Asserts Arbutus’ Share of Patent Infringement
Claims Against Moderna and Pfizer/BioNTech is Potentially Worth
Billions of Dollars and Preserving that Value Should be a Key
Focus
Calls on Arbutus to Cease Any Further Share
Issuances and Plans to Vote AGAINST
Proposed Share Increases to Company’s Incentive Plan
Urges the Company to Launch a Strategic Review
of its Hepatitis B Virus Portfolio by Yearend, Including Potential
License and Collaboration Agreements
Whitefort Capital Management, LP (together with its affiliates,
“Whitefort Capital,” “us” or “we”), which is a long-term investor
and the second largest shareholder of Arbutus Biopharma Corp.
(NASDAQ: ABUS) (“Arbutus” or the “Company”) with an ownership
interest of approximately 6.8% of the Company’s outstanding shares,
today published an open letter to shareholders outlining its views
of the best paths forward to maximize value.
The full text of the letter is below:
May 17, 2024
Dear Fellow Shareholders,
Whitefort Capital Master Fund, LP (“Whitefort”) currently owns
approximately 12.9 million common shares, or approximately 6.8% of
the total outstanding stock of Arbutus Biopharma Corporation
(“Arbutus,” “ABUS” or the “Company”).1 Whitefort is the second
largest shareholder of the Company, behind Roivant Sciences Ltd.
(“Roivant”), the Company’s joint venture partner in Genevant
Sciences Ltd. (“Genevant”), which holds the exclusive license to
the Company’s lipid nanoparticle (LNP) delivery technology
patents.
Whitefort is a long-term investor in Arbutus, having
continuously held shares since October 2022. We are writing to you
today to share our perspectives on maximizing value at Arbutus, and
to explain why we now intend to take a more active approach with
respect to our investment. We also want to ensure that the Board of
Directors (the “Board”) and our fellow shareholders understand the
urgency of these issues.
We appreciate having had the opportunity to speak with Board
Chairman Dr. Frank Torti and Interim CEO and Board member Michael
J. McElhaugh ahead of the Company’s Annual General and Special
Meeting (“Annual Meeting”) on May 22, 2024. We hope to continue our
constructive engagement with them and other members of the Board
going forward. In our ongoing dialogue with the Company, we have
requested that the Board act with urgency to terminate the
Company’s at-the-market (ATM) program in order to avoid continued
dilution and preserve the substantial value of the Company’s LNP
patent infringement claims against Moderna, Inc. (“Moderna”) and
Pfizer Inc. (“Pfizer”)/BioNTech SE (“BioNTech”). As such, we were
encouraged to hear Mr. McElhaugh state at a conference this week
that, given the Company’s substantial cash balance ($138 million as
of March 31, 2024) and sufficient liquidity through Q2 2026, the
Company does not “anticipate the need to further utilize the ATM
this year.”2 This is a step in the right direction. However, we
believe that Arbutus should firmly commit to
cease any further share issuances for the foreseeable future,
including under the ATM program.
With respect to the Hepatitis B (HBV) pipeline, the Company
should be judicious with capital allocation and target the highest
probability of success and near-term Phase 2a combination therapy
clinical trials involving the Company’s RNA interference (RNAi)
therapeutic AB-729 (imdusiran). In particular, we look forward to
additional data readouts on the AB-729-201 Combo trial (imdusiran +
Peg-IFNα-2a + NA) at the upcoming EASL Congress in June 2024, where
preliminary data presented in 2023 showed that four patients
reached HBsAg levels below the lower limit of quantification during
interferon (IFN) treatment, which has a known tolerability profile.
Assuming additional data in this Phase 2a combination therapy
clinical trial confirms progress toward a functional cure for HBV,
we believe that the Company should hire a
financial advisor by the end of 2024 to explore strategic
alternatives for its HBV portfolio, including potential license and
collaboration agreements and other strategic
partnerships.
Moderna Claim Construction Order: A
Pivotal Catalyst for the Value of Arbutus’ LNP Patent
Estate
On April 3, 2024, the U.S. District Court for the District of
Delaware issued its claim construction order (the “Claim
Construction Order”) in the patent infringement litigation jointly
filed by Arbutus and Genevant against Moderna, which alleges
infringement of various Molar Ratio Patents, as well as an
Encapsulation Patent, related to the Company’s LNP delivery
technology allegedly used in Moderna’s mRNA-based Spikevax COVID
vaccine. The Claim Construction Order, which determined that
“particle” is not limited to a “finished” particle, that rounding
of significant figures applies to molar percentages, and that no
lower bound applies to the cationic lipid in the ‘378 Patent, is a
very favorable ruling and strengthens the Company’s litigation
claims against Moderna.
Moreover, the Claim Construction Order has positive implications
for the patent infringement litigation jointly filed by Arbutus and
Genevant against Pfizer and BioNTech in the U.S. District Court for
the District of New Jersey. That case alleges infringement of
certain overlapping Molar Ratio Patents, the Encapsulation Patent,
as well as two Manufacturing Method Patents, related to the
Company’s LNP delivery technology allegedly used in Pfizer and
BioNTech’s jointly developed mRNA-based COMIRNATY COVID vaccine. We
believe that the Claim Construction Order substantially increases
the value of the patent infringement litigation claims against
Moderna and Pfizer/BioNTech.
Under the terms of its joint venture in Genevant, Arbutus is
entitled to a 20% “off-the-top” gross royalty after applicable
litigation expenses in relation to infringement actions. In
addition, Arbutus currently owns approximately 16% of the common
equity of Genevant. Effectively, Arbutus owns an approximately 33%
economic stake in the infringement actions against Moderna and
Pfizer/BioNTech. Through yearend 2023, total global sales of
Moderna’s Spikevax COVID vaccine and Pfizer/BioNTech’s COMIRNATY
COVID vaccine were approximately $140 billion. Moreover, certain of
the Company’s Molar Ratio Patents extend through 2029. If the
juries in these respective proceedings find patent infringement,
proxy damages will be calculated based on a reasonable royalty
standard, based on a hypothetical voluntary arms-length negotiation
as of the date of the first infringing sale of the COVID
vaccines.
Roivant’s CFO Richard Pulik, for example, said at a recent
investor conference3 that the royalties struck with different
partners across BioNTech and others across different non-COVID
indications were usually struck “at mid-single digit to low teens
when there was no clinical data. So, obviously there was clinical
data at the time of infringement here.” The implication is that an
infringing royalty rate in these circumstances, in which a license
of the LNP delivery technology platform would represent “but-for”
causation required for commercialization, should be higher than
historical royalties relating to pre-clinical therapeutics.
Furthermore, damage awards are subject to enhancement (potentially
up to treble damages) where there is a finding of willful
infringement.
This math implies that Arbutus’ share of
patent infringement claims against Moderna and Pfizer/BioNTech is
potentially worth billions of dollars, or multiples of the current
Arbutus market capitalization. Accordingly, preserving the value of
Arbutus’ LNP patent estate should be a key focus for the
Company.
Whitefort Will Vote Against Proposal
#2: Increased Share Authorization Under Incentive
Plan
Given the value proposition of the LNP patent infringement
litigation claims set forth above and the high level of dilution
that Arbutus shareholders have already suffered, the Board should
be especially sensitive to further shareholder dilution stemming
from its equity incentive plan.
While we acknowledge that equity incentives can be important
motivational tools, we have decided to Vote Against Proposal #2 at
the Company’s Annual Meeting “To approve an amendment to the
Arbutus Biopharma Corporation 2016 Omnibus Share and Incentive
Plan, as supplemented and amended (the “2016 Plan”), to (a)
increase the aggregate number of common shares authorized for
issuance thereunder by 9,500,000 common shares and (b) increase the
aggregate number of common shares that may be issued pursuant to
incentive stock options granted thereunder by 9,500,000 common
shares.”
Arbutus’ total shares outstanding have increased by 3.4x since
2018 due to heavy utilization of the ATM in order to continue
raising funds to support the HBV pipeline. The proposed share
authorization increase to the 2016 Plan represents an incremental
5% dilution. Further, the overhang from outstanding stock option
awards, restricted stock units and remaining share grant
authorization under the 2016 Plan already represents an incremental
approximately 15% dilution on top of the substantial historical
dilution under the ATM. Moreover, Arbutus’ total shares outstanding
have increased 11% since the end of 2023 due to continued heavy
utilization of the ATM, notwithstanding the pending catalyst of the
Claim Construction Order. Under these circumstances, we simply
cannot accept an additional 5% share dilution from the proposed
amendment to the 2016 Plan.
We believe that the existing terms of the 2016 Plan should
remain in effect, unchanged. In 2023 alone, Arbutus granted stock
options and restricted stock units on an underlying 6,427,190
common shares, representing a 34% increase relative to last year
and an 82% increase relative to the prior year. We see no valid
reason for this year’s proposed increase of 9,500,000 common shares
in the 2016 Plan, compared with proposed increases of 3,500,000
common shares in each of the last two years. Notably, the 2016 Plan
still had 7,672,299 shares available for future issuance as of
December 31, 2023, and still has 3,108,772 shares available to
grant as of March 25, 2024, implying substantial share grants
already in 2024.
Strategic Alternatives for the HBV Drug
Pipeline by Yearend 2024
As Arbutus management acknowledges prominently in its investor
presentation,4 “[t]herapeutic success [in HBV] will require a
combination of agents with complementary [mechanisms of action]
MOAs” (emphasis in original), including agents developed by third
parties. Assuming confirmatory data readouts in the Company’s Phase
2a combination therapy clinical trials at the EASL Congress in June
2024 and the AASLD Liver Meeting in November 2024, we believe that
the Company would be well positioned to pursue a strategic license
and collaboration partnership at that time.
Ultimately, we believe that Arbutus is most likely to maximize
the probability of success of its HBV program by partnering with a
larger biopharmaceutical company that has an existing franchise in
hepatitis, and the clinical expertise and commercial infrastructure
to pursue a complex combination therapy targeting a functional cure
for HBV. With the pending retirement of Chief Scientific Officer
Dr. Mike Sofia by yearend, whose stewardship has laid the
groundwork for a potential functional cure for HBV, we believe this
creates a natural transition to place the HBV franchise in the most
capable hands to achieve future success.
By way of example, in October 2018, Arrowhead Pharmaceuticals
Inc. (“Arrowhead”) entered into a license and collaboration
agreement with Janssen Pharmaceuticals, Inc. (“Janssen”), a
subsidiary of Johnson & Johnson, to develop and commercialize
its RNA interference therapeutic targeting functional cure in HBV.
Payments to Arrowhead under the deal were worth up to $3.7 billion.
In a conference call presentation announcing the deal, Arrowhead’s
CEO Chris Anzalone presciently stated:5 “Sometimes leadership is
about knowing where you can lead and when you should be part of a
team.” Because these projects can be large, expensive and
complicated, he added, the arrangement with Janssen “keeps us
from needing to access the capital markets anytime soon.”
(emphasis added)
More recently, in October 2023, UK pharmaceutical company GSK
plc in-licensed the Arrowhead RNAi therapeutic for HBV from
Janssen, assuming remaining financial obligations under the license
and collaboration agreement with Janssen up to $1 billion.6
Arrowhead’s RNAi therapeutic targeting functional cure in HBV is a
direct comparable to Arbutus’ leading RNAi HBV therapeutic AB-729
(imdusiran). Moreover, Arrowhead’s ARO-HBV development program was
at a similar stage of development to Arbutus’ existing development
pipeline for AB-729 (RNAi) and AB-101 (oral PD-L1 inhibitor) at the
time of its original license and collaboration agreement with
Janssen.
For these reasons, we firmly believe that the Board must act
with urgency to end new share issuances, limit dilution from its
2016 Plan, explore strategic options for its HBV portfolio by
yearend and judiciously allocate capital until then. Taking these
steps will allow the Company to preserve shareholders’ interest in
the valuable LNP patent litigations against Moderna and
Pfizer/BioNTech while optimizing the development of the HBV
portfolio. We look forward to continuing our collaborative and
constructive engagement with the Board and continuing to share our
views with fellow shareholders.
Sincerely,
Joseph Kaplan Co-Managing Partner Whitefort Capital Management,
LP
No Solicitation
Neither the foregoing letter nor this press release constitutes
a solicitation of a proxy within the meaning of applicable laws,
and accordingly, Arbutus shareholders are not being asked to give,
withhold or revoke a proxy.
About Whitefort Capital
Founded in 2017, Whitefort Capital is an investment firm that
pursues a value event-driven approach across the capital structure
globally, including stressed/distressed credit and legal/process
oriented special situations.
_________________ 1 Percentage ownership based on total common
shares outstanding of 188,717,409 as of April 30, 2024, per the
Company’s 10-Q for the quarterly period ended March 31, 2024. 2 See
https://wsw.com/webcast/jmp63/register.aspx?conf=jmp63&page=abus&url=https%3A//wsw.com/webcast/jmp63/abus/1673136.
3 Leerink Partners Global Biopharma Conference 2024 – Fireside Chat
with Roivant CFO Richard Pulik:
https://investor.roivant.com/events/event-details/fireside-chat-leerink-partners-global-biopharma-conference-2024.
4 See
https://investor.arbutusbio.com/static-files/a9f0f400-f38d-49ef-9af2-80c752db4e13.
5 Arrowhead and Janssen Collaboration Call transcript (October 4,
2018). See also:
https://arrowheadpharma.com/news-press/arrowhead-enters-3-7-billion-license-and-collaboration-agreements-with-janssen/.
6 See
https://arrowheadpharma.com/news-press/gsk-enters-agreement-to-obtain-exclusive-license-for-jnj-3989-to-expand-the-development-of-bepirovirsen-2/.
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version on businesswire.com: https://www.businesswire.com/news/home/20240517970994/en/
Investors
Whitefort Capital Management, LP info@whitefortcapital.com
Media
Longacre Square Partners Scott Deveau/Dan Zacchei
Whitefort-LSP@longacresquare.com
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