Friday, November 6, 2020

Catabasis Pharmaceuticals: Selling at 50% of Cash, Reverse Merger Candidate

Here's another entry in my sporadic biotech reverse merger candidate investment theme, Catabasis Pharmaceuticals (CATB) is a clinical stage biopharmaceutical company that recently announced their lead product candidate, edasalonexent -- a potential treatment for a form of muscular dystrophy, did not meet its primary or secondary end points of their Phase 3 trial.  I'll keep this pretty brief, from the sounds of the press release it sounds like this is game over for Catabasis:

BOSTON, MA, OCTOBER 26, 2020 – Catabasis Pharmaceuticals, Inc. (NASDAQ:CATB), a clinical-stage biopharmaceutical company, today announced that the Phase 3 PolarisDMD trial of edasalonexent in Duchenne muscular dystrophy (DMD) did not meet the primary endpoint, which was a change from baseline in the North Star Ambulatory Assessment (NSAA) over one year of edasalonexent compared to placebo. The secondary endpoint timed function tests (time to stand, 10-meter walk/run and 4-stair climb) also did not show statistically significant improvements. Edasalonexent was observed to be generally safe and well-tolerated in this trial. Catabasis is stopping activities related to the development of edasalonexent including the ongoing GalaxyDMD open-label extension trial. The Company plans to work with external advisors to explore and evaluate strategic options going forward.

 

“We are deeply saddened and disappointed by the results of our Phase 3 PolarisDMD trial,” said Jill C. Milne, Ph.D., Chief Executive Officer of Catabasis. “I want to sincerely thank all of the boys, their families and caregivers, investigators and the trial sites that participated in and enabled this program. The entire Catabasis team has worked tirelessly to find a treatment for this progressive disease. We hope that our data and work to date can be used to benefit ongoing and future research in DMD.”

 

The Phase 3 trial was a one-year placebo-controlled trial designed to evaluate the safety and efficacy of edasalonexent in boys ages 4-7 (up to 8th birthday) with DMD. The global trial enrolled 131 boys across eight countries, with any mutation type, who were not on steroids. Edasalonexent was well-tolerated, consistent with the safety profile seen to date. The majority of adverse events were mild in nature and the most common treatment-related adverse events were diarrhea, vomiting, abdominal pain and rash. There were no treatment-related serious adverse events and no dose reductions. The global COVID-19 pandemic had no meaningful impact on the trial or its results. Data from the PolarisDMD trial will be further analyzed and are expected to be presented at an upcoming scientific conference and published.

 

“These results are disheartening for the Duchenne community, and specifically for the boys who participated in this trial and their families. However, the results contribute to the natural history data of Duchenne and add to the knowledge base that will one day produce a foundational, long-term therapy for this disease,” said Pat Furlong, Founding President and Chief Executive Officer of Parent Project Muscular Dystrophy (PPMD). “The continued advancement of research and the development of possible treatment options will remain of critical importance to our community. We appreciate Catabasis’ efforts and commitment to every family that is or has ever been affected by Duchenne.” 

 

The Company expects to report Q3 2020 financials in November of 2020. As of September 30, 2020, Catabasis had cash and cash equivalents of approximately $52.9 million.

The company is pre-revenue, R&D is likely at a full stop now, general and administrative expenses have run a little under $3MM:

Now that the company is a cash shell, the burn rate should be lower, but let's just call it $1MM a month going forward.  Cash and marketable securities were ~$54MM as of 6/30, Catabasis does have an ATM program they have been hitting for incremental cash, so to square the cash burn against the $52.9MM they reported in their press release, let's assume they've issued another 1 million shares, bringing their total to approximately 20 million shares outstanding.  At a price of $1.36, that gives us a market cap of $27MM versus a cash balance of ~$50MM, almost a 50 cent dollar.  And since CATB never generated revenue, we have a large NOL here as well of approximately $200MM. 

The most likely outcome is in the next few months a privately held biotech will merge into and come public through a reverse merger with CATB.  Effectively using CATB as a capital raising transaction with a deSPAC like transaction except here a target has more certainty in the actual amount of cash raised.

Disclosure: I own shares of CATB

6 comments:

  1. Thanks for the write-up. What do you think is the reason for the discount? Is the market pricing in cash burn? Transaction fees?

    What do you think an actual transaction would look like? Would they use their cash to buy the equity of a private company?

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    1. I think its most just rotation from believers in the story to people like me that just buy these after the story is completely busted. The cash burn should be pretty minimal from here.

      A transaction would look like a SPAC deal, there are a lot of biotechs that need capital and access to capital, public markets are good for that, so by coming public via a busted shell it would raise $40-50MM in cash via the merger plus access to more via the public listing.

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  2. Big risk is them not closing shop and developing CAT-5571. What are your thoughts here? I do agree that 'working with external advisors' does imply closing up shop more than it implies focusing on CAT-5571, but I'm not convinced and/or experienced enough to reliably judge this.

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    1. I agree that its a risk as its not a 100% clear what the next steps are here, but the results were pretty devastating and given where the stock price trades, would be tough to raise capital for another go at it.

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    2. CEO only has 160k shares, yet earns ~$1M a year. That's not great either.

      And looking at the language again: 'Catabasis is stopping activities related to the development of edasalonexent including the ongoing GalaxyDMD open-label extension trial. The Company plans to work with external advisors to explore and evaluate strategic options going forward.'
      --> I would've liked it more if they said they were stopping activities at all, instead of 'activities related to the development of edasalonexent'.

      Other than that I quite like the idea. Intuitively it feels like busted pharma's turning into an arb should be fertile hunting grounds.

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    3. I agree with the language leaves the door open. Just issued a PR stating they hired advisors, still using the 'activities related to the development of edasalonexent' language, but still sounds like a white flag to me rather than continuing to push forward.

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