Elevation Oncology: Broken Biotech, Slightly Riskier

Elevation Oncology (ELEV) (~$17MM market capitalization) is a clinical-stage biotech that until yesterday was pursuing the development of their lead therapeutic candidate, EO-3021, in a Phase 1 study for the treatment of gastric and gastroesophageal cancers.  Due to a non-competitive risk-benefit analysis, Elevation is discontinuing development of EO-3021, implementing a 70% reduction-in-force and evaluating strategic options.  If Elevation Oncology sounds familiar to some readers, they bought seribantumab and other assets from Merrimack Pharmaceuticals (formerly MACK, now a non-traded liquidating trust) in 2019 for a small upfront fee and some milestone payments.  ELEV discontinued development of seribantumab in January 2023.  After that failure, ELEV switched their focus to EO-3021, so this is the second swing and miss, seems time to formally waive the white flag and return cash to shareholders.

Somewhat frustratingly, ELEV is continuing pre-clinical development of EO-1022 with a planned IND in 2026, they're guiding to their cash balance lasting them into the second half of 2026.  Hopefully this is just a cheap attempt to prove the remaining development pipeline has some value and not an attempt at a third swing at drug development.  On the positive side, Kevin Tang owns 8% of ELEV, this is likely too small for a reverse merger (and it seems like reverse merger activity has slowed recently anyway), I would encourage management and the board to consider the likely incoming cash + CVR offer from Tang.  It will probably be the best option.  A $30MM loan paired with the cash burn and risk of going forward with EO-1022 make this one a little riskier than average.

Disclosure: I own shares of ELEV

Dun & Bradstreet: Strategic Process Wrapping Up, Cheap Valuation

Dun & Bradstreet (DNB) (~$3.8B market cap) is a provider of commercial data to enterprise and government clients, they are known for their DUNS number identifier which functions as a social security number or CUSIP for commercial entities.  The DUNS number is fairly ubiquitous in business (D&B tracks roughly 600 million entities worldwide), the identifier is recommended or sometimes required by commercial and governmental organizations to do business with each other.  D&B does other things like provide credit scoring for small-and-medium sized businesses (Paydex score), data to analyze supply chains and corporate information supplying many CRM or ERP platforms.  This is a fairly good business featuring recurring revenue, high retention rates, high incremental margins on revenues, etc., all things that generally attract people to data companies, however, they're slow growing and seem to be perpetually in turnaround mode.

Last August, D&B confirmed reports they had received inbound interest from third parties and had hired Bank of America to assist with running a strategic process.  We're eight months into that process, about a month ago Bloomberg reported Veritas Capital is in talks to buy D&B for roughly the current market cap at the time, or $5.4B plus debt, which is approximately $12.25/share.  The article also hints at alternative structures where D&B sells their two units (Finance & Risk and Sales & Marketing) to strategic buyers; all along the way there have been reports or company disclosures of both strategic and financial buyers showing interest in D&B.  In the company's recent earnings call, management mentioned the process was creating a distraction (blamed it for impacting new business, leading to a slow-to-no growth quarter) and that the process would be complete by the end of the quarter.  The market didn't like the excuse and along with a broader selloff in markets, DNB now trades for $8.50/share making this an interesting event-driven setup.

D&B is no stranger to private markets and the leveraged finance community (hopefully making it easy to finance a deal), it was taken-private in 2019 by a consortium led by Bill Foley (of FNF, FIS, etc fame) via his Cannae Holdings (CNNE).  The company's time out of public markets was short lived, it was re-IPO'd the following year with Bill Foley being the Executive Chairman.  Foley's Cannae Holdings is a HoldCo of his investments which has perpetually traded at a discount to its sum of the parts value (not a bad comp for what Bill Ackman is trying to do with HHH), last year they internalized the management structure and brought Foley on as CEO formally.  D&B is Cannae's largest holding (~1/3rd of the portfolio), monetizing this investment could provide a catalyst to close the NAV gap (separately, another CNNE holding, Paysafe (PSFE) is also rumored to be sold).

The current market selloff has created an attractive entry point for D&B, the company is pretty aggressive with their adjusted financials, so while cheap, it's not quite as cheap as management or data aggregators might show.

Restructuring charges and transition costs add-backs make up almost 10% of adjusted EBITDA.  However, even using the non-adjusted EBITDA number, the company looks pretty cheap at current prices even if a deal fails to get over the finish line.  Management is guiding to $955-$985MM in adjusted EBITDA in 2025, if we back out some of these adjustments and assume some underlying growth, I think $800MM in true EBITDA is a reasonable expectation.

D&B has $3,344MM in net debt, the enterprise value is ~$7.1B, making the EV/EBITDA multiple in the 9x range, cheap for a recurring revenue data model (higher quality ones trade for double this valuation).  Who knows how far the current market fall will go, but this seems like a reasonable "heads I win (potentially a lot) and tails I don't lose much" (assuming a 6+ month holding period to churn out any broken arb selling) situation.

Disclosure: I own shares of DNB

Third Harmonic Bio: Strategic Alternatives, Keeping Options Open on THB335

Third Harmonic Bio (THRD) (~$155MM market cap) is a clinical-stage biotech that just released data on their Phase 1 study for lead candidate THB335 for the treatment of chronic spontaneous urticaria (hives).  Alongside the announcement (where the data is apparently good enough to prepare for a Phase 2 study, as usual, no opinion on the science from me), THRD disclosed they were going to evaluate a full range of strategic alternatives and implementing a 50% reduction in workforce (eliminating 27 positions).

Continuing a positive recent trend, Third Hamonic Bio is doing most of the heavy lifting for us, THRD disclosed their estimate for cash on 6/30:

Assuming no use of their ATM between 11/1 and today, I get the following back of the envelope liquidation value (again, this likely won't liquidate):

The shareholder base looks pretty good here, Atlas Ventures and OrbiMed Advisors own collectively about 25% of the company, other familiar names are present in EcoR1 Capital, BVF Partners and RA Capital.  A reverse merger is likely here, possibly with a CVR attached to THB335.  I added a small position to the growing broken biotech basket (need some more momentum in deal announcements to clear out room).

Disclosure: I own shares of THRD

CARGO Therapeutics: Broken Biotech, Significant Cash Position

CARGO Therapeutics (CRGX) (~$150MM market cap) is a clinical-stage biotechnology company that is developing CAR T-cell therapies for cancer patients.  Last night, the company issued a press release stating they're discontinuing the FIRCE-1 Phase 2 Study of their lead asset, firicabtagene autoleucel, due to a non-competitive benefit risk profile for patients.  The stock is down approximately 75% on the news.

Additionally, CARGO announced they are going to evaluate strategic options and are commencing a 50% reduction in force.  The announcement is not a full waving the white flag, they do have a Phase 1 ready asset in CRG-023 that just received an IND application approval from the FDA earlier this month.  CARGO currently plans to go ahead with mid-year launch of a Phase 1 study, but my guess is those plans could change by then depending on what happens with the strategic review.  CARGO was a late 2023 IPO and thus has a nice chunk of cash remaining on their balance sheet that could be attractive to a reverse merger partner and provides some margin of safety at these prices if the process drags out.

Above is my typical back of the envelope math on a potential liquidation value for CRGX.  The shareholder base here seems pretty vanilla, there are no cornerstone biotech investors owning more than 10%, the board is staggered and management owns very little stock.  It might need an activist or other push to get things moving here, but I like the discount to a large cash balance and added it to my broken biotech basket.

Disclosure: I own shares of CRGX

International Game Technology: Gaming Segment Sold to Apollo, RemainCo Cheap

International Game Technology (IGT) (~$3.5B market cap) is a gaming supplier, the result of a 2015 merger of IGT and Gtech that is currently being unwound.  The historical IGT business is a video gaming terminal (slot machine) business, it is being spun in Q3 2025, merged immediately with smaller peer Everi Holdings (EVRI) in a reverse morris trust and the combined IGT/Everi will then be acquired by Apollo Global.  The end result is a $4.05B cash payment, before taxes and expenses (estimated at $400MM), to RemainCo (the IGT name is going with the slot machine business) which will be a global lottery management business (itself the creation of a merger between Italian Lottomatica with U.S. based lottery operator Gtech in 2006).  The lottery business (think scratch offs, draw games, multi-state lotteries) is generally a good one, it grows at GDP+, has infrastructure like characteristics, reasonable capex requirements, high barriers to entry and stable competition. 

Assuming the deal with Apollo closes, the market is assigning a low valuation to RemainCo:

There are only a few lottery competitors, closest peer Scientific Games (now Light & Wonder, ticker LNW) sold their lottery business in 2022 to Brookfield for about 11x EBITDA, Intralot (Greek based) trades for 9.5x, La Fancaise des Jeux trades for 9x and The Lottery Corporation (2022 spin from Tabcorp in Australia) trades for 16x.  Proforma RemainCo is trading well below all of these at ~5x EBITDA.

One reason spinoffs sometimes work is they create pure plays that generally trade a premium to a conglomerate.  Occasionally there are some downsides to breaking a company up, here while RemainCo should trade at a premium to the slot machine segment, my guess is it's currently being discounted because of revenue concentration (in addition to the Apollo deal obscuring value) that becomes more apparent when you split the business up.

The Italy Lotto makes up nearly 40% of RemainCo's revenue, unlike the U.S. (where RemainCo will have contracts with 37 of the 48 states/territories that have lotteries), Italy runs its lottery at the federal level via two contracts (roughly equal in size).  One of those contracts (Italian Gioco del Lotto game) is expiring this year and the bidding process is competitive.  Lottoitalia (a joint venture that IGT owns 61.5%) has run the contract since the 1990s, good time to mention that IGT is controlled by an Italian family via their De Agostini holding company (~42% ownership, ~60% of the vote) who are the original owners of Lottomatica and generally seem to be doing right by shareholders.  One potential reason for raising a lot of liquidity this year is the Italian lotto contracts feature an upfront payment by the winning bidder, reported to be at least $1B but likely will end up being more.  IGT accounts for the upfront fee as an asset that is then amortized straight line over the 9 years of the contract (they do remove the upfront amortization in their adjusted EBITDA metric).  The request for proposal was issued a couple weeks ago with a March 17th deadline, a reported other bidder is a consortium led by Flutter Entertainment (FLUT), which admittedly is a formidable, well financed competitor (but lottery is currently a negligible piece of their business).  My guess is IGT/RemainCo will do what it takes to win the contract, even if it means overpaying on the upfront fee.  

But if they don't, the stock still seems pretty cheap to me:

By removing the $1B upfront fee and ~$250MM in EBITDA (my guess, hoping that's overly conservative), it would only take EV/EBITDA up to 5.5x.  The stock would probably fall a fair amount, but the potential for shareholder returns via a buyback would increase and potentially offset some of that decline.  They've publicly stated their plan is to paydown $2B in debt, uses for the remainder of the Apollo funds hinge on the Italian Lotto bid, but they've stated some will go to shareholders in form of a buyback or special dividend.

Incumbents are hard to beat, especially ones so deeply entrenched, I think the Apollo transaction and Italian Lotto RFP fears are obscuring a really good business that should trade at a more normal 8x EBITDA (discount to its peers for being controlled) when all the dust settles.  As always, appreciate feedback, especially if you're on the ground in Italy, please share any thoughts on the RFP process.

Disclosure: I own IGT Jan '27 LEAPs

Keros Therapeutics: Pre-SA Broken Biotech, Large Cash Position

Keros Therapeutics (KROS) (~$420MM market cap) is a what I'm labeling a pre-strategic alternatives broken biotech, the company in two separate press releases (here and here) announced the halting of all dosages in their Phase 2 clinical trial of Cibotercept (KER-012) due to observations of pericardial effusions, which is a condition where excess fluid accumulates in a membrane that surrounds the heart.  What I find interesting in this situation is:

1. KROS has a significant cash position, my estimates put it around $650MM for a reverse merger, much higher than beaten up biotechnology companies I usually highlight
2. KER-012 is described as KROS's second program, their most advanced asset, Elritercept (KER-050) was out licensed to Takeda for $200MM plus milestone payments, so this failure might be obscuring the larger story here
3. KROS doesn't screen like a classic broken biotech because of the Takeda payment and their liberal use of their at-the-market equity offering program

Below is my basic back of envelope math on a potential liquidation value (again, not predicting a liquidation, more as a base case valuation for a potential merger/reverse merger):

The company has not declared a review of strategic alternatives, hasn't recently announced a reduction in force related to the failed KER-012 trials, etc., so this a riskier situation than others, but I think the absolute cash amount and sale of their primary asset makes this an interesting broken biotech to watch.

Other thoughts:

• My ATM estimate is using their 10/31 sharecount, based on their previous cadence, they likely issued more shares well above the current price into their December data disappointment, so the above NAV might be conservative
• The Takeda deal for KER-050 includes $370MM in development milestones and $720MM in sales milestones (plus a tiered royalty structure), how much is that worth today?  I'm not including any value in my liquidation NAV

Disclosure: I own shares of KROS

Howard Hughes: Pershing Square's Offer

I'm a couple days late on this post and turned into a bit of a "reply guy" on Twitter/X (you can follow me @ClarkinM) spewing some incoherent thoughts on the proposed Pershing Square offer, humor me a bit as I try to more intelligently spell out the current situation and where it might go from here.

On Monday, Bill Ackman's Pershing Square issued a letter to the Howard Hughes board outlining a proposed transaction that would see Pershing Square use the $1B they raised from outside investors at the management company level to buy 11,764,706 shares of HHH for $85/share in a tender offer.  Then simultaneously, HHH would issue an additional $500MM in debt to repurchase 5,882,353 more shares at $85/share.  As part of this transaction, Pershing Square would formally take over management of Howard Hughes Holdings and turn the company into a diversified investment HoldCo with Howard Hughes Corporation (the real estate business) as one of HHH's investments.  Pershing Square would charge a 1.5% base management fee for their services with no incentive fee.

To get it out of the way, Bill Ackman will probably get his way, maybe there's a bump, but this transaction has been teed up for a while (even the 2023 HoldCo corporate restructure in hindsight points to this being the end game).  I don't expect a third-party white knight to come in save minority shareholders, the best HHH shareholders can probably expect is a small bump in the tender offer and/or a discount in the external management fee.  Bill Ackman's fiduciary duties are to his management company investors and no longer HHH since he resigned from the board, he wants to keep this company public (rather than raise a fund privately to buy it) for a permanent capital vehicle that would justify the $10.5B valuation he raised capital at last year.  It's clear now, there's no scenario where he takes HHH fully private.

But here are my list of problems with this transaction:

1. Bill Ackman states, "When we filed our 13D on August 6th of last year, HHH's closing share price the previous day was $61.46 per share.  Including the market value of the Seaport Entertainment spinoff, this $16.62 increase represents a 35% total return over the last 14 years, or a 2.2% compounded annual return, and the Company has paid no dividend since its inception.  The Company's stock price performance is obviously extremely disappointing.."  Make no mistake about this, Bill Ackman founded Howard Hughes, it was his design in the GGP reorganization, he was the Chairman of the Board from the 2010 spinoff until April 2024 when he stepped down (presumably to setup this deal), not to mention he sat down for his infamous Forbes Baby Buffett article in 2015 touting HHH (HHC at the time) as the next Berkshire.  It's very disingenuous to now throw stones at the company with the solution being he needs to be brought back and paid handsomely to turn this around.  Why didn't he implement this strategy before?  The answer comes back to his management company is really the "next Berkshire" for him and not HHH.
2. This proposed transaction goes against HHH's two major strategic shifts in the last 4-5 years.  After the failed strategic alternatives process in 2019, Ackman got on a conference call and pledged to cut costs and refocus the company (even highlighted how the cost cuts should be capitalized and improve NAV).  This transaction clearly goes against this strategy as it will saddle the company with a significant G&A (~$60MM/annual) burden due to the external management fee.  The second strategic shift was the simplification of the business, becoming more of a pure play master planned community developer.  They've jettisoned almost all of their assets outside of their MPCs, sold the more cyclical and management heavy hotels within the MPCs, spun off Seaport Entertainment Group (SEG), all in an effort to simplify the business (and all those decisions were made while Ackman was the Chairman).  Ackman then files his original 13D/A a week after the spinoff, not giving HHH a chance to re-rate following the hiving off of the cash sucking Seaport business.  Now his plan is to allocate the free cash flow from HHC and invest in private businesses (hasn't he always been a public market investor?), going back on the Seaport spin rationale, just doesn't make sense and can't have it both ways.
3. The tender price is simply too low, management put out a "conservative" NAV of $118/share, in order to compensate remaining shareholders (any tender would likely be pro-rated) for the additional burden, the price needs to be higher than $85/share.  We've seen in the past, REITs that went to an external management structure, the asset manager directly compensates shareholders for the switch.  Here its indirect and insufficient.  Post transaction, the new externally managed HHH will trade at a significant discount to NAV.  Yes, the levered buyback will bump up NAV a bit since it will be done at a discount, but I would still anticipate an externally managed HHH to trade $70 or below in the current environment.  Could he bring in PIPE investors to backstop the tender?  Or some special dividend with a PIPE similar to biotech reverse mergers?  Something to show that outside investors at the HHH level are willing to go along with this transaction and not just investors in his management company.  When has an externally managed HoldCo actually worked?

The only other option for HHH would be to turn him down but given his ownership interest, he could bring in more friendly directors (presumably the board is already friendly) at the next annual meeting to get something done here.  Seems like the dye is cast, but doesn't mean its a feel good deal, feels a bit like Michael Dell and DVMT to me.  I'm still a little bitter about that one, guessing I will be about HHH for a while too.

Disclosure: I own shares of HHH