If you own shares of Emergent BioSolutions (NYSE: EBS) you will notice some changes in your portfolio including ownership in shares of a company named Aptevo Therapeutics (Nasdaq: APVO) on August 1. That’s because EBS is spinning off Aptevo, its oncology division. This could create some tax related issues in non-IRA accounts and will make the share price of EBS fluctuate before and after the final transaction takes place. In this article, I analyze the impact of the upcoming changes for EBS and how APVO shapes up as a standalone company.

A Little Catching Up

Shares of EBS took a tumble on June 22, 2016, dropping as much as 30% at its low point on news that it would be receiving a smaller than expected government contract for its flagship vaccine against the biochemical weapon based on Bacillus anthrax. I documented the initial details in this article and I cleared things up a big further in a later update.  Since the news-related fall in its stock price, EBS has bounced back based on its profitable operations, experienced management, and its recently instituted $50 million share buyback.

Spinoff Accounting Facts

A share buyback program can boost the price of a stock, but the effects of a spinoff can be unpredictable.  One of our recent picks, Whitewave Foods (WWAV), which we sold for a nice 38% profit when it was taken over by Danone group, was spun off from Pinnacle Foods. But things don’t always work out that well, so it’s important to get as much information as possible before making decisions regarding ownership of the shares involved in any transaction such as a spinoff by a parent company.

Companies spin off divisions or subsidiaries for two reasons.  Either the company to be spun off doesn’t fit the mold of the parent company or the spinoff will realize some sort of financial advantage for the parent company.  In this case, EBS is spinning off Aptevo because the latter doesn’t fit in with the rest of the parent company.   EBS develops and manufactures vaccine and defense-related products while Aptevo makes medications to treat cancer and blood clotting problems.   The two sectors are not related and Aptevo is only a small fraction of the total company which is a steady performer but not a rapid growth area. 

According to the pertinent news release from EBS:  “On July 10, 2016, Emergent’s Board of Directors approved the spin-off of Aptevo and declared a dividend distribution of one share of Aptevo common stock for every two shares of Emergent common stock outstanding as of the close of business on July 22, 2016, the record date for the distribution. Emergent expects to complete the distribution of Aptevo common stock to Emergent stockholders on August 1, 2016.  The distribution of Aptevo common stock will be made in book-entry or certificated form and no action or payment by Emergent stockholders is required to receive shares of Aptevo common stock. An information statement containing details of the separation and important information about Aptevo will be mailed to Emergent stockholders prior to August 1, 2016.”

That means as of August 1^st you’ll own one share of APVO for every two shares of EBS that you currently own.  So, unless you sell your shares of EBS before August 1^st you will own shares of EBS and shares of APVO post-spinoff; the two stocks will trade independently based on their individual circumstances.   The price of EBS shares will be adjusted based on the share price that APVO starts its trading on August 1^st.  I recommend that you read the entire press release and check with your accountant before making any decisions about these shares.  

Knowing What You’re Getting

Now that you’ve got the accounting facts, it’s time to get an understanding of what you’re getting with ATVO.  The details are a bit sketchy, but the company does have products on the market and is projected to deliver some $30-$40 million in sales per year initially.

The products are not household names and are very niche specific which can be both good and bad.  The reward is that if there is little completion in a treatment niche, ATVO will get the bulk of the sales. The risk is if there is little demand for the products, sales will be scant. The company’s products include treatments for clotting disorders in newborns, genetic clotting problems related to platelets, and shingles related infections as well as Hepatitis B related treatments focusing on patients that have undergone liver transplants.  The research pipeline involves prostate cancer and drugs designed to improve the immune system in specific situations. Prostate cancer is a competitive area and the immune system is a very tricky place to do research.

EBS Remains the Main Event

The prudent approach is to see what happens with ATVO before making a decision on what to do with its shares, but keep the focus on the known quantity, which is EBS.  Given that ATVO is a totally different business and that it operates at a different scale, it seems as if the spinoff should be a good move for EBS.  The stock has been coming back, having gained nearly 19% from its June lows, although it remains some 26% off of its highs.  The real story may be what happens after the EBS earnings report which is scheduled to be released late next week. Analysts are expecting a loss of $0.17 per share on $112 million of revenues, a bad quarter, which means that a less than awful quarter could boost the shares.  EBS has beaten analyst expectations on earnings for its past four quarters, which is a hopeful sign.   The company’s conference call should be interesting. 

Disclosure: Dr. Duarte owns shares in EBS.

Portfolio Summary

Recent Changes:

New Recommendation: Seres Therapeutics (MCRB) – Recommended on 7/22/23 with a buy limit of $38. 7/22/16 closing price was $34.47. Dr. Duarte owns shares in MCRB.