as we recently announced, we have reduced our headcount and our overall anticipated cash utilization in 2009, thereby extending the time period for which we have funding.

We believe that our current Board, comprised of four independent directors and Faheem Hasnain, our President and Chief Executive Officer, and the management of the Company have a record of working to advance the interests of all stockholders, consistent with their fiduciary duty.

Based on our strategic review and ongoing analyses, the Board believes that our current strategic plan is the right plan to build value for our stockholders. Since we are committed to considering all alternatives to creating value, we have reviewed your proposal for the liquidation of the Company. We have, however, unanimously concluded that the interests of our stockholders are best served by continuing to focus on executing our current strategy.

Moreover, the Board believes that the assumptions stated in your March 30 press release with regard to the Company’s ability to distribute a significant cash dividend do not properly take into account, among other things, the Company’s significant lease and other obligations, which are detailed in the Company’s 2008 Annual Report on Form 10-K. Further, we believe that in this current economic environment, your proposals would significantly impair the Company’s ability to realize appropriate value for its existing assets.

Accordingly, we do not believe that your suggestions are in the best interests of our stockholders. We intend to maintain an open and active dialogue with our stockholders as we continue to work to enhance stockholder value.

Sincerely,

Brad Goodwin

Chairperson of the Board

Furthermore, Seth Klarman, managing director of The Baupost Group, nearly doubled his stake on the company from 2.7M to 4.4M shares following Wong’s proposal according to a 13D filed on April 8, 2009. Baupost is now 17.8% owner of FACT.

Disclosure: We do not have an actual holding in FACT. This is not a recommendation to either buy or sell any securities.

Comments

[wobatus:]

Funny, this is how we got here.

Apr 15 07:35 PM