Penwest
Pharmaceuticals (NASDAQ: PPCO) shares are trading near their 52-week lows and
some investors are growing restless. Tang Capital and Perceptive Life Sciences are
two such shareholders that own a combined 40 percent of the troubled company. The
investors expressed serious concerns about Penwest’s direction and believe the company
should be liquidated to unlock value.
In a
letter
to the board, Tang Capital and Perceptive Life Sciences wrote:
We write to express serious concerns about the current direction of Penwest
in the hope that you will take action before it becomes too late and we are forced
to pursue other measures. Specifically, for the reasons explained below, we
ask that you stop wasting corporate assets and substantially wind down the Company’s
operations so that we, the shareholders, may realize the full value of the Opana ER
royalty income stream. We also ask that you confirm that our January 12, 2009
notice that we intend to nominate 3 persons for election to the Board of Directors
at the 2009 annual meeting complies with Penwest’s advanced notice bylaw provisions.
We request that you take these actions no later than March 10, 2009.
Penwest’s principal asset is its royalty earned on the sale of Opana
ER by licensee Endo Pharmaceuticals. Opana ER was launched by Endo in 2006 and had
2008 net sales of approximately $140 million to $145 million, which is up 63 to 70
percent year-over-year. Net of the royalty holiday and development cost recoupments,
Penwest will earn approximately $19 to $25 million in 2009 and $45 to $55 million
in 2010, depending on sales growth.
The income stream from this asset is great, but a generic version of Opana ER is set
to hit the market on or after July 15, 2011. Meanwhile, the company has spent $30
to $32 million in 200, or approximately 60 percent of its market capitalization, on
the development of a new drug A0001. The problem is that only an estimated 11 percent
of compounds in Phase I trials make it to market. Meanwhile, the capital markets have
all but shut down for early-stage biopharmaceutical companies.
One equity analyst who provided coverage on the company recently wrote:
Lottery ticket strategy. Management continues to manage for the
pipedream (our opinion) that is referred to as A0001 (for mitochondrial diseases).
To run a whole company for a single product that is not even beyond proof of concept
is a profound disservice to shareholders…The overhead is just too heavy to maintain
this expensive endeavor. Note that the PPCO management team has very little
impact on the true share price driver (the Opana ER pain drug royalty stream - our
opinion) beyond signing royalty checks (and management should not be given credit
for its marketing success, again our opinion).
The Board represents who? Shareholders or management? You decide.
In November 2008, the Board implemented a retention package that rewards management
for a change of control (200% of salary and highest bonus since at the Company).
Jennifer Good took control as CEO in June 2006, and the stock has fallen from the
$15-20/share range to currently under $2/share. Why compensate this performance
for a takeout that could be in the $5/share range? Shareholders deserve a Board
response to this question. Ironically, the Company is getting rid of CFO Ben
Palleiko, who is the one person we would have chosen to keep.
In the end, Tang Capital and Perceptive have invested more than $45 million
in Penwest stock. Based on their review of SEC filings, the current officers and directors
have invested almost no money in the company since 2003. In fact, they have sold more
than $2.2 million in stock in addition to their $6.5 million in cash compensation.
So, if management and members of the board are truly committed to A0001, the shareholders
suggested the company enter into a transaction with these insiders whereby Penwest
grants them or an entity they create rights to A0001 and any follow-on compounds,
free of charge, in return for spending reductions.
