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At the time of Sandon Capital’s acquisition, Alchemia (ACL) was a biotechnology company developing a metastatic colorectal cancer drug. The company also had a profit share arrangement with Dr Reddy’s, one of the world’s largest generic drug manufacturers, for the production of Fondaparinux (Fonda), an oral anticoagulant for deep vein thrombosis and pulmonary embolism.

The Opportunity

ACL had assets that were mutually at odds with one another. The Fonda profit share was a strong cash generating business, whilst the colorectal cancer drug was a failing high-risk endeavour.  This latter fact was not accepted by the Board and management team, nor some shareholders.
Despite ACL’s colorectal cancer drug failing FDA Phase III trials, the Board and some shareholders still held hope that the drug would be successful. The market seemed impervious to the fact that the strong cash flows from Fonda were being wasted on a failing drug development strategy.

Sandon Capital saw an opportunity to halt the futile strategy of ploughing more cash into any further trials of the failed colorectal cancer drug.  The continued strong cash flows from Fonda could then be returned to long suffering shareholders.

COMMENCED

2nd quarter, 2015

AVERAGE PURCHASE PRICE PER SHARE

~$0.053

THE ACTIVIST CAMPAIGN

Upon acquiring a substantial stake (>5%) in ACL, Sandon Capital commenced discussions with the directors about Board renewal. This saw the resignation of two directors, however, the remaining directors wanted to continue to implement the failing colorectal cancer drug development strategy.

In June 2015, Sandon Capital requisitioned a shareholder meeting to replace the Chairman and one other director. Soon after the general meeting was requisitioned, it was withdrawn after Sandon Capital succeeded in having the Chairman resign and Ken Poutakidis appointed as an independent director and interim Chairman.

Three months later, in September 2015, ACL announced it had entered into a binding term sheet for the sale of the worldwide exclusive intellectual property rights of Fonda for US$17.5m. Following the sale, ACL announced it would return the bulk of its cash to shareholders via a 9.3 cents per share capital return.

SUMMARY

Sandon Capital had been patiently following ACL since early 2014. At the time, Sandon Capital considered the share price too expensive. After further share price declines, a large stake in the company became available. After acquiring a >13% position, Sandon Capital pushed for Board changes which were ultimately successful. Following changes at Board level, ACL’s key cash producing asset, Fonda, was sold for a price that represented a multiple of Sandon Capital’s purchase price and the proceeds were returned to shareholders.

Current View

Sandon Capital had the bulk of its investment in ACL returned via the $0.093 per share capital return in February 2016. The remaining stub position was sold on market in February 2016.

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Past performance is not indicative of future performance. The content of these case studies constitutes the views and opinions of Sandon Capital. They have been prepared without taking into account the objectives, financial situation or needs of any particular individual. The case studies do not constitute advice.

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