AUPH - Aurinia: Despite Milder Shareholder Vote A Bid To Sell Is Still Not Over

2023-05-22 04:15:56 ET

Summary

• Two of Aurinia's largest shareholders wrote tough letters against the AUPH board, leading to two resignations.
• One of these shareholders also wanted AUPH to sell out.
• While a sale has been put on hold for now, any further poor performance will start more sale chatter.

Since January, I have been saying that Aurinia Pharmaceuticals Inc. (AUPH) should sell itself, and since last month, I see a group of shareholders have also taken up the call to sell.

In my January article , titled "Aurinia's Patent Dispute Is Over, But Without A Buyout, There's No Upside," I said that the then recent resolution of a patent dispute with Sun Pharma had rekindled buyout chatter. This chatter was mostly in the form of "maybes" from Dealreporter and even one from Bloomberg. Despite the chatter, which has gone on for over two years, there's been no buyout; interestingly, the stock is up ~50% since my January article. Now, in March, there was further rumoring at Betaville "uncooked" alert - but nothing came of it. This has become boring now, ever since October 2021.

So, is the company going to do well without a buyout?

Aurinia's single biggest problem is demographics. Its only approved drug targets a demographic in which there are few takers of expensive medicines, and the rest of its pipeline is preclinical. I do not need to belabor this point because I have discussed it thoroughly before. Key takeaway is that Aurinia's present value is tied in to this one approved drug - voclosporin/lupkynis in Lupus Nephritis - and this drug has major hurdles to selling well.

However, in my March article , I noted some improvements in revenue:

I was, thus, pleasantly surprised to see that in the last reported quarter, that is, the quarter that ended in December and was reported in February, there was an uptick in revenue. Consensus estimate was $27.13mn while the company estimate was $28.4mn, and it appears that they met this target. I said "appears" because there is some discrepancy in the presented news as I see it on Seeking Alpha. Full year revenue also shows a doubling of revenue year over year, and falls right in the upper middle of guidance. This is certainly positive news. On the other hand, Otsuka made a one-time $30mn payment last quarter for voclosporin receiving marketing authorization in the EU. This influx of funds may produce a wrong picture in the mind, however, it is almost a one off event. Approvals in three of the five major countries in the EU will trigger an additional $10 million milestone from Otsuka. Japan approval will produce another $10mn. The company expects this to happen this year.

In the May quarter, that is, Q1, Aurinia repeated this feat:

The company reported $34.4M revenue for the period with ~59% YoY growth exceeding Street forecasts by as much as $6.3M, driven by an increased net product revenue from its two main customers for Lupkynis.

The company also raised its guidance, from $120M - $140M to $135M -$155M for the full-year outlook for net product revenue. Consensus was in the middle, at $142.7M.

Thus, with revenue beat and a raised guidance, the company appears ready for better things, right? However, recently, even major shareholders have started calling for buyout.

Last month, AUPH's second largest shareholder, MKT Capital, which holds 4.2% of the stock, wrote a scathing letter to shareholders, calling to withdraw support for CEO Peter Greenleaf, board chairman George Milne, and compensation committee chairman Joseph Hagan. "In our view, these incumbents have perpetuated a culture of failure and self-enrichment at the expense of shareholders and must be held accountable," the letter said. MKT Capital wants a reconstituted board to make every effort to sell the company. MKT thinks the company can command a price of $28 per share; today's share price is $10.64. Among other things, MKT said it was disappointed with executive compensation, especially that the CEO doubled his compensation to $10.7mn last year despite the company performing poorly in the market. "To put this in context, Mr. Greenleaf's total 2020 pay was 6.2 times the median of Aurinia's peers."

Among other things, the letter also stated:

• The Board has consistently prioritized the interests of management by enriching Company executives at the expense of shareholders.

• Year after year, management and the Board take harmful actions that dilute shareholders.

• The Board has failed to hold management accountable for poor total shareholder returns.

• The Board has historically been unwilling to embrace and act on shareholder feedback.

• The Board has been unable to manage turnover in key research and development ("R&D") and commercialization positions in the c-suite.

• Management and the Board have failed to diversify Aurinia's drug pipeline through business development efforts.

• The Board's limited shareholdings have only perpetuated its misalignment with investors.

MKT Capital highlighted the huge volume of vested shares management owns, as opposed to the low volume of shares they own outright.

Aurinia's largest shareholder is South Korea based Iljin SNT, which owns 6.1% of all outstanding shares, and has been invested since 2010. Iljin SNT, too, has opposed Aurinia's management, and specifically decided not to support 7 board members. The list included both Chairman George M. Milne, and Joseph Hagan, but did not include CEO Peter Greenleaf. Also, Iljin differs from MKT in that its filing does not mention any call for selling the company. Thus, the Iljin letter is milder than the MKT one, and there are probably behind-the-scenes negotiations that have set the tone.

After a shareholder vote this past week, ??Chairman George Milne and board member Joseph Hagan resigned. The stock rose slightly as a result. The other 6 board members have retained their posts. However, this does send a strong signal to the board that major shareholders are losing patience. However, I must say that the effect is much more subdued than, say, what we saw at Amarin where Sarissa basically took over the company.

Before the shareholder vote, the company released earnings on May 4, where Olivia Brayer from Cantor Fitzgerald asked the CEO about the letter from MKT Capital:

And then can you guys address the recent letter that came out from MKT Capital? Have you actually had any prior contact with them and any other comments around the letter or a strategic review process more broadly?

Here's what Greenleaf said:

So we're disappointed that MKT seems to be ignoring these facts and launching a distracting campaign. The shareholders we've engaged with up to this point, Olivia, and we're pleased to announce, they understand this. And as you've seen, both ISS and Glass Lewis have recommended that shareholders vote to re-elect all eight of our incumbent directors.

It is interesting that just a week after this fighting stance, Aurinia faced another shareholder letter, this time from Iljin. Although the letter itself was milder, it raised the same issue of executive compensation. Although it blamed compensation committee chairman Hagan for the high compensation, if you "read between the lines," as we often hear in the Aurinia circle, there was a clear rebuke to the CEO, who gained the highest compensation under Mr Hagan's tenure.

In 2019, Iljin asked for another shakeup at the Aurinia board, asking to introduce three new board members. At that time, both Greenleaf and Milne opposed that move.

So, I wonder how the CEO would have reacted had Iljin sent its letter before the earnings call. I believe Iljin's plan was to make changes with less noticeable waves, and the letter was timed in that manner. But Peter Greenleaf has a lot to worry about, and much to do, to regain confidence. One of these, as MKT Capital said in a letter after the vote, is a "strategic review" of the company, which, I believe, includes the possibility of a sale. Clearly, the interest in selling Aurinia has not subsided in some quarters.

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