Realm Therapeutics (NASDAQ:RLM) pt.2

Summary

The following does not constitute investment advice and represents my opinion – which is biased because I am a shareholder. However, we encourage all shareholders in Realm to exercise their rights as owners of the copy and VOTE in the upcoming shareholder meeting.

 

My firm, BAVARIA Industries Group AG, owns approximately 6% of the shares outstanding in Realm Therapeutics – a failed biotech that we acquired shares in at a materially discount to the expected cash available for distribution.

We sent our first letter, a copy of which can be found here, soon after we acquired our stake. Essentially, we congratulated the management team on maximising the cash available for distribution after they discovered the drug was not going to work. We also encouraged them to pursue a tender offer at the estimated net cash (15p) prior to de-listing from the AIM market, to allow UK investors to receive a fair recovery without having to go through the tedious process of dealing with a conversion to NASDAQ listed ADS.

They disagreed.

 

What’s happened since then?

The company announced a transaction, wherein another failed biotech (ESSA Pharma Inc.) will get the chance to acquire our cash for essentially 85c on the dollar.

We originally found the Board’s dismissive nature towards our quick and easy process for returning value to shareholders curious. However, it is now apparent why. This is a Board beholden to a large US institutional investor that is seeking to bail out another failed bet, by taking advantage of Realm shareholders. The conflicts of interest in this transaction are immense (and have yet to be pointed out in any regulatory documents).

Below I have attached copies of the two letters we recently sent to the Board. It outlines why we believe the current transaction is utter bullshit and also provides an idea for how to structure it in a more equitable manner.

 

http://ir.realmtx.com/financials/sec-filings

 

24/05/2019

The Board of Directors

Realm Therapeutics, Inc.

267 Great Valley Parkway

Malvern, PA 19355

 

Dear Directors,

 

As you are well aware, BAVARIA Industries Group AG (“we” or “BAVARIA”) is the third largest shareholder in Realm Therapeutics (“Realm” or the “Company”), with a current holding equating to ~6% of the outstanding shares.

 

The purpose of this letter is to express our extreme displeasure regarding the announcement made on May 16, 2019 that Realm is proposing to be acquired by ESSA Pharma Inc. (“ESSA”). This transaction highlights to us that the Board of Directors is beholden to a large US institutional investor with material conflicts of interest; and is at serious risk of breaching their fiduciary duties.

 

How a transaction, that results in Realm shareholders receiving the equivalent of US$3.40 in shares when the company is expected to have US$4.40 in distributable cash, meets the Board of Directors Duty of Care, is completely beyond our comprehension. Not only are Realm shareholders receiving a price that undervalues our company’s cash, but we are receiving compensation by way of stock in a speculative, money haemorrhaging “business.”

 

The only logic we can see for this transaction is that BVF Partners needed a patsy to bail out another failed venture and so decided to leverage their significant stake in Realm and take advantage of a Board with zero skin in the game, to the detriment of every other shareholder.

 

We strongly urge you to reconsider the transactions current form and either:

 

  1. Offer shareholders the option to receive cash instead of shares or;
  2. Cancel the transaction and distribute cash to shareholders

 

Given the company will already be “wound up” and has accounted for these costs in the estimated cash remaining, we so no reason why shareholders should not be able to receive the cash that is rightly theirs.

 

We do not wish to take this matter further, but if need be we will defend our rights to the fullest extent of the law. We are also aware that a New York law firm has began to solicit plaintiffs to pursue a class action.

 

All of this can quite easily be avoided by offering all shareholders a fair exit.

 

Sincerely,

 

Daniel Sims

Portfolio Manager

BAVARIA Industries Group AG

Bavariaring 24, 80336 München

 

Charles Spicer responded to the first letter within a day or so, basically saying nothing. So we sent another letter…

 

28/05/2019

The Board of Directors

Realm Therapeutics, Inc.

267 Great Valley Parkway

Malvern, PA 19355

 

Dear Charles,

 

We appreciate your prompt response to our letter, but stand by the statements we made. Our concerns around the Boards independence and failure to adhere to their Fiduciary duty are due to the following actions:

 

  • Using ESSA’s 60-day VWAP price to set the acquisition price for Realm, despite its price being ~20% lower than the VWAP on the day immediately preceding the announcement. Effectively allowing ESSA to acquire a $100 bill for $84, with Realm shareholders expected to foot the difference
  • Proposing we use the cash that yourself and the management team did an excellent job in maximising, to bail out a company that looks to be on its death bed
  • Failing to mention the clear conflict of interest certain Realm shareholders have in seeing this transaction go through, due to their substantial ownership in ESSA (which is in desperate need of cash)
  • Failing to monetise the NASDAQ listing which conservatively could have added $0.40 per ADS (and increased the recovery amount by ~9%). This despite a flourishing IPO market and a booming economy

 

Restructuring the transaction such that it contains a “mix & match” facility, wherein shareholders can elect to receive cash or scrip as compensation for their shares, is the most equitable outcome. This will allow the US biotech funds to take their cash and roll the dice again, while allowing the remaining shareholders to receive a fair distribution of their cash.

 

If such a restructuring of the transaction is not possible, BAVARIA would be open to providing an exit opportunity for interested shareholders, by way of a tender offer. This would allow shareholders to receive a fair percentage of their cash back (to pursue other Biotech investments if they so desire) while also shifting the duration risk of the final liquidation onto us, and the remaining shareholders.

 

We wish to resolve this as amicably and promptly as possible. However, we have substantial resources at our disposal and our primary business is in complex restructurings, so we are well versed in vigorously defending our shareholder rights.

 

Finally, we did not mean any offence by the comments regarding lack of “skin in the game.” We simply struggle to see how an investment with a current value of US$32,000 could be deemed material when one compares that against the US$319,597 in cumulative fees Realm has paid you during your tenure as a Director.

 

We are available today and tomorrow in the AM (EST) for a call to discuss our options.

 

Sincerely,

 

Daniel Sims

Portfolio Manager

BAVARIA Industries Group AG

Bavariaring 24, 80336 München

One thought on “Realm Therapeutics (NASDAQ:RLM) pt.2

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s