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Burford Capital says 'litigation isn’t always just about winning' in Napo case

The litigation finance specialist issued a seven-page statement explaining how it calculated returns on its US$7.4mln investment in Napo Pharmaceuticals

Burford Capital Limited fights back

Burford Capital Ltd (LON:BUR) has come out swinging with a list of arguments to refute attacks over its investment in Napo Pharmaceuticals by hedge fund Muddy Waters.

The AIM-listed litigation finance group, which has seen its shares lose as much as two thirds of their value since being hit by a series of critical reports and videos from the bearish US boutique last month, said it had been deluged by investor questions about Napo ever since.

Muddy Waters had accused Burford of overstating the performance of its $7.4mln investment in Napo, which had applied for financing for a legal battle with Salix Pharma.

The New York state court case, which Burford had categorised as having been positively resolved with a significant return, “should have been a loss”, the San Francisco-based fund argued.

Napo has received more media attention due to the involvement of fund giant Invesco as an investor in the biotech and in Burford.

Burford's rebuttal

On Monday, Burford issued a seven-page statement that stressed that Napo was “not referred to Burford by Invesco” and that the investments in Napo and Burford were overseen by different Invesco fund managers.

The crux of the explanation is that, under complex system of investments in other related cases and claims, including an ongoing dispute between Napo and Glenmark Pharmaceuticals, Burford did not need Napo to win its case in order to benefit.

Burford's investment was designed so that it would receive “the greater of two potential streams of payments upon any ‘litigation resolution’”, one stream being a multiple of Burford’s invested capital and the other stream was a share of the monetary proceeds paid by a litigation defendant.

Burford said this meant it would “immediately be entitled to a significant payment under the first stream even if Napo did not receive any proceeds in the litigation” and that “Napo did not need to win a case for Burford’s entitlement to vest”.

“Litigation isn’t always just about winning; it can simply be about improving one’s position,” the company said.

On that note, it added that while Napo “lost pieces” of the Glenmark arbitration, it was successful “on certain points”, which “was sufficient to count as a litigation resolution” for the funding agreements and trigger Burford’s entitlement, with no litigation risk remaining.

While Napo lost the Salix case, “after what was widely viewed by the lawyers as an erroneous jury instruction”, Burford and Napo agreed to an October 2014 restructuring, where Burford’s litigation funding agreements were replaced with a secured debt instrument and led to Burford adjusting its carrying value to $21.3mln, but retaining a 30% discount

Jaguar markings

When Napo spun off the animal pharmaceutical uses of its business into a merger with Jaguar Animal Health, another Invesco investment, Burford said it obtained no equity in this newly merged business.

Burford remained interested in Jaguar via the debt instrument and Napo’s large equity stake, saying it did not make any change to its carrying value of Napo, but when Napo was fully merged into Jaguar in 2017, Burford receive $8mln in cash and a large equity stake in Jaguar.

Jaguar has since seen its valuation plummet but Burford kept the investment at its initial concluded value and did not make an adjustment until the first half of 2019, “when it had become clear to us that a rebound in the share price was unlikely in the near term”.

The company said: “If we had adjusted our concluded investment table every period and used the same mark-to-market values as on the balance sheet, there would have been no meaningful difference in our reported returns.”

Muddy Waters was contacted for comment, but it's only responses were on Twitter.

Burford shares were down 0.8% to 694p by Monday lunchtime.

Quick facts: Burford Capital Limited

Price: 715 GBX

LSE:BUR
Market: LSE
Market Cap: £1.57 billion
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