Sinovac’s Dramatic Poison Pill Saga

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Investing in biotech is one of the most unreasonable things imaginable in stock trading. In general, handpicked stocks aren’t even a good idea.

First time investors might still try their hand in it. More specifically, they’d have a go at penny stocks (shares worth $5.00 or less) in a market so volatile that you’re basically treating your real money like Monopoly money. There’s really no other way to put it: Biotech penny stocks cranks up that risk due to the regulatory hoops companies have to jump through with the FDA serving as the game master. Their medicines, technology, and treatments are usually in development for decades and approval for clinical trials remains pretty rare. There might be little distinction between biotech and pharmaceutical companies, but the latter actually has drugs and treatments on the market already. The former is hoping to introduce their medicines and solutions one day.

Sinovac entered that grey area and has been there indefinitely. Its actual value is impossible to determine now. The last available data on its shares was $6.47 as of February 2019 which made its market capitalization about $460 million.

It’s the perfect example for everything that can go wrong with investing in biotech, but it offers a more thrilling tale than the recent madness involving Gamestop, Reddit, and Wall Street.

Sinovac Biotech Ltd.

The company’s structuring and arrangements were rather peculiar. Its headquartered in China, but it was incorporated in Antigua and Barbuda and its stock was traded in the United States on the Nasdaq Global Market.

Sinovac was developing COVID-19 vaccine using the “old technique”. Its trial results in monkeys went well although there were several concerns raised due to the methodology and limitations e.g. COVID symptoms in monkeys aren’t as adverse as it is in humans.

During development, something interesting happened: the company suddenly stopped trading on Nasdaq.

It happens and many times companies are virtually wiped from existence overnight. But something no one saw coming was happening behind the scenes with Sinovac.

Since penny stocks are sometimes synonymous with fraud or a company tanking completely — there was speculation that Sinovac was in rough waters. The company was technically (and still is) worthless, at least, on the stock market and there was no way to give it a value. With funding from the general public completely cut off — it had no other choice but to turn two private investors on May 22 2020. Sinovac received $15 million in the form of a loan convertible into equity in a subsidiary to accelerate their COVID-19 development.

And so, the unraveling began: the company found itself locked in an all out corporate-governance battle royale.

Coup d’etat

Here’s where the story ramps up and drifts into what would be considered fiction, but it actually happened.

A group of investors were growing frustrated with the company and mounted a coup in a bid to take over the company.

So in February of 2018 at Sinovac’s annual meeting — those jaded investors nominated an alternative group of board members and convinced the majority of voting shareholders to eject Sinovac’s incumbent directors.

However, Sinovac declared that the election was illegitimate. And a month later — they announced that all of its current directors had been re-elected “by a majority of the votes validly cast.”

Minority shareholder Aihua Pan wasn’t going to sit idly by though and he escalated the situation.

A conspiracy

Pan’s raid backfired. It actually netted Sinovac with a treasure trove of information after Pan and his goons forgot two laptops. The company said the laptops contained meeting minutes and audio recordings of a conspiracy: Pan, the hedge fund 1Globe Capital, and other investors conspired to secretly amass a 45% stake in the company. This conspiracy is what led to the failed coup.

The U.S. Securities and Exchange Commission sided with Sinovac. On May 13 2020, the Boston-based firm, 1Globe Capital LLC, agreed to pay a combined $290,000 in civil penalties to settle the for secretly conspiring with other shareholders to take control of the company.

The poison pill

Corporations using the shareholder rights plan i.e. the poison pill is comparable to detonating a nuclear bomb. The initial blast is obviously the worst of it since there’s 0% chance of survival, but the nuclear fallout afterwards can be just as terrible if you’re caught within range. Any company activating the poison pill is almost certainly to be right outside that range though they may still experience the subsequent nuclear winter.

Though the threshold needed is only 15%, 1Globe Capital, Chiangjia Li, OrbiMed Advisors and other investors’ holdings had accounted for 40% of outstanding shares.

So Sinovac swallowed the poison pill — issuing 28 million new shares to dilute investor holdings so certain shareholders couldn’t take control. This resulted in trading being halted and legal proceedings all over the world.

Luckily, Sinovac managed to avoid the fallout. The company secured $500 million in December 2020 and their vaccine has found some minor success in Asia and Latin America as it boasts a 50.4% effectiveness.

The company has no plans on going public.

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