NantHealth’s 2016 IPO for the Wrong Reasons

This past Friday, NantHealth has filed an S-3 form with the SEC for a new $200M offering of common stock, preferred stock, or debt securities .

Patrick Soon-Shiong (SS), is a rock-star in the Pharmaceutical industry. He is rumored to be Los Angeles’ most wealthy resident. He’s a part-time owner in the LA Lakers and shares hugs with Kobe. And the best part? His wealth was acquired by waging war on cancer.

Abraxane

Part of SS’s fortune came from Abraxis. The company developed a nano-tech based delivery method for paclitaxel. It generated some controversy, with a 25x markup in price, at $4200 for Abraxane vs $150 for paclitaxel.

ABRAXANE is a reformulated version of paclitaxel, a chemical found in the Pacific yew tree that destroys cancer cells. But paclitaxel, which is given intravenously, is difficult to use. Because it does not dissolve in water, the drug must be mixed in Cremophor, a combination of castor oil and alcohol that can cause severe allergic reactions. To reduce that risk, patients who receive Cremophor first receive a steroid and an antihistamine.

Dr. Patrick Soon-Shiong, chief of Abraxis, says Abraxane’s price is justified because it causes fewer allergic reactions.CreditJ. Michael Short for The New York Times

Working with University of Illinois researchers in the 1990’s, Dr. Soon-Shiong found a way to give Taxol without Cremophor by coating paclitaxel in fragments of albumin, a protein found in human blood. He named the new treatment Abraxane.

Abraxane patients do not need antihistamines or steroids. The drug can also be given at slightly higher doses and injected more quickly than traditional paclitaxel, which requires a three hour-infusion.

For anyone in SS’s position, the journey is an uphill battle. Abraxane was heavily criticised in the media for unjustified costs when long-term cancer survivorship rates were comparable to paciltaxel. And the increased effectiveness came with a neuropathy tradeoff cost. Some doctors questioned the basis for FDA approval given that the majority of the study occurred in the Ukraine and Russia. They ran into other bumps along the way as well. Abraxis failed to defend itself in the first ever nanocrystalline patent trial against Elan.

Nonetheless, Abraxane was highly successful in the market and Celegene acquired Abraxis in the summer of 2010 for $2.9 Billion. Celegene went on to apply Abraxane to Pancreatic and Lung cancer as well, with its own criticism and controversies.

APP Phramaceuticals, Inc.

Formerly named Abraxis Pharmaceutical Products, Inc. , American Phramaceutical Partners was acquired in September, 2008 by Fresenius in a $3.7 billion buyout deal. The founder, chairman, and CEO of APP was also Soon-Shiong. APP and Abraxis were closely inertwined, with APP being the exclusive producer of Abraxane since 1999.

APP was as a reseller and manufacturer of injectable drugs, and took a few false steps. One such problem was partnering with Hospitals to create perverse purchasing incentives. APP had been partnered with Premier when nurses and doctored discovered APP had sold them toxic medication from low quality manufacturers.

Enter NantHealth

NantHealth (NH), founded July 7th, 2010, is a member of the NantWorks, LLC ecosystem. The Umbrella company was founded in 2007, and controls a wide range of SS’s health-tech ventures in various efforts to cure cancer and revolutionize healthcare. The family includes NantStudio, NantKwest, NantMobile, NantCell, NantTronics, NantBio, NantCloud, NantOmics, and NantHealth.

It’s worth noting that NK had previously had a public offering. NantKwest (NK) IPO’d in July 2015 with 15 employees, a $207 million share offering, and $2.6 Billion valuation. The venture’s goal is to repurpose the body’s immune system to fight “cancer, infectious diseases and inflammatory diseases”, using “Natural Killers” (NK).

The Nant Health venture attempts a different tack to cure cancer. It seeks to disrupt cancer by leveraging a combination of data science and cognitive science to create targeted genomic cures for cancer.

In 2014, the cover of Forbes put NH at a valuation of $1.6 Billion. A 60-minutes special aired with an enamoured Sanjay Gupta praising NantHealth for Disrupting Cancer. In that year, NH had $33 million in revenue.

NantHealth had raised a total of $547 million dollars in venture capital in their journey.

The IPO

On Jun 3, 2016, NH performed their IPO. They issued $90 million of shares priced at $14, valuing NH at $1.7 billion. That’s not a very large fund raising for a $1.7 billion company.

Just two-days after their IPO, a @JohnKassabian tweeted his praise of the transaction.

Reading Nant Health’s S-1 Filing, this is what John was referencing.

16. Redeemable Series F Units

On June 20, 2014, the Kuwait Investment Office (“KIO”) purchased 53,581 Series F units of the Company through a Delaware blocker corporation at a purchase price of $2.7995 per unit for an aggregate amount of $150,000. KIO is the London Office of the Kuwait Investment Authority (“KIA”). As part of the investment, KIO has the right and option, but not the obligation, to require NantHealth to redeem 100% of the outstanding shares of the blocker corporation if the Company has not completed a qualified initial public offering on or before June 20, 2016 at an amount equal to the original purchase price of $150,000 plus accrued annual interest of 7.0%. As of December 31, 2015, the Company determined that the redemption of the Series F units is probable and, as such, has accrued $16,042 of interest as a reduction to Series A members’ equity. Prior to December 31, 2015, the Company had concluded that redemption was not probable and had not adjusted the carrying value of such units to redemption value. The Series F units are classified in the consolidated and combined balance sheets as temporary equity as a result of the contingent redemption feature. The Series F units have the rights and preferences discussed below in Note 17.

So, in essence, if NantHealth had failed to IPO before June 20th, 2016, Nant Health had re-pay the Kuwait Investment Authority for the $150 million double-dip they took plus 7% annual interest. Oops!

And it turns out that most of that $90M was purchased by existing investors. Four days into the IPO, SS purchased $5 MM worth of shares at $14, and AllScripts an additional $15 MM. Celegne had bought another $43 MM. AllScripts had owned 10% of NantHealth at the time in a $200M for $100M investment swap with Nant Capital.

The Return

NH as well as NK now sit at ~$330MM valuations, a far cry from their billion dollar valuations at IPO time. The stock prices have plummeted. They are likely still over valued even at a five-fold loss in value since IPO.

The Nant companies have also increasingly come under fire for allegations of fraud and misleading business practices.

The Upcoming Nant IPO

However, the Nant party might just be getting started. In addition to the fresh $200M NH offering, in the quest for curing cancer, SS plans to take the whole Nant group public as soon as May 2018. Though this will likely be later.

And cause you made it this far, here’s another bonus from twitter

Amateur Financial Analysis

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Finance is filled with fools. Sometimes they get lucky.

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