Significant Shareholder Brock Pond Capital Partners Sends Letter to Avid Bioservices Company Board of Directors Opposing GHO/Ampersand Transaction

Believes Proposed Offer of $12.50 / Share Significantly Undervalues the Company and Does Not Adequately Compensate Shareholders for Exceptional Growth Ahead

Does Not Intend to Vote For the Deal and Urges CDMO to Remain a Standalone Public Company Absent an Improved Offer

ANN ARBOR, Mich., Nov. 13, 2024 /PRNewswire/ --

Board of Directors
Attn: Corporate Secretary
Avid Bioservices, Inc.
14191 Myford Road
Tustin, CA 92780

Dear Board of Directors,

My name is Prasad Phatak and I am writing to you in my capacity as Managing Member of Brock Pond Capital Partners LLC ("Brock Pond"), a private investment manager.  Through my investment fund and personal interests, I am the owner of ~1 million common shares of Avid Bioservices ("Avid" or the "Company"), more than the entire Board combined.  As members of the Board and management are also aware, I have been an owner of Avid continuously since 2017 to varying degrees, first through my prior entity Tappan Street Partners LLC where I was the Company's largest shareholder and more recently through Brock Pond.  I have seen numerous CEOs, witnessed the transition to a pure-play contract manufacturing business, recent facility expansions, and unfortunately, a variety of capital market missteps.  I believe the Company's own management team would agree that I know Avid's business very well, especially given the duration of my involvement.  For that reason, it should be very telling that I am disappointed in the Board's recommendation to accept the transaction proposal, which I believe significantly undervalues the Company.  Absent an improved offer by GHO/Ampersand (the "Acquirors") or another buyer, I believe the offer does not compensate shareholders for Avid's significant expected growth in the near and medium-term and I intend to vote against the proposed transaction.  Shareholders would be better served by Avid continuing to operate independently, allowing public markets to more appropriately value Avid's increasing cash flow over time.  The Company's strong backlog and pipeline of late-stage projects significantly de-risks its growth profile versus other companies.

I believe the proposed transaction is sub-optimal for public shareholders for the following reasons:

• Transaction Price Is Woefully Inadequate – Although the transaction price may look attractive on today's revenue, it offers no credit for Avid's incredibly robust growth profile over the next several years.
  
  • The transaction premium of 13.8% is embarrassingly low. The transaction value is only $.02/share higher than the 52-week high achieved on 9/19/24. There is simply no need for the Board to give up control for such a low premium, especially as the business is poised for tremendous growth.
    
    
  • By the Company's own admission, it is expected to fill capacity to $400m of revenue at 30%+ EBITDA margins in the next two to five years¹. At reasonable EBITDA multiples on the approximately $120mm of EBITDA generated in the future and a range of discount rates, it implies a fair value today much closer to $16-$17 / share, even after ignoring ~$550mm in federal and state NOLs and interim cash flow generation. This illustrative analysis is presented in the appendix to this letter, including sensitivities assuming the Company fills capacity over a different period.
    
    
  • The Company's backlog at 7/31/24 was $219mm, 34% higher than the midpoint of its FY25 revenue guidance. Citing FY25 revenue multiples or selling based on current revenue in light of this backlog is nonsensical and disingenuous. When asked on its most recent quarterly call if the backlog would burn over four or five quarters, Nick Green, the Company's CEO, responded by saying, "it is going to be probably slightly more accelerating than decelerating, just due to the fact that we've got I think, a better proportion of the early phase clients in the quarter than we have in prior quarters." Simply waiting six months would yield a significantly higher price for the Company.
    
    
  • The Company has been increasingly winning later-stage projects, implying a significant ramp in revenue as projects proceed to commercial production. Avid has also recently won business from a large pharmaceutical customer, another sign of improved market presence and future stable growth. As of December 2023², the late-stage pipeline was expected to deliver $100-$200mm of incremental revenue per year, post approval. Management has indicated that if updated, that number would be even higher today.
    
    
  • Given unutilized capacity, EBITDA is expected to grow significantly faster than revenue. According to Avid's CFO, as revenue increases, incremental EBITDA is expected to drop through at an ~50% rate, which is not adequately captured in the transaction price.
    
    
• Poor time to sell Company – In its press release, Avid states that "after years of investment and expansion, now is the right time to move forward as a private company…" Public shareholders should vote against this transaction because of this statement alone. After years of diluting shareholders, a botched convertible note, and extensive capital investment and unabsorbed overhead, the Company wants to sell to private equity and allow others to reap the benefits from those investments. The Acquirors merely need to let the existing assets operate and benefit from dramatic EBITDA and revenue growth in the coming years, skimming value from public shareholders. Private equity sponsors are financial investors – almost by definition, this is a transfer of financial gains from public shareholders to another party. By the Company's own admission in its corporate presentation³ in December 2023, the Company is "positioned for dramatic increases in gross margins and EBITDA in line with increasing capacity utilization" and "minimal capex [is] required to grow [the] business 150%." These are usually the types of things that attract public market shareholders, not necessitate a sale. Avid needs minimal capex going forward and is free cash flow positive, questioning why the Board believes a private equity sponsor is the right fit at this time. Although a sale could make sense, it would be far more favorable to continue to operate the business and revisit a transaction in several years, when profitability and the share price are significantly higher. One of the Company's equity analysts, Matt Hewitt of Craig Hallum, said it best⁴: "It has been our expectation since day one that this would ultimately be the outcome, but in all fairness, we thought it would a couple years from now and at a higher price."
  
  
• Industry Conditions Are Improving – After a thaw in biotech funding over the past two years, all indications are that funding levels are improving. Numerous large and small industry participants have pointed to improving conditions in recent earnings releases and on its most recent quarterly calls the Company has cited improving activity with early-stage customers. Additionally, the BioSecure Act, which recently passed the House of Representatives, is expected to be a boon for domestic manufacturers. On its recent quarterly calls, Nick Green, the Company's CEO, cited the expectation for new business wins related to the BioSecure Act over the coming quarters and highlighted that the Company was already benefiting from new inquiries. Commentary from a wide range of industry participants suggest BioSecure will be a significant benefit, and even absent that, bellwethers such as Lonza and Thermo Fisher Scientific all believe the biologics market will grow at double-digit rates over the medium and long-term.
  
  
• Process vs Standalone Evaluation – Though more full details about the process are expected in the background section of the merger proxy, the process is of little consequence. Avid has the potential for significant gains in the next several years, with reduced risk from its backlog, known late-stage projects, and improving industry conditions helping to fill its capacity. There can be significant disagreement between a company's standalone value and that derived through a sale process. Financial advisors, who are typically incentivized to complete a transaction (and not paid for a standalone plan), are not always the best source of impartiality in weighing these options. In my 20+ year career in public market investing, I have never seen a Fairness Opinion that did not justify the transaction value in a potential acquisition. The same Board that did not elect to sell shares to the public when it needed to finance expansion and Avid traded above $30 / share is now telling shareholders to sell all our shares at $12.50 / share, giving me little confidence in the Board's recommendation.

Path Forward
I will not vote in favor of the proposed transaction because I believe the current offer materially undervalues the Company.  Absent an improved offer, shareholders are better off continuing to own Avid and allowing shares to compound higher for the next several years.  The Board's responsibility is not to accept any offer or even the best offer it might receive – it is a fiduciary duty to help maximize value for all shareholders.  In this case, the choice is obvious, and shareholders will do far better with the Company operating independently, even with higher risks from execution.

Sincerely,
Prasad Phatak
Managing Member
Brock Pond Capital Partners LLC

Key Assumptions

• EBITDA multiple represents a trailing multiple.
• Ignores over $550mm of federal and state NOLs
• Ignores positive free cash flow generated in the interim period, which is additive to share price.

Contact:  [email protected] 

¹ https://ir.avidbio.com/static-files/9cbd92f4-5f66-449a-b8c3-e4addb38860b.  Page 16.
² https://ir.avidbio.com/static-files/9cbd92f4-5f66-449a-b8c3-e4addb38860b.  Page 14.
³ https://ir.avidbio.com/static-files/9cbd92f4-5f66-449a-b8c3-e4addb38860b.  Page 16.
⁴ Craig Hallum research note, November 7, 2024.

SOURCE Brock Pond Capital Partners LLC

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