SA 11/24: Ocata CEO Gift Wraps Ocata, Sells Out Shareholders

SA 11/24: Ocata CEO Gift Wraps Ocata, Sells Out Shareholders Nov 24, 2015 21:14:12 GMT actcrazy likes this

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Post by spambox on Nov 24, 2015 21:14:12 GMT

Ocata CEO Gift Wraps Ocata, Sells Out Shareholders, SEC Filing Shows
seekingalpha.com/article/3711106-ocata-ceo-gift-wraps-ocata-sells-out-shareholders-sec-filing-shows

Biotech Research Group
Nov. 24, 2015 2:29 PM ET

Summary

Ocata's CEO has been negotiating the sale of the company for six months.

The CEO misled shareholders during conference calls and road shows.

Insiders reprice options while the company negotiates its sale.

Ocata's (NASDAQ:OCAT) shareholders are betting their hopes that either an activist shareholder or the now disclosed "Company B" will drive a bidding war for control of Ocata Therapeutics. The most recent SEC filing by Ocata, a SC 14D9, is an interesting story that highlights the anatomy of a deal. The filing provides a detailed time line that identifies the steps taken by Ocata's management and Astellas Pharma (OTCPK:ALPMY) to ensure that a deal could be consummated even at the expense of shareholders.

For shareholders, the SC 14D9 is the smoking gun that demonstrates a lack of transparency from management and the strategic moves that enrich insider rewards while simultaneously negotiating with a potential suitor, which can be a significant factor for the court to review the pending class action lawsuit. Clearly, while the CEO of Ocata was delivering presentations at road shows and delivering quarterly results and guidance, he was well aware that the company had, for all intents and purposes, been sold to Astellas.

For shareholders who oppose the deal, the filing also identifies a "Company B", which Ocata labeled for confidentiality purposes and might still be in play as Ocata's negotiating party, Jefferies and Company, is actively involved in dialogue for a potentially better offer.

The filing also provided the first glimpse into management's future projections as to the potential revenue stream of the RPE program exclusively, demonstrating that within four years, the company had revenue expectations of at least four million dollars and that revenues could exceed one hundred million dollars in year seven, accompanied by a 95% profit margin. In years eight through eleven, management projects revenues of almost one billion dollars with a similar gross profit margin. Although management discounts the projected revenue stream with a risk-adjusted probability ratio of 35%, the pro forma put forth by management is an indication that the value of the company could be far greater than this deal represents, with a potential transformative report coming as early as the first quarter of 2016, the scheduled release of the Phase II cohort data.

Within its calculations, management expected the need for approximately one hundred million dollars to take the RPE program through year 2019, which would have been the cusp for the initial revenue stream, which intensifies dramatically through years 2018-2032. The company on its own could theoretically raise the funds at prior current market value by issuing an additional 25 million shares, leaving the outstanding share count at roughly 70 million shares, providing significant earnings per share based on management's own projections. And, these projections only accounted for the RPE program, and I assumed a share price of five dollars to raise funds, far less than might be achieved once certain milestones were reached beginning as early as the first quarter in 2016.

So, did management make a poor decision in negotiating an all or nothing deal with Astellas or was the Ocata CEO simply over matched by deeper pockets and a better negotiator? Here is the time line, you decide. Here is the entire SC 14D9 filing for further details of the deal.

While the entire filing is linked above, I will offer some of the most pertinent line items that I feel are relevant, demonstrating management's weakness and the lack of aggressive fight for shareholder value that both the CEO and the BOD are obligated to recognize.

It is also important to note that several email requests to both Ocata's investor relations, as well as to Paul Wotton, have received no response. Although a quiet period should be expected based on the details outlined in the SC 14D filing, it was my hope that even a slight response from the management demonstrating sensitivity to shareholder concern would have been warranted.

Background Of The Deal

Paul Wotton certainly began to deliver on his promises to develop working partnerships as is shown in his first meetings with Astellas in July of 2014, approximately thirty days after he took over the role as CEO.

Between January 2014 and January 2015, members of Ocata's management team and representatives of Astellas had multiple brief in-person meetings...Ocata and Astellas expressed mutual interest in evaluating a potential licensing relationship between the parties regarding Ocata's RPE program.

On July 24, 2014, Ocata and Astellas entered into a mutual confidentiality agreement (which did not contain a standstill provision) to enable discussions for evaluating a potential licensing relationship...thereafter, Astellas conducted preliminary due diligence on Ocata's RPE program.

Ocata makes itself more valuable to Astellas with the following data:

On October 14, 2014, Ocata announced that Phase 1/2 clinical data published online in The Lancet medical journal demonstrated positive long-term safety results.

After a failed capital raise, the company continued to negotiate with outside companies to form strategic agreements and/or licensing agreements.

During December 2014 and through February 2015, members of Ocata management had periodic and preliminary discussions with a financial advisor to a non-U.S., publicly-traded pharmaceutical company (which we refer to as "Company A") which had approached Ocata and expressed interest in exploring a potential strategic and/or licensing transaction with Ocata.

Perhaps the increased attention to Ocata by a second company caused Astellas to expand the potential relationship.

In January 2015, Astellas expressed interest in expanding the evaluation of a licensing relationship with Ocata to include broader geographic coverage than only Japanese markets, which had been the focus of the parties' preliminary discussions until that time.

Then, with Astellas showing greater interest, Ocata receives a preliminary offer from Company A with the following details:

On February 3, 2015, Ocata received a preliminary, non-binding proposal from Company A for a strategic stock-for-stock business combination of the two companies to effect a corporate inversion. The preliminary proposal provided for, among other things, a pro forma ownership in the combined company for Ocata stockholders of 55% and for Company A's stockholders of 45%, which transaction would be funded with approximately $90 million of cash from Company A. Ocata's chief executive officer updated the Board regarding Company A's proposal.

While in discussions with Company A, management then receives a preliminary offer from Astellas to license the science from its RPE program.

On March 13, 2015, Astellas' associate director of business development emailed to Ocata's senior vice president for business development a preliminary non-binding proposal for a worldwide co-exclusive licensing agreement concerning Ocata's RPE program.

On March 16, 2015, the Board held a meeting at which it further evaluated the preliminary proposal from Company A. ... with a revised 52%/48% ownership split as between Ocata's stockholders and Company A's stockholders, respectively, based on an implied valuation for the Shares within a range of $5.00-$8.00.

On April 2, 2015, The Board concluded that the terms proposed by Company A presented potential uncertainties and risks to Ocata stockholders that outweighed the potential benefits.

Then, either poor negotiating skills by Ocata management or the unwillingness to press Astellas left only one interested party, Astellas...

By April 7, 2015, Company A and Ocata had reached an impasse in their discussions concerning a potential strategic transaction... Accordingly, on such date, the parties terminated discussions.

Then, within twenty four hours Ocata feeds Astellas again.

On April 7, 2015, Ocata made available to Astellas and its advisors an online data room containing due diligence information regarding Ocata's RPE program to facilitate the licensing relationship discussions.

After a successful offering, which raised over $28 million, the buyers not disclosed; Astellas continues to show interest in a licensing agreement.

On August 18, 2015, Astellas' associate director of business development contacted Ocata's senior vice president for business development and stated that Astellas would deliver the final draft of the license agreement within a few days and that it did not anticipate any significant issues in finalizing the agreement.

Although Astellas' associate director of business did not anticipate any significant issues in finalizing the agreement, there was one significant change one week later. Astellas now wanted the entire company.

On August 25, 2015, Eastern time (August 26, 2015, Tokyo time) Astellas' chief executive officer called Ocata's chief executive officer and indicated that Astellas planned to send a proposal that would outline Astellas' proposed terms of an acquisition of Ocata at a price of $8.00 per Share.

This is where the story got interesting, and I believe that Paul Wotton was seriously outplayed in the negotiation. He already lost the deal with Company A and now Astellas provides an ultimatum as well.

On August 27, 2015, Ocata's senior vice president for business development spoke to Astellas' associate director of business development by telephone and inquired as to whether Astellas still had interest in pursuing the potential licensing agreement that the parties were in the midst of negotiating as an alternative to Astellas' acquisition of Ocata. Astellas informed Ocata that Astellas wished to acquire Ocata and would no longer be pursuing a licensing transaction.

On August 31, 2015, the Board held a meeting to further evaluate the Initial Proposal...it concluded as a preliminary matter that Jefferies should contact Citi, and in an attempt to seek an improved price from Astellas, indicate that the Board believed that the Initial Proposal undervalued Ocata.

On September 1, 2015, in accordance with the Board's directives, representatives of Jefferies communicated... the Board believed that the Initial Proposal did not adequately value Ocata and its RPE program.

On September 6, 2015, Ocata's chief executive officer and Astellas' chief executive officer met in Boston, Massachusetts... At the meeting, Ocata's chief executive officer also indicated that Astellas should increase its proposed price per Share in order for the proposal to be viewed more favorably by the Board.

Beginning on September 9, 2015, Ocata made available to Astellas and its advisors in Ocata's online data room additional nonpublic information regarding Ocata.

From September 9, 2015 through November 9, 2015, representatives of Ocata and Astellas engaged in various due diligence discussions concerning Ocata's business.

On September 17, 2015, Ocata provided to Astellas certain prospective financial information regarding Ocata for the fiscal years 2015-2017, which was materially consistent with the operating model that Ocata management had prepared and provided to the Board on September 3, 2015

On September 21, 2015, the Board held a meeting to, among other things, discuss further the Initial Proposal.

On October 1, 2015, the Board held a meeting to discuss the status of the discussions with Astellas and next steps.

Astellas raises the bid by .40 cents in a revised proposal, amounting to an additional whopping $17 million, and Paul Wotton immediately agrees to present the offer to the BOD.

On October 19, 2015, Astellas' chief executive officer and Ocata's chief executive officer spoke by telephone. On this call, Astellas' chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.40 per Share. Ocata's chief executive officer responded that he would discuss Astellas' revised proposal with the Board. Later on October 19, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.40 per Share in cash.

On October 25, 2015, the Board held a meeting to discuss, among other things, the October 19 Proposal...

Now, did poor management and trial design cause a delay in the trials as expressed during the October 25th meeting, causing Paul Wotton to act hastily?

At the meeting, members of Ocata management informed the Board that Ocata was anticipating a potential delay of approximately four months in randomizing patients in its AMD Phase 2 study as a result of a higher than anticipated screen failure rate among enrolled patients against the strict entry criteria for the study. It was anticipated that there could be a corresponding delay in the Company's ability to access capital, which previously was expected to follow delivery of interim results of the clinical study. It was not anticipated that this screening delay would delay the overall study timetable. In light of this development, the Board requested that management prepare a plan for a reduction in near-term operating expenses to account for this potential delay.

The management expresses concern to eliminate risk to shareholders while simultaneously earning several million dollars, and it provides the following explanation in a conciliatory manner:

The Board considered Astellas' increased purchase price of $8.40 per Share in cash in light of the management standalone plan and risks and opportunities facing the business. In its consideration of the October 19 Proposal, the Board continued to review Ocata's short- and long-term business strategies, the competitive landscape and market trends in the industry, and the challenges confronting Ocata in achieving its strategic objectives, including Ocata's capital funding requirement for its ongoing clinical trials, the challenges in securing advantageous licensing partnerships to contribute to the funding of Ocata's development operations, the performance and status of Ocata's research and development programs, as well as the significant cost levels required to continue and maintain these programs and the long development period and inherent uncertainty in the development of the Company's treatment programs, including obtaining regulatory approvals for such treatments. Ocata's management discussed with the Board the potential benefits to Ocata's stockholders of an acquisition of Ocata, including by providing immediate liquidity to stockholders while eliminating their exposure to the risks in Ocata's standalone plan.

Although the Board believed that Astellas' proposed $8.40 per Share purchase price would provide substantial value to Ocata's stockholders, the Board discussed how best to further enhance stockholder value and other potential strategic alternatives, including a possible sale or other strategic transaction involving Ocata. Representatives of Jefferies updated the Board on the status of discussions with other companies that had been approached and again noted that no indications of interest had been received from these parties. The Board again considered the potential advantages and disadvantages of contacting and discussing a potential transaction with additional third parties. Based on the benefits and risks discussed, the Board concluded that widening the solicitation efforts and approaching a limited number of additional potential strategic buyers that could have tangential interest in a strategic transaction with Ocata would be prudent and in the best interests of stockholders, and authorized Jefferies to contact additional parties based on the criteria previously discussed by the Board. The Board also discussed, with input from Jefferies and Goodwin Procter, the potential for other companies to pursue an acquisition of Ocata following announcement of a transaction with Astellas, provided that the merger agreement with Astellas contained appropriate provisions that allowed the Board to engage in discussions with such other companies.

Based on the discussion at this meeting and the earlier Board discussions, the Board concluded that the October 19 Proposal would, if consummated, provide substantial value to the Company's stockholders and could exceed the potential stock price growth that otherwise would likely be achieved under management's standalone strategic business plan, particularly in light of the execution risks in the plan as well as in the Company's industry and the markets generally. The Board also concluded that continuing to approach and discuss a possible transaction with other parties as a means by which to test the adequacy of Astellas' proposal was advisable. The Board also authorized Ocata's management and advisors to continue discussions with Astellas and to seek a further price increase and other improved terms from Astellas, and concluded that Jefferies should contact Citi to indicate that the Board believed that Astellas' October 19 Proposal could still be improved upon.

On October 27, 2015, Astellas' chief executive officer and Ocata's chief executive officer spoke by telephone. Astellas' chief executive officer indicated that Astellas was willing to increase its proposed purchase price to $8.50 per Share, that this was its best and final offer and that Astellas was prepared to move expeditiously to negotiate and sign a definitive agreement to effect the transaction.

On October 27, 2015, at the direction of Astellas, representatives of Citi informed representatives of Jefferies that Astellas' $8.50 per Share proposed price was its best and final offer.

On October 28, 2015, Ocata received a revised written, non-binding proposal from Astellas to acquire Ocata for $8.50 per Share in cash (the " October 28 Proposal "). The October 28 Proposal was otherwise substantially identical to the October 19 Proposal.

On October 29, 2015, the Board held a meeting to discuss, among other things, the October 28 Proposal, the solicitation of other potential strategic acquirers, and management's standalone plan.

On October 30, 2015, Goodwin Procter sent a revised draft of the Merger Agreement to Covington & Burling. Thereafter, the parties negotiated the Merger Agreement.

On November 2, 2015, the Board held a meeting to discuss, among other things, the status of discussions with Astellas.

Assumptions that Company B was not interested, a rush to judgment?

On November 8, 2015, the Board held a meeting to discuss the proposed terms of the transaction and the status of discussions with Astellas...Given the slow pace of the discussions with Company B, despite repeatedly informing Company B that it would need to proceed quickly if it was interested in a strategic transaction with Ocata, the Board concluded that Company B either did not have serious interest in a strategic transaction with Ocata at this time or was unable at this time to devote the necessary resources to fully engage with Ocata.

Representatives of Goodwin Procter provided an overview of the negotiation process to date with Astellas' representatives, and discussed in detail Astellas' proposed $8.50 per Share Offer Price.

The management now states it has a lack of alternatives, with over thirty million dollars in the bank and the first results from the Phase II cohort just six months away:

The Board then discussed the October 28 Proposal in the context of Ocata's overall strategic alternatives, including continuing as a standalone company. After considering the Company's lack of strategic alternatives to the Astellas transaction and the uncertainty in the Company's ability to continue as a standalone company given the challenges in achieving its strategic objectives, the Board directed the Company and its advisors to proceed toward the execution of a definitive agreement with Astellas expeditiously.

During the remainder of November 8, 2015 and on November 9, 2015, representatives of Ocata and Astellas had various telephonic discussions to finalize the Merger Agreement and related agreements.

On November 9, 2015, after the U.S. stock markets closed, the Board held a meeting to discuss the final terms of the proposed transaction and proposed definitive Merger Agreement and related documents. In attendance at that meeting were members of Ocata management and representatives of Jefferies and Goodwin Procter. Jefferies reviewed its financial analysis of the $8.50 per Share cash consideration with the Board and rendered an oral opinion, confirmed by delivery of a written opinion dated November 9, 2015, to the Board to the effect that, as of that date and based on and subject to the various assumptions made, procedures followed, matters considered and limitations and qualifications on the review undertaken as described in such opinion, the $8.50 per Share cash consideration to be received in the Offer and the Merger, taken together as an integrated transaction, by holders of Shares (other than Astellas, Purchaser and their respective affiliates) pursuant to the Merger Agreement was fair, from a financial point of view, to such holders. After further discussion, the Board unanimously determined that the Merger Agreement, the Offer, the Merger and the other transactions contemplated thereby, were advisable and in the best interests of the Company and its stockholders.

Later in the evening on November 9, 2015, the Merger Agreement was executed, and all signatories to the Support Agreements executed such agreements, and Ocata and Astellas jointly announced the execution of the Merger Agreement.

Thought Going Forward

While I read the background portion of the Astellas deal, I can't help but wonder if "Company B" is slow playing a hand. Because "Company B" showed interest and had limited knowledge that management was working to secure other deals, "Company B" might simply have let Astellas open the bidding. Certainly speculation on my part, but if the art of the deal is performed successfully, a bidder never shows weakness from the willingness to walk away from the negotiating table or the fact that they have limited resources. Astellas played it perfectly, and Ocata's management clearly was the weaker party.

Astellas and Ocata might also face significant headwinds from activist and retail shareholders. With Morningstar reporting institutional and fund ownership at roughly 30% of the outstanding shares and management with less than 2% of the outstanding shares, it leaves a 60% gap that must be represented by the retail class. Although these numbers are reported through September 30, 2015, I believe that they accurately represent the current positions.

One retail investor owns slightly over 6% according to the 13G filing and is rumored to be against the deal proposed by management. Speculation also is swirling the blogs that this shareholder is actively seeking offers from both pharmaceutical companies and pharma-based large investment firms.

Whether or not either of these two scenarios play out, the threshold required for Astellas to breeze though this offering is a tall order. Regardless of the success or failure that Astellas has in securing shares through the tender offer, a fairness hearing will still be filed and heard in the Delaware court. If the deal comes down to a shareholder vote on a final merger, the 50% threshold might not be a given.

Shares Trading Above The Offer Price

An interesting dynamic has also emerged as the share price during the prior two trading sessions is trading higher than the offer price from Astellas. The stock traded as high as $8.65 on 11/19/15 and closed higher than the offer at $8.51 on 11/20/15. Call options for February 2016 are also quite active with open interest swelling to over 1,500 contracts from less than 50 contracts on 11/1/15. Both indications that investors expect a higher bid.

What About The Shorts?

The most recent "short report" for Ocata's stock shows that slightly over 3.6 million shares remain short for Ocata. Although most likely bruised with the sudden offer, the question still remains if there is indeed a naked short position that could quite literally cause the bump in share price that the retail class is looking to gain. Is Astellas part of the short campaign that kept prices depressed while a bid was being prepared? Conspiracy theorists certainly believe so. A third-party trader could have easily kept the lid on the stock price, as we now know that negotiations began months ago, and that company events were met with increased selling pressure. Did the stock trade down from a high of $12.49 to keep the share price in the range that Astellas was willing to offer?

The increase in the short position rose simultaneous to the negotiation process, leading many to believe that the current share price was manipulated and artificially depressed. Even with ample cash on hand and positive clinical results, the rise in share price was constantly met with selling pressure. If Astellas does take control, the short positions that it holds will not need to be delivered or covered.

As the attorneys position themselves to become the lead in a class action suit against the company and its management team, they should also aggressively focus upon the trading patterns and shares that have not been delivered as required by the SEC when creating a short position.

Is The End Game Near?

Shareholders will not need to wait long to see the outcome of this offer. I see four scenarios:

1. The deal is consummated by Astellas for $8.50 per share.

2. A higher and competing offer is made by "Company B". The offer will include indemnification for the eleven million dollar penalty.

3. A higher and competing offer is presented by an accredited investment firm. The new owners will keep the medical team in place to further advance the studies.

4. A venture partner will take a large ownership stake in Ocata and provide the capital necessary to fund clinical studies though 2017 and allow long-term investors to reap the rewards from the company's intellectual property and emerging clinical studies.

As for Paul Wotton, I believe that the company, going forward, will be far more successful without him. If this deal fails, I look for him to be quickly replaced.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

The Biotech Investor

SA 11/24: Ocata CEO Gift Wraps Ocata, Sells Out Shareholders

Post by spambox on Nov 24, 2015 21:13:32 GMT

Post by spambox on Nov 24, 2015 21:14:12 GMT

Post by goldencoin9999 on Nov 24, 2015 23:03:08 GMT

Post by greatceasarsghost on Nov 25, 2015 1:51:11 GMT