In my 10/26/18 article, I highlighted the numerous conflicts of interest at play among the management and Board of Directors (BOD) at HedgePath Pharmaceuticals (OTCQB: OTCQB:HPPI) and with HPPI’s majority shareholder Mayne Pharma (OTCPK: OTCPK:MAYNF). Numerous and repeated questionable actions among all involved and an unfortunate turn of events in the regulatory pathway for HPPI’s SUBA-itraconazole has backed HPPI into the proverbial corner due to an expiring deadline with its partner Mayne Pharma. I highly suggest readers review that article for the extensive commentary on the events that have brought us to the current state of things for HPPI.
It cannot be emphasized enough just how much perceived self-dealing on the part of Mayne and conflicts of interest among all the decision makers for both HPPI and Mayne were at play when the license agreement between the two companies was modified in January 2018. Again, all this was discussed thoroughly in my 10/26/18 article.
Mayne's Filed Proposal
If there was any practical hope of a much more equitable outcome for HPPI’s minority shareholders given the inevitable missed license agreement deadline in place currently, then Mayne has quickly dashed that in a recent SEC 13D/A filing on 11/5/18. This filing gives great insight into just how aggressive Mayne is willing to be now that it smells blood in the water. The following letter was sent to the independent board members of HPPI by Mayne (and included in the 13D/A filing as an Exhibit):
HedgePath Pharmaceuticals, Inc.
324 South Hyde Park Avenue, Suite 350
Tampa, Florida 33606
Attention: Dana Ono (firstname.lastname@example.org), Bob Martin (email@example.com), Mark Watson (firstname.lastname@example.org)
Dear Independent Directors:
Thank you for your proposal dated October 29, 2018 (HPPI Proposal). We appreciate the attention and diligence the Independent Committee has taken to consider these very important matters, while we do not necessarily agree with all of the characterizations in the HPPI Proposal.
Terms and expressions defined in the amended and restated supply and license agreement dated May 15, 2015 (SLA) have the same meaning in this letter.
After careful consideration of the HPPI Proposal, the surrounding circumstances, and critically the interests of Mayne Pharma shareholders, we are not in a position to accept the HPPI Proposal.
Mayne Pharma is open to an alternative dialogue with HPPI that serves the interests of both parties. Mayne Pharma would like to make the following indicative, non-binding proposal to HPPI (Accelerated Take Back Proposal) to accelerate the assumption of the right to exploit the Product in the BCCNS Field in the US by Mayne Pharma (Right). The key terms of this proposal are:
- In exchange for a voluntary transfer (Transfer) by HPPI to Mayne Pharma of the Right, effective on a date to be agreed upon, but not later than November 30, 2018, Mayne Pharma would, promptly upon such Transfer taking effect, exercise warrants to inject $500,000 into HPPI;
- Following such exercise, HPPI would immediately commence all necessary activities to implement the Transfer, in collaboration with Mayne Pharma, including contract assignments, information transfer, change of FDA sponsorship, and all activities reasonably required to implement the Transfer. Mayne Pharma would target completion of these activities by December 31, 2018;
- Promptly upon completion of the foregoing activities (trigger to be agreed), Mayne Pharma will exercise further warrants to inject $500,000 into HPPI.
This is a non-binding proposal, and neither Mayne Pharma nor its affiliates has any legal obligation with respect to any of the terms of this proposal unless and until definitive agreements are entered into between Mayne Pharma and HPPI.
The Independent Committee from HPPI initially submitted a proposal to Mayne, and one has to assume this was a lot more equitable for minority shareholders of HPPI than the current terms of the license agreement state. I’d like to think it included a further extension of the deadline, but regardless of what it says (and we simply don’t know what it says), Mayne rejected this proposal. Instead, Mayne wants to accelerate the transfer of the SUBA-itraconazole rights in BCCNS ahead of the actual deadline. So not only does Mayne not want to discuss more equitable treatment of the deadline, it wants HPPI to transfer the BCCNS license a full month sooner than the deadline calls for. How about that HPPI's minority shareholders? This is essentially Mayne saying “That’s right, get out of our way, we want what’s ours even sooner than we’re supposed to get it. And we're not even going to modify the incredibly unfair license terms you guys are stuck with.” In return for getting the license sooner, Mayne would exercise enough of its warrants at $0.12/share to inject $1 million into HPPI.
To me, it all comes back to the extensive self-dealing Mayne conducted in establishing the terms of the 12/31/18 license deadline in place currently without much push back from HPPI’s BOD that has at least two “non-independent” Directors (Chairman Magrab and Director Cross), and a third in Robert Martin that I’d contend isn’t really “independent” either since he was hand-picked by Mayne and placed on the Board at the same time as Chairman Magrab was in November 2016 when Mayne made its power play to seize control of the Board.
For its part, HPPI also filed an 8-K with the SEC largely as a response to Mayne’s filing discussed above. Pertinent text from HPPI's filing includes:
1. On October 26, 2018, the Company’s Board of Directors (the “Board”) deemed it necessary in light of the evolution of discussions with Mayne Pharma to form a committee of disinterested directors (the “Independent Committee”) in order to engage in discussions and negotiations regarding Mayne Pharma’s rights to SUBA BCCNS. The Independent Committee consists of W. Mark Watson (serving as Chairman), R. Dana Ono and Robert Martin, who are each disinterested with respect to Mayne Pharma. The Independent Committee has been endowed with the full power of the Board to discuss, negotiate and approve any transactions and related documentation with Mayne Pharma that relate to the SLA (including the SUBA BCCNS product and the Company’s rights thereto), or any contractual or financing matters arising therefrom involving Mayne Pharma, and in connection therewith to fulfill the full Board’s fiduciary obligations to all Company stockholders, including its minority stockholders.
2. It is the Company’s understanding that the 13D/A was filed principally so that Mayne Pharma could be in compliance with applicable U.S. securities laws, rules and regulations. No aspect of any proposal of Mayne Pharma to the Independent Committee as described in the 13D/A (the “Initial 13D/A Proposal”) has been accepted even in concept by the Independent Committee. The Initial 13D/A Proposal was non-binding and the terms thereof were not specifically requested by the Independent Committee. The Independent Committee has been in active discussions with representatives of Mayne Pharma on a variety of related matters, and readers of the 13D/A should not infer from the filing of the 13D/A that the Initial 13D/A Proposal or any aspect thereof has been or will be accepted or approved by the Independent Committee.
3. The Independent Committee is considering all alternatives available to the Company in light of the present circumstances facing the Company with respect to the SUBA BCCNS product.
4. Neither the Company, the Board nor the Independent Committee is committing by making the foregoing disclosures to provide further public updates on the matters described herein, unless required by applicable law, rule or regulation.”
So a few thoughts immediately came to me as I read this filing. First, I think it’s quite interesting that only three of HPPI’s five Board members are part of the Independent Committee involved in the Mayne negotiations. The 2 “non-independent” Board members (Chairman of the Board E. Brendan Magrab and Director Steffan Cross) are not part of the process apparently. Why all of a sudden are just these 3 Directors involved? I’m assuming this was not the case in January 2018 when the Equity Financing with Mayne was conducted. And there was no associated filing by Mayne or HPPI then like there was this time around. Why is that? Is the company somehow feeling a bit more under the microscope now given all its past perceived conflicts and trying to keep everything above the table now given the doomsday scenario is close at hand. This aspect to all matters surrounding the license deadline with Mayne needs to be evaluated.
Also, I still have to question the designation of Robert Martin as truly “independent” even though he is stated as such in SEC filings. I do find the description of Robert Martin as “disinterested with respect to Mayne Pharma” quite misleading as I just don’t think he is truly independent on this matter. Will this stand up to independent scrutiny? This also needs to be evaluated.
Furthermore, what is CEO Virca’s role at this time? He’s failed to accomplish the one objective he simply had to complete to maintain control of the single asset the company has at this time: file the SUBA-itraconazole NDA in BCCNS. Yet, he failed. What was he doing in the entire first half of 2018? At this point, I’d go so far to consider him a liability for minority shareholders. Given his current employment contract expires at 12/31/18 and he requires 60-day notice if he will not be extended into 2019, what is his status at the company?
So, the Independent Committee hasn’t accepted or endorsed Mayne’s proposal at the time of the 8-K filing on 11/5/18. Who is to say exactly how this will play out? We already know that Mayne rejected HPPI’s first proposal. One has to think this was the best case proposal for minority shareholders, namely, extending the deadline long enough so that the Integrated Safety Study could be compiled and the NDA submitted in the BCCNS setting. Mayne then countered with an extremely one-sided counter-offer, as laid out in the 13 D/A filing. And now, here we are.
What a More Equitable License Arrangement Looks Like
What would a more equitable outcome look like? In my 10/26/18 article I discussed the lack of an upfront fee, any milestone payments, and what one has to assume at this point is a sub-standard royalty structure back to HPPI if Mayne does indeed get the rights entirely to the BCCNS indication. Interestingly, on 10/26/18, Mayne acquired the U.S. and Australian rights to FDA-approved halobetasol foam. This is the first foam application of a derm product that already has competing cream, ointment, and lotion halobetasol formulations on the market that combined account for $64M in U.S. sales. Mayne further contends that peak U.S. revenue from the foam formulation is in excess of $25M.
What were the terms of this transaction? Mayne paid $10M upfront, will pay another $5M at commercial launch in 1Q19, up to $17M of contingent payments based on commercial success, and royalties based on 10-year sales performance. Now, compare that to the license terms if Mayne takes over the BCCNS license from HPPI. Again, no upfront fee, no milestone, no contingency payments, and likely a non-competitive royalty fee for a product with no competing drugs on the market for BCCNS and orphan drug status in BCCNS. Moreover, as discussed in my November 2017 report, HPPI management sees the low-hanging U.S. BCCNS market as a $300M market opportunity plus any further penetration into the full BCCNS patient population. So, possibly >10x higher revenue potential than the foam halobetasol acquisition and yet the financial terms are wildly and exaggeratingly unfair to HPPI in comparison. How can this possibly stand up to independent scrutiny? The players involved on both sides of the BCCNS license agreement agreeing to such a deal will have to answer for this if push comes to shove. This situation is tantamount to a bank heist simply based on Mayne’s own product acquisition terms in somewhat parallel transactions, and all the conflicts of interest and self-dealing must be addressed in this situation.
Time will tell just how this situation gets resolved between HPPI and Mayne, but it is looking more and more likely that HPPI’s minority shareholders will have to resort to litigation to resolve this “robbery in progress”. Mayne needs to either extend the license agreement (or ideally do away with it entirely) or offer substantially more equitable terms to HPPI to acquire the BCCNS license given all the conflicts in place that allowed the current license terms to take shape.
Disclosure: I am/we are long HPPI.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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