Advertisements
Feeds:
Posts
Comments

Posts Tagged ‘Neurobiological Technologies Inc (NASDAQ:NTII)’

Neurobiological Technologies Inc (NASDAQ:NTII) has filed its 10Q for the period ended march 31, 2009. After reviewing the 10Q, we have reduced our estimate of NTII’s liquidation value to $19.6M or $0.73 per share. NTII closed on Friday at $0.72, which is approximately our estimate of its value, and so we are taking the opportunity to exit. We opened the position on February 23, 2009 at $0.53, so we are up 35.9% on an absolute basis. The S&P500 Index was at 770.05 when we opened the position, and closed Friday at 929.23, which means we are up 15.2% on a relative basis.

We started following NTII (see our post archive here) because it was trading at a substantial discount to our estimate of its $21.9M or $0.81 per share liquidation value and Biotechnology Value Fund, Millennium Technology Value Partners and Highland Capital Management held approximately 45% of NTII’s outstanding stock (one stockholder estimated 65%) and were calling for its liquidation. NTII has now reached our reduced estimate of its liquidation value, so we are exiting the position.

The value proposition updated

NTII expects “cash, cash equivalents, short-term and long-term investments to total approximately $23 million at June 30, 2009,” which is up slightly from our estimate as at March 31, 2009. The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

NTII Summary 2009 3 31

Conclusion

At its $0.72 close on Friday, NTII is trading at just under our estimate of its $0.73 per share liquidating value. While we believe that there may be slightly more value in NTII (for example, if it receives a portion of the net proceeds paid to Celtic Pharmaceuticals upon a sale of XERECEPT), we ‘re not certain of that value, so we’re taking the opportunity to exit now.

[Full Disclosure:  We do not have a holding in NTII. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Advertisements

Read Full Post »

Neurobiological Technologies Inc (NASDAQ:NTII) has engaged a financial adviser to explore a sale of the company or its major assets to determine “if there is a transaction more beneficial to our shareholders than a liquidation,” according to its CEO, William Fletcher.

We’ve been following NTII (see our post archive here) because it’s trading at a substantial discount to our estimate of its liquidating value and stockholders representing at least 45% of its stock (one stockholder estimates 65%) have called for its liquidation. NTII is up 25% from $0.53 when we started following it to close yesterday at $0.66. At yesterday’s close, NTII has a market capitalization of just $17.8M, which is around 80% of our estimate of its $21.9M or $0.81 per share liquidation value. There exists the possibility that its liquidation value is significantly higher again if NTII receives a portion of the net proceeds paid to Celtic Pharmaceuticals upon a sale of XERECEPT. The company’s decision to explore a sale or liquidation is welcome news. With Biotechnology Value Fund, Millennium Technology Value Partners and Highland Capital Management, holding approximately 45% of NTII’s outstanding stock and calling for its liquidation, we feel the company will be under some pressure to accede and that should lead to a reasonably quick resolution.

Reuters has the article:

March 26 (Reuters) – Neurobiological Technologies Inc (NTII.O) said it was evaluating a potential sale of the company or its major assets and had hired a financial adviser to help with the process.

“We have retained RBC Capital Markets to assist us in efficiently determining if there is a transaction more beneficial to our shareholders than a liquidation,” acting Chief Executive William Fletcher said.

In January, the company had suspended further development of Viprinex, its drug for acute ischemic stroke, and cut about 75 percent of its workforce.

Thanks JM.

[Full Disclosure:  We do not have a holding in NTII. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

The New York Times has an article by Andrew Pollack, “Drug Investors Lose Patience,” about investors pushing biotechnology companies to liquidate and return capital to investors. Pollack notes that such clashes have become much more common in recent months as the stock market crash has pushed the market capitalization of many biotechnology companies to less than the cash on hand, which creates an opportunity for investors to realize an immediate return if the company dissolves. The article covers three situations that we have been following closely for several months, Avigen Inc (Nasdaq: AVGN), Neurobiological Technologies Inc (NASDAQ:NTII) and Northstar Neuroscience Inc (NASDAQ:NSTR).

The first is the clash between Avigen Inc (Nasdaq: AVGN) and Biotechnology Value Fund (BVF). We’ve been following AVGN (see archived posts here) for exactly the reason that Pollack identifies: it’s a net cash stock (i.e. it’s trading at less than the value of its cash after deducting all liabilities) and specialist biotechnology activist fund BVF has been pushing it to liquidate and return its cash to shareholders. MediciNova Inc (NASDAQ:MNOV) has made an offer for AVGN that we think represents a clever way for AVGN’s stockholders to receive cash equivalent to that which they would receive in a liquidation (less $7M to be paid to MNOV) with the possibility for “an extraordinary, uncapped return” if MNOV is successful post-merger. We estimate AVGN’s cash at around $1.22 per share (BVF estimates $1.20 per share), which is around 20% higher than AVGN’s $1.02 close yesterday.

Pollack provides a good background to the AVGN vs BVF stoush:

The Biotechnology Value Fund, often called BVF, was a longtime shareholder in Avigen. But it sold 640,000 shares, nearly all its holdings, for about $3.95 to $4.60 a share. The sale was near the stock’s highs for the year – in the two months before Avigen was scheduled to announce, in October, the clinical trial results of its drug to treat a symptom of multiple sclerosis. After the drug failed, BVF swooped in and bought more than eight million shares, nearly a 30 percent stake, at about 58 cents a share. That was well below Avigen’s cash total of about $1.90 a share at the time.

BVF has made a $1-a-share tender offer for Avigen and is trying to replace the directors. If it gains control, it could liquidate Avigen or sell it to MediciNova, which has said it wants to buy it. Mr. Chahine, the chief of Avigen, which is based in Alameda, Calif., said its assets might be parlayed into a deal that would be worth more than BVF or MediciNova would pay and more than the liquidation value. “All we’re saying is, give us an opportunity to canvass the field, see what’s out there and bring something to the shareholders,” he said.

But Mr. Nodelman said such a process might eat up the company’s remaining cash. “Someone’s got to police the space,” he said. “We’re making sure that the last $50 million in the company don’t go to the bankers and the consultants and the golden parachutes.”

BVF, which specializes in smaller biotech companies, has become the most outspoken investor pressing for its money back. The fund, based in San Francisco, gets about half of its capital from the Ziff family, which made its fortune in magazine publishing.

Mr. Nodelman makes no apologies for BVF’s having bought Avigen stock again after the collapse.

He also neatly captures the perspective of AVGN’s CEO, Ken Chahine, who, we think, speaks for on behalf of most CEOs in the same position:

“I hear that argument” about shareholder rights, said Kenneth G. Chahine, Avigen’s chief. “But it’s really ‘I want to raid the cash.’ We’re back to 1987 and ‘Barbarians at the Gate.’ “

The second situation mentioned in the article that we have been following is Neurobiological Technologies Inc (NASDAQ:NTII):

BVF is also one of four investors, which collectively own about two-thirds of the shares, demanding money back from Neurobiological Technologies of Emeryville, Calif.

The company’s stroke drug is derived from the venom of the Malayan pit viper. Three of the investors, including BVF, were shareholders when that drug failed in a clinical trial in December. The fourth bought in after the failure. The stock now trades at 58 cents, but its liquidation value would be as high as $1 a share.

Matthew Loar, the chief financial officer, said the company was sympathetic to the requests but had not yet decided what to do. In any case, he said, it could not act as fast as the investors want.

“You can’t just turn off the lights in a company in a day,” he said. Among other things, the company must figure out what to do with 1,000 poisonous snakes, he said. “We’re going to get rid of them in the most expeditious, reasonable way possible.”

We’ve been following NTII because it’s trading at a substantial discount to our estimate of its liquidating value. At its $0.59 close yesterday, NTII has a market capitalization of just $15.9M, which is around 10% higher than our $14.5M estimate for its net cash value but around two-thirds of our estimate of its $21.9M or $0.81 per share liquidation value. There exists the possibility that its liquidation value is significantly higher again if NTII receives a portion of the net proceeds paid to Celtic Pharmaceuticals upon a sale of XERECEPT. With stockholders representing 45% (note that Samuel L. Schwerin estimates 65%) of the outstanding stock of NTII calling for its liquidation, we feel the company will be under some pressure to accede and that should lead to a reasonably quick resolution.

The third situation we have been following is Northstar Neuroscience Inc (NASDAQ:NSTR), and it is particularly interesting because the company has agreed to liquidate:

Under pressure from the hedge fund RA Capital Management, for example, Northstar Neuroscience, a medical device company in Seattle whose stroke treatment failed, is proposing to liquidate, with shareholders receiving an estimated $1.90 to $2.10 a share in cash. The company’s stock, which had been as low as 90 cents in November, closed at $1.90 on Monday.

We started following NSTR because it is a net cash stock that has announced that it plans to liquidate. NSTR closed yesterday at $1.92, giving it a market capitalization of $50.2M. We originally estimated the final pay out figure in the liquidation to be around $59M or $2.26 per share, which presents an upside of around 17%. The company estimates a slightly lower pay out figure of between $1.90 and $2.10 “assuming we are unable to sell our non-cash assets” and expects to make an initial distribution within approximately 45 days after the Effective Date (which is to be announced) of approximately $1.80 per share.

The article notes that in some cases the investors asking for their money back are “not long-suffering shareholders” but “speculators who bought in only after the stock price collapsed, hoping to make a quick killing.” Aside from their characterization as “speculators,” we find ourselves in the latter camp. Our definition of investment hell is being caught in what Pollack calls a “zombie” – a company “lurching from product to product, surviving years or even decades without ever achieving success.” Finding a stock trading below a conservative estimate of the value of its assets with a good prospect that the value can be unlocked is our definition of investment heaven. Here’s to a few more quick killings, even if an investor requires the patience of Job to get them.

Hat tip to John Allen.

[Full Disclosure:  We have a holding in AVGN. We do not have a holding in NTII or NSTR. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

Greenbackd Portfolio Q1 performance and update

March 1, 2009 marked the end of Greenbackd’s first quarter, so we thought we’d take the opportunity to update you on the performance of the Greenbackd Portfolio and the positions in the portfolio, discuss some changes in our valuation methodology since our first post and outline the future direction of Greenbackd.com.

First quarter performance of the Greenbackd Portfolio

We get many questions about the content and performance of the portfolio. We had originally planned to report on a six-monthly basis, but we have now decided to report on a quarterly basis so that we can address these questions on a more frequent basis. Although it is still too early to determine how Greenbackd’s strategy of investing in undervalued asset situations with a catalyst is performing, we’ve set out below a list of all the stocks we’ve included in the Greenbackd Portfolio and the absolute and relative performance of each at the close on the last trading day in our first quarter, Friday, February 28, 2009:

greenbackd-portfolio-performance-2009-q13The absolute total return across the current and former positions as at February 28, 2009 was -3.7%, which was +7.0% higher than the S&P500’s return over the same periods. A negative return for the first period is disappointing, but we are heartened by the fact that we outperformed the market by a small margin.

You may have noticed something odd about our presentation of performance. The S&P500 index declined by 18.0% in our first quarter (from 896.24 to 735.09). Our -3.7% performance might suggest an outperformance over the S&P500 index of +14.3%. We calculate our performance on a slightly different basis, recording the level of the S&P500 index on the day each stock is added to the portfolio and then comparing the performance of each stock against the index for the same holding period. The Total Relative performance, therefore, is the average performance of each stock against the performance of the S&P500 index for the same periods. As we discussed above, the holding period for Greenbackd’s positions has been too short to provide any meaningful information about the likely performance of the strategy over the long term (2 to 5 years), but we believe that the strategy should outperform the market by a small margin.

Greenbackd’s valuation methodology

We started Greenbackd in an effort to extend our understanding of asset-based valuation described by Benjamin Graham in the 1934 Edition of Security Analysis. Through some great discussion with our readers, many of whom work in the fund management industry as experienced analysts or even managing members of hedge funds, we have had the opportunity to refine our process. We believe that what started out as a pretty unsophisticated application of Graham’s liquidation value methodology has evolved into a more realistic analysis of the balance sheet and the relationship of certain disclosures in the financial statements to asset value. We’re not yet ready to send it into space, but we believe our analyses are now qualitatively more robust than when we started and that has manifest itself quantitatively in better performance (more on this below).

The two main differences between our early analyses and our more recent ones are as follows (these are truly cringe-worthy, but that’s why we undertook the exercise):

  1. We didn’t take account of the effect of off-balance sheet arrangements and contractual obligations. This caused us to enter into several positions we should have avoided, including BGP and VVTV.
  2. We were using overly optimistic estimates for the recovery rates of assets in liquidation. For example, we started using 50% of Gross PP&E. We now use 20% of Net PP&E. We now apply Graham’s formula as the base case and deviate only when we believe that Graham’s formulation doesn’t reflect reality.

The effect of these two broad errors in analysis was to create several “false positives,” which is to say that we added stocks to the portfolio that wouldn’t have passed our current, more rigorous standards. The performance of those “false positive” stocks has been almost uniformly negative, and dragged down the performance of the portfolio. As an exercise, we went back through all the positions we have opened since we started the site and applied our current criteria, which are more stringent and dour than our earlier standards. We found that we would not have opened positions in the following eight stocks:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • BGP (-10.8% on an absolute basis and -21.6% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • KONA (+87.8% on an absolute basis and +81.9% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • VVTV (-25.0% on an absolute basis and -23.1% on a relative basis)
  • ZLC (-72.0% on an absolute basis and -61.1% on a relative basis)

It seems we got lucky with KONA, but the performance of the balance of the stocks was wholly negative. The performance across all stocks listed above was -12.5% on an absolute basis and -3.9% on a relative basis. Excluding these eight stocks from our portfolio (i.e. treating the portfolio as if we had not entered into these positions) would have resulted in a slightly positive absolute return of +0.7% and a relative performance over the S&P500 of +12.5%. This is a compelling reason to apply the more dour and rigorous standards.

We like to think we’ve now learned out lesson and the more dour and rigorous standards are here to stay. Set out below is an example balance sheet summary (for Chicago Rivet & Machine Co. (AMEX:CVR)) showing our present base case discounts from book value (circled in red):

example-summary-2

Readers will note that these are the same base case discounts from book value suggested by Benjamin Graham in the 1934 Edition of Security Analysis, more fully described in our Valuing long-term and fixed assets post under the heading “Graham’s approach to valuing long-term and fixed assets.” Why we ever deviated from these standards in the first place is beyond us.

Update on the holdings in the Greenbackd Portfolio

Leading on from our discussion above, four of the stocks we picked using the initial, overly optimistic criteria no longer meet our more stringent standards but haven’t yet been removed from the portfolio. We’re going to take our medicine now and do just that. To make it clear, these stocks aren’t being removed because the value has deteriorated, but because we made a mistake adding them to the portfolio in the first place. As much as we’d like to treat these positions as void ab initio (“invalid from the beginning”), we’re not going to do that. We’ve made a full accounting of the impact they’ve had on the portfolio in the First quarter performance of the Greenbackd Portfolio section above, but we don’t want them affecting our future performance. The stocks to be removed from the Greenbackd Portfolio and their absolute and relative returns are as follows:

  • BRN (-13.1% on an absolute basis and +4.9% on a relative basis)
  • HRT (-25.3% on an absolute basis and -9.7% on a relative basis)
  • MGAM (-24.2% on an absolute basis and -5.0% on a relative basis)
  • COBR (-17.1% on an absolute basis and +3.6% on a relative basis)

We’ll provide a more full discussion of where we went wrong with these stocks at a later date, but suffice it to say for present purposes that all were errors from the second bullet point in the Greenbackd’s valuation methodology section above (i.e. overly optimistic estimates for the recovery rates of assets in liquidation).

There are fifteen stocks remaining in the Greenbackd Portfolio:

Eight of these positions (ABTL, ACLS, ARCW, CAPS, CRC, CRGN, NSTR, and VOXX) are trading at or below our nominal purchase price and initial valuations. The remaining seven positions (AVGN, DITC, IKAN, MATH, NENG, NTII, and SOAP) are trading above our intial purchase price but are still at varying discounts to our valuations. We’ll provide a more full update on these positions over the course of this week.

The future of Greenbackd.com

We are going to trial some small changes to the layout of the site over the next few weeks. We’ve already made the first change: the newest comments now appear at the top of the list. We’ll also be amalgamating some pages and adding some new ones, including a page dedicated to tracking the portfolio with links to the analyses. We’re also considering some options for generating income from the site. At the moment, Greenbackd is a labor of love. We try to create new content every week day, and to get the stock analyses up just after midnight Eastern Standard Time, so that they’re available before the markets open the following day. More than 80% of the stocks that are currently trading at a premium to the price at which we originally identified them (NTII, SOAP, IKAN, DITC, NENG, MATH and AVGN) traded for a period at a discount to the price at which we identified them. This means that there are plenty of opportunities to trade on our ideas (not that we suggest you do that). If you find the ideas here compelling and you get some value from them, you can support our efforts by making a donation via PayPal.

We look forward to bringing you the best undervalued asset situations we can dig up in the next quarter.

Read Full Post »

Neurobiological Technologies Inc (NASDAQ:NTII) is a particularly interesting play. Prima facie, it appears to be a cash-burning biotechnology stock trading at a premium to its liquidating value. In other words, a stock we wouldn’t touch with a ten foot pole. On closer inspection, however, it becomes clear that NTII is trading at its net cash value, has other readily valuable assets and offers the possibility of substantial additional upside. At its $0.53 close on Friday, NTII has a market capitalization of just $14.3M, which is right on our $14.5M estimate for its net cash value. Our estimate for its liquidating value is around 50% higher at $21.9M or $0.81 per share with the possibility that it is significantly higher again. Three activist investors, Biotechnology Value Fund (BVF), Millennium Technology Value Partners and Highland Capital Management, hold approximately 45% of NTII’s outstanding stock and have called for its liquidation. We’re adding it to the Greenbackd Portfolio.

About NTII

NTII is a biopharmaceutical company historically focused on developing treatments for central nervous system conditions and other serious unmet medical needs. The company recently terminated development of its most advanced product candidate, ViprinexTM. The company has the right to receive royalty payments from the sales of Namenda (memantine HCL), an approved drug marketed for Alzheimer’s disease, and potential milestone and royalty payments from the development of XERECEPT, an investigational drug which has completed a Phase 3 clinical trial for the treatment of swelling associated with cerebral tumors. Additionally, NTII’s earlier stage pipeline includes rights to a protein in preclinical development for the treatment of Alzheimer’s disease. The company’s investor relations website is here.

The value proposition

NTII has no material ongoing operations as of December 2008. It continued to burn cash through the last quarter.  According to the most recent 10Q, however, its cash burn rate should now be “significantly curtailed since the Viprinex program for acute ischemic stroke was terminated in December 2008.” The summary of our estimate for the company’s liquidation value is set out below (the “Book Value” column shows the assets as they are carried in the financial statements, and the “Liquidating Value” column shows our estimate of the value of the assets in a liquidation):

ntii-summaryThere are two unusual elements in our summary balance sheet:

  1. Total Liabilities, carried in the balance sheet at $24.6M, have been adjusted down to 35% to remove $16M attributable to deferred revenue and warrant liability. We would not normally adjust the Total Liabilities at all. We have excluded these amounts from the Total Liabilities in this instance because the company “[does] not believe these items will ever require cash payments from us” (see Liquidity and Capital Resources in the most recent 10Q).
  2. Long Term Investments, carried in the balance sheet at $9M, have only been discounted by 20%, rather than our usual 80%. The Long Term Investments are predominantly AAA-rated auction rate securities (ARS) that continue to pay interest. The figure for the ARS in the balance sheet reflects the ARS’s purchase price less impairment charges of $1.6M at December 31, 2008. From the most recent 10Q:

Beginning in February 2008, failed auctions occurred throughout the ARS market, and since then all auctions for NTI’s ARS have been unsuccessful. While the credit rating of these securities remains high and the ARS are paying interest according to their terms, as a result of the potentially long maturity and lack of liquidity for ARS, the Company believes the value of the ARS in NTI’s portfolio has been impaired. During the fiscal year ended June 30, 2008, the Company recorded an impairment charge to reduce the carrying value of the ARS. The impairment charge was based on a model of discounted future cash flows and assumptions regarding interest rates. The Company has also recorded an unrealized loss of $1,360,000 on its ARS at December 31, 2008 based on a decrease in the estimated fair value since the impairment charge was initially recorded. Due to recent wide and rapid fluctuations in the credit markets, combined with the Company’s low forecasted operating expenses in comparison to its cash and investments balances, the Company believes the current fiscal year decline in estimated market price for the ARS to be temporary. The Company believes it has the ability to hold its ARS until recovery of the temporary decline in value. All other unrealized gains and losses were immaterial. The Company has classified its ARS as long-term at December 31, 2008, and all other investments are classified as short-term.

Accordingly, we believe that a 20% discount to the value of the ARS carried in the Long Term Investments is sufficient, if overly cautious.

XERECEPT®

NTII sold the rights to XERECEPT to Celtic Pharmaceuticals in 2005. Celtic Pharmaceuticals has continued to develop XERECEPT and recently announced that it has retained an investment bank to assist with the sale of XERECEPT. NTII is entitled to receive between 13% and 22% of the net proceeds received by Celtic Pharmaceuticals upon the sale of XERECEPT. We don’t know if the sale process will be successful or if NTII will receive any payment, but it does present the possibility of additional value to stockholders of NTII.

Off-balance sheet arrangements

According to the 10Q, NTII has “no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our consolidated financial condition, changes in our consolidated financial condition, revenues or expenses, consolidated results of operations, liquidity, capital expenditures or capital resources.”

Contractual obligations

NTII’s noncancelable contractual obligations set out in its 10Q are as follows:

  • Active ingredient production/purification and operation of a snake farm. Raw venom of the Malayan pit viper was the starting material for the active ingredient in Viprinex, and was produced by Nordmark in Germany where Nordmark maintained a colony of snakes in a manufacturing facility. We agreed to make monthly payments to Nordmark for our supply of the active ingredient and for the fully burdened costs of operating the snake farm until such time as either 1) the agreement is terminated pursuant to specified terms or 2) commercial production commences. If the agreement is terminated by us prior to commercialization, we are required to make a termination payment of up to €2.8 million (or approximately $3.7 million at the December 31, 2008 exchange rate) to Nordmark. We have notified Nordmark of our intent to terminate the agreement and remove the snakes located at the facility. Under the terms of the agreement, we are responsible for specified operating costs of the facility as long as the snakes are at the facility. We have identified several reptile zoos willing to take snakes, and are in process of completing the arrangements for the transfer of the snakes. We cannot estimate the costs for this process, but we currently expect it to be completed by March 31, 2009.
  • Clinical Research Organizations. We had agreements in place with several Clinical Research Organizations for work needed on the clinical trials in various foreign countries. We generally paid the CROs on a monthly or quarterly basis for work as it was performed, and the terms of most of the agreements allow them to be cancelled with no obligations beyond the costs incurred by the CROs to the time of termination. Our CROs have closed down the clinical trial and are in the process of reconciling pass-through costs for the clinical trial and amounts we have paid compared to actual costs incurred. We have accrued expenses as of December 31, 2008 which we believe are appropriate under the agreements, and are holding further payments to the CROs until we are satisfied that all costs are justified under the agreements. We expect resolution with all CROs in the third or fourth quarter of our fiscal year ending June 30, 2009.
  • Medical facilities conducting the clinical trials. We generally pay medical facilities for each patient enrolled into our trials, and withhold a portion of total site compensation until all data required in the clinical trial protocol is received. The portion withheld is recorded as a liability in our consolidated financial statements. As we receive the final data from each site we authorize the release of the final payments called for under the agreements. We expect this process to be completed by March 31, 2009.
  • Data management. We pay outside service organizations on a monthly or quarterly basis for services related to managing the data collected from the clinical trial. We have recorded an accrued liability for the charges we expect to incur, and the service organizations are in process of reconciling the payments from NTI to the actual charges incurred. We expect this process to be completed by June 30, 2009.
  • License agreement for Viprinex. We have an exclusive worldwide license for all human therapeutic indications for Viprinex from Abbott. Under this license, we have an obligation to use commercially reasonable efforts to develop Viprinex for the treatment of acute ischemic stroke. If we do not use commercially reasonable efforts to develop Viprinex for stroke Abbott may reclaim rights to develop the product. While no license maintenance payments are required to Abbott, milestone payments of up to $2 million would be due upon various regulatory approvals of Viprinex, along with royalty payments based on worldwide Viprinex sales. In the event we sublicense the rights to Viprinex, additional payments may be due to Abbott based on the terms of the sublicense. We have the right to terminate the agreement upon providing 90 days notice to Abbott, and Abbott has the right to terminate the agreement only in the event of our breach. We presently do not intend to develop Viprinex further under the license from Abbott and expect rights will ultimately be returned under the terms of the agreement. Upon returning the rights to Abbott, we are also required to return all drug material, data and intellectual property to Abbott.
  • Employees. All of our employees are employed on an “at-will” basis.
  • Buck Institute for Age Research. We have entered into agreements with Buck for rights to preclinical proteins for the treatment of Alzheimer’s disease and Huntington’s disease. The research programs under these agreements may be extended annually and we have the right to terminate the agreements upon 60 days notice if we determine the research program objectives cannot be substantially met. In addition, we have certain milestone obligations to Buck in the event that specified research goals are met. We have notified Buck that we do not intend to extend the research program for Huntington’s disease, and are currently reviewing the Buck proposal for the second year of the Alzheimer’s disease research program.

While these contractual obligations are significant relative to NTII’s net assets, we believe that NTII’s interest income and the royalty revenue ($2m in the last quarter) should wash these obligations for the next 12 months, or at least reduce the cash burn rate to between $1M and $2M. The royalty ends in 2009.

The catalyst

Three large shareholders, BVF, Millennium Technology Value Partners and Highland Capital, hold 45% of NTII’s outstanding stock. BVF initiated its position in June last year, disclosing a 19.7% holding. According to a later 13D amendment,  BVF sent a letter on December 23, 2008 calling on NTII’s board:

…to exercise its fiduciary duty to shareholders by winding up NTII in order to return cash to shareholders as quickly and efficiently as possible. The letter explains that costs associated with a liquidation could be limited by immediate, decisive action because  [NTII]’s remaining assets are financial and passive in nature requiring negligible activity to manage. The letter calls on [NTII] to take immediate action to maximize shareholder value by returning capital to shareholders, consistent with its fiduciary duties, and to refrain from engaging investment bankers or other advisors (except for the sole purpose of winding up the company), whose self-interests would likely lead to a further drain of capital.

Samuel L. Schwerin (Managing Partner of Millennium Technology Value Partners) filed a 13D amendment on  January 6, 2009 disclosing a 7.7% holding (which includes the Millennium Technology Value Partners’ holdings disclosed below). Schwerin’s purpose for the filing is as follows:

On January 6, 2009, in the context of the failure of the clinical trial for Viprinex, [NTII]’s primary asset, Millennium Technology Value Partners delivered a letter urging [NTII] to take immediate and decisive action to monetize the remaining value of [NTII]’s assets for the benefit of its shareholders. The letter details Millennium’s belief that the only remaining course of action for [NTII]’s management and board to pursue is the immediate dissolution and liquidation of the company. Millennium has communicated to management that such dissolution should take the form of an immediate distribution of cash to shareholders, followed by an efficient and timely monetization of remaining assets in a manner designed to maximize proceeds to shareholders. Millennium’s letter further suggests that during nearly a dozen conversations between management of [NTII] and Millennium over the past year, management made assurances to Millennium that contingency liquidation plans had been developed in the event of failed Viprinex trials. Millennium expressed its strong belief that these plans should be implemented immediately and that there is no need, nor reason, to waste time or shareholder resources on advisors or to delay the liquidation process in order to explore risky alternative strategies, courses that Millennium believes are likely to result in further diminution of value for all shareholders.

Highland Capital disclosed a 17.6% holding in its original 13D notice filed January 9, 2009. According to the notice:

Highland Capital delivered a letter to NTII requesting the expeditious wind down of [NTII]’s business. In the letter, Highland Capital expressed its belief that, due to the failure of the Viprinex program, [NTII] has no incremental value as an ongoing concern. Highland Capital expressed a strong belief that the only way to return value to the shareholders is through liquidation of [NTII]’s assets. The letter notes that [NTII] is seeking to hire a new CEO and President, and that such action shows an intention to continue operations. Highland Capital believes that the Board should immediately decide to liquidate [NTII], and that hiring a new CEO and President is unnecessary if such action is to be taken.. Highland Capital expressly lists various assets, including cash, currently held by [NTII] which are all capable of near-term liquidation. Highland Capital asserts that it is [NTII]’s Board of Directors’ fiduciary duty to the public shareholders to liquidate these assets, wind down business, and return all proceeds to the public shareholders. Highland Capital expressed concern that the Board was considering “strategic options” to continue business which would result in the immediate degradation and eventual loss of all shareholder value.

Millennium Technology Value Partners disclosed a 3.7% holding in its original 13D filing dated January 23, 2009. Annexed to the filing was the following letter:

The Board of Directors of Neurobiological Technologies, Inc.
c/o Abraham E. Cohen, Chairman of the Board
2000 Powell Street, Suite 800
Emeryville, CA 94608

Dear Members of the Board:

As you know, on January 6, 2009 Millennium Technology Value Partners L.P. (“Millennium”) delivered a letter to the Board of Neurobiological Technologies, Inc. (“NTI” or the “Company”) urging it to take immediate and decisive action to monetize and distribute the Company’s remaining assets for the benefit of shareholders. We have since learned through a review of public filings and discussions with you that the Company has received correspondence from stockholders representing 65% of NTI shares expressing a similar point of view. This would appear to constitute a clear mandate from the stockholders of the Company for you to take immediate action to commence an orderly liquidation. We are disappointed that in the face of such an overwhelming directive from your stockholders, you are able to act other than with absolute immediacy to carry out the will of your constituency.

Over the past 14 months, management and members of the Board repeatedly assured Millennium that contingency plans involving liquidation had been developed and would be implemented immediately should Viprinex fail. Now that Viprinex has failed, we can’t help but wonder, where is the contingency plan and why hasn’t it been implemented? While we appreciate the Company’s January 13 announcement regarding the reduction of staff and the trimming of costs, the ultimate inaction on the Board’s behalf is alarming. Trimming costs merely lowers the cash burn and slows the rate of decline in shareholder value. It does not stop the decline, and more importantly, it does not seek to return maximum value to shareholders.

We are further concerned by discussions involving the potential engagement of financial advisors. As you know, financial and strategic advisors often require a considerable period of time to “evaluate strategic alternatives” and are compensated in such a way as to place an inherent bias against recommending liquidation, which in NTI’s case, is the best, and most immediate, course of action. There is no need, nor reason, to waste time or shareholder resources on advisors or to delay the liquidation process in order to explore risky alternative strategies, courses certain to result in further diminution of value for all shareholders, when the majority of the stockholders of the Company appear to have already made their views perfectly clear. The Board should understand that any action that it takes that would require the approval of its stockholders — other than the prompt liquidation of the Company — will not receive sufficient votes to pass. Accordingly, and by definition, any such attempts would clearly constitute a waste of corporate assets.

Recent discussions with management and members of the Board have further confirmed that “the process of exploring alternatives is ultimately most likely to conclude that liquidation is the best course of action for the shareholders of NTI.” Yet 37 days have passed since the failure of Viprinex, “the sole major asset of the Company,” without the Board communicating or enacting a plan designed to maximize shareholder value through the dissolution and liquidation of NTI assets. We have even gone so far as to outline a plan of liquidation to the Company that we believe could be approved by a substantial majority of the Company’s stockholders. In that plan, excess cash would be immediately distributed to shareholders, with the remaining assets to be liquidated in a timely and orderly manner over the coming months by a shareholder appointed fiduciary, with all proceeds being distributed directly to shareholders immediately upon receipt.

Should the Board have any question that the plan outlined above is in the best interests of shareholders, and that any attempts to pursue an alternative course of action would be over the objection of your stockholders, then we urge you to call a Special Meeting to allow the shareholders to reinforce our own conclusions and those suggested in correspondence from shareholders representing 65% of NTI stock.

To reiterate what we said in our January 6, 2009 letter and have repeated numerous times during our discussions with management, we believe that any action other than the immediate dissolution and liquidation of the Company is an irresponsible waste of corporate assets and will result in a severe impairment of shareholder value. We trust that the best interests of NTI shareholders continue to be of utmost importance to you, the members of the Board, and look forward to your prompt response. If either the Board or management has any questions about the appropriate liquidation plan and how best to implement it, we would welcome the opportunity to discuss it further.

With every day that you fail to take action, the value of the Company declines. We urge you to consider very carefully your primary obligations to your stockholders, and the consequences of your failure to honor these obligations.

Respectfully,

Samuel L. Schwerin
Managing Partner

Conclusion

At its $0.53 close on Friday, NTII is trading at its net cash value and around two-thirds of our estimate of its $0.81 per share liquidating value. The difference between our estimates for NTII’s net cash value and its liquidation value is the $9M in ARS, which we’ve discounted by 20% to $7.2M, and which the company believes will eventually yield full value. The possibility exists that the upside might be even greater if NTII receives a portion of the net proceeds paid to Celtic Pharmaceuticals upon a sale of XERECEPT. With stockholders representing 45% (note that Samuel L. Schwerin estimates 65%) of the outstanding stock of NTII calling for its liquidation, we feel the company will be under some pressure to accede and that should lead to a reasonably quick resolution. NTII is reminiscent of our position in Avigen Inc (NASDAQ:AVGN), which seems to be working out well. We’re adding it to the Greenbackd Portfolio.

NTII closed yesterday at $0.53.

The S&P500 Index closed yesterday at 770.05.

[Full Disclosure:  We do not have a holding in NTII. This is neither a recommendation to buy or sell any securities. All information provided believed to be reliable and presented for information purposes only. Do your own research before investing in any security.]

Read Full Post »

%d bloggers like this: