Friday, January 19, 2024

Aclaris Therapeutics: Strategic Review for Broken Biotech, Big Discount to Cash

Aclaris Therapeutics (ACRS) (~$85MM market cap) is a clinical-stage biotech company focused on developing novel drugs for immuno-inflammatory diseases.  In November, the company announced their lead candidate, zunsemetinib, did not meet its primary or secondary endpoints in a Phase 2 trial for the treatment of moderate to severe rheumatoid arthritis, the stock dropped 80+% on the news.  Earlier this week, Aclaris announced their CEO was stepping down and the company was initiating a strategic review:

Concurrent with today’s announcement, Aclaris also announced that it is conducting a strategic review of its business to determine how to optimally deploy its capital to maximize shareholder return. On a preliminary unaudited basis, as of December 31, 2023, Aclaris’ aggregate cash, cash equivalents and marketable securities was approximately $182 million.

Aclaris also reiterates the following business plans:

  • ATI-1777: Aclaris is seeking a development and commercialization partner for ATI-1777, its investigational topical “soft” JAK 1/3 inhibitor. Aclaris recently reported positive top-line results from its Phase 2b trial in atopic dermatitis.
  • ATI-2138: Aclaris is assessing the most effective pathway including the lead indication for ATI-2138, its Phase 2 ready investigational oral covalent ITK/JAK3 inhibitor. Aclaris announced positive results from its Phase 1 MAD trial of ATI-2138 in 2023.
  • Discovery: Aclaris plans to continue to advance discovery programs through KINect®, its proprietary drug discovery platform.
I don't love the verbiage they use here, from the sounds of "optimally deploy its capital" and "reiterates the following business plans" it appears the initial desire is to continue their research and development pipeline.  However, this situation seems ripe for an activist, indeed Tang Capital and BML Advisors both own 6+% of the shares each.  Tang Capital could throw out an offer, similar to RPHM, and change the direction of the strategic review.

My back of envelope liquidation estimate:
As usually, these are very much swag estimates, ACRS does a nice job of breaking out their R&D expense by program, feel free to get more granular in your estimates.
On the positive side (from an investment perspective), the company did do a 46% reduction-in-force in December, halted zunsemetinib development and appear mostly in a standstill on ATI-1777 and ATI-2138 as they decide on next steps.  On the negative side, the co-founder is now the interim CEO, he might not want to sell and might rather continue on developing new drugs, but the activist shareholders and high cost of capital will hopefully change his mind.  This is on the riskier side of the broken biotech spectrum, but remains at a pretty attractive discount to net cash.

Disclosure: I own shares of ACRS

58 comments:

  1. One of my favorite positions at the moment. I think you've laid out the risk/reward very well. Besides BML and Tang, Millennium Management also became a new large shareholder after the test failure. Combined they have close to 20%. Also Wellington Management sold out. Given that basically the entire float has changed hands since the November announcement I am betting that most of the new owners are looking for sale/liquidation, not business as usual or a reverse merger.

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  2. Is there a risk that some of the $32m contingent consideration become actual expenses as they decided to use zunsemetinib for the development of pancreatic cancer treatment?

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    1. If they did to decide to develop it, you'd hopefully assume it was positive NPV despite the contingent consideration.

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  3. Would you please explain how you arrived at the Net Liabilities of ~5m which is based on the 30-Sep-23 Balance sheet given the Total Liabilities appear much higher at ~62m (even assuming that you've disregarded the 'Contingent Consideration' of ~33m).

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    1. Sorry - I meant to explain that line. Its the net of the current assets other than cash, minus the liabilities other than contingent consideration which I don't consider real debt in this situation.

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    2. Thanks for the fast response. I guess it is back to pre-school for me because I still can't reconcile your 5.08m net liabilities number. As at 30-Sep-23 if I take A/c Rec 0.346m and Prepaid expenses and other current assets 19.670m which are the only remaining current assets that wouldn't be taken into account in the 182m (i.e. cash and cash equivalents, short-term marketable securities in terms of current assets, plus non current marketable securities) I get 20.02m. If I then deduct the total liabilities of 62m and add back the contingent consideration I get 20.02m - 62m + 32.5m = 9.48m. Other than the ~5m discrepancy would you please explain why you believe the 'prepaid expenses and other current assets' should be taken into account in the valuation? In the 10Q for 30-Sep-2024 I couldn't find any further details on this line item implying it would have a 'value' in a e.g. liquidation scenario.

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    3. I apologize, my math was all other tangible assets (so other than cash, marketable securities and intangibles) minus total liabilities other than the contingent consideration.

      They have value because they're expenses that will be incurred and not hit cash and marketable securities. The working capital will unwind or approximately so. It's a pure estimate, feel free to have your own pre-school math. I'm not trying to be precise.

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  4. Hi mate - thanks for this.

    Have a couple of Q's:

    1. On 12/5/2023, Aclaris announced a receipt of $15m from Sun Pharma for some licensing. Is this a future cash payment, or is it already included in the $182m of gross cash announced on the 10th of Jan?
    2. Say this was to go into liquidation - what are the tax implications for international shareholders of that cash distribution? Nws if you have no clue here - otherwise hopefully another reader will know.

    Thanks

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    1. 1) Yes, that $182MM is management's estimate for 12/31/23 cash & securities
      2) Defer to others

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  5. Hi - Re #2 - My understanding is, as a non-US person, it would depend on whether it was deemed to be a return of capital (in which case you pay capital gains at the appropriate rate depending on the country in which you are domiciled), or a dividend (in which case your broker likely withholds 30%). That said - you could avoid this by closing out prior to the payment date as the gap closes. Hope that helps !

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  6. Hi MDC,

    Thanks for this. Some questions please:

    1. Where did you get the number on severance? Shouldn't 50 employees * $170k average wage be closer to -$8m in severance cost (assuming 1x payout on salary)?
    2. Does the staggered board affect your thoughts on how feasible activism is here?

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    1. Per the 12/19 8-K:
      As a result of the reduction in force, the Company expects to incur a one-time charge totaling approximately $3.1 million in connection with one-time employee termination costs, including severance and other benefits. This charge is expected to be incurred during the quarter ending December 31, 2023. In addition, an estimated charge between $1.9 million and $2.2 million is expected to be incurred for additional termination costs, including severance and other benefits, over the next twelve months.

      I don't worry about the staggered board really, they've already announced they're pursuing a strategic review, while the wording around the review is less than perfect, it still shows they're doing something here.

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  7. Looks really interesting - there is another write-up on this name here: https://amadeusvalue.substack.com/p/aclaris-therapeutics-acrs

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  8. Isn't $30m cash burn estimate a bit on the low side? Given that quarterly cash burn is $30m and they announced late in Q4 a cut in expenses.

    How should one read these x% reduction in work force statements when programs are all halted? Cut R&D expenses mostly to 0 and then reduce the rest of operating expenses roughly by x - some amount %?

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    1. Q3 burn was roughly $21M if you back out stock based compensation, revaluation of contingent consideration and D&A. But its good to be pessimistic since there will almost certainly be expenses we can't predict in any wind-down or sale.

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  9. Cheif scientific officer went full time on Monday

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    1. Yes because they sacked the CMO. I see this as a consolidation of roles vs. a statement regarding appointing someone full time

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  10. https://www.sec.gov/Archives/edgar/data/1373604/000161682424000044/acrs13g020724.htm

    Our friends at BML boosted their ownership to 13.3%

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  11. Hi MDC/ All, Has anyone looked into Talis Biomedical Corp (TLIS). They are ticking a lot of the Neg EV/ broken biotech boxes. For Example: They have BML on the register & have RIF'd three times now (latest 90%). Most recent departure was CSO. In Nov they announced strategic alternatives (hired TD Cowen) focusing on maximizing shareholder value.. BUT.... & it might be a big 'but' here, they only mention liquidation as a last resort "including but not limited to, equity or debt financing alternatives, merger and acquisition transactions, divestiture of assets, licensing opportunities, joint ventures, collaborations or other partnerships with other companies." .... "If the Company is unable to complete a transaction, it may be necessary to seek other alternatives to reduce costs or restructure the Company, including a voluntary liquidation and dissolution of the Company.". Anyway, figured I'd throw it out here. DYODD of course.

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    1. I'll relook at this one, I did spend some time on it before (forget which post, but there are some comments somewhere on it here), I had trouble with the capital structure, had a different read of the share count than others. I do like that Baker Brothers are major shareholders here, clearly they're biotech/science investors which can lead to a reverse merger (which isn't all bad, some of the recent ones have sold off on the deal announcement but then recovered nicely), but they're the real deal and likely wouldn't have a target that's mostly all smoke. I'll revisit, thanks.

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  12. Not sure if this was the best place to post this, so apologies if not !!

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  13. https://x.com/InvestSpecial/status/1757706768958767455?s=20

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  14. Dalius Special Sits Investments just tweeted a brief summary.

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  15. Tang just reduced his position to 2,5% and Foresite exited completely. Does that change anything in your original thesis or is the combined stake of BML and Tang of >15% still enough to have the situation work out?

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    1. Not really, no. Maybe a little less exciting because it seems like Foresite has the most success in orchestrating cash plus CVR deals. But this is a basket trade, I don't really tinker with each position much, content to be patient.

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    2. Here's how I look at it, I separate funds into friendlies (activists) or unhelpful (biotech or passives more likely to vote for mgmt/reverse mergers) to liquidation. At start of year there were four funds I'd categorize as friendly involved (Millenium, Foresite, Tang, and BML). BML has doubled their stake since then, and my math is that group has stayed roughly same percentage, only dropping 22% to 21%.

      There were eight funds I'd categorize as unhelpful (Wellington, Vanguard, Biotech Value, Rock Springs, Black Rock, Citadel, Venrock and RA), and their group percentage has declined from 46% down to 24%. So overall ratio of friendly to unhelpful shareholders has increased significantly in our favor and it's likely most "unknowns" are friendly since many likely came in the huge turnover after drug test failed.

      Tang's basis was likely under 90 cents, so maybe he wanted to take some profits in the new year because of other cash needs. Foresite has been in Aclaris for over 3 years and probably had a much higher basis. It's possible they sold for a tax loss in December. I'm not clear on the SG13 rules but since they had under 5% I think they only had to file at year end and share could have been sold at any time last year. And I'm thinking Tang might have just reduced his position below 5% forcing a filing within 10 days, but again rules are not perfectly clear ot me. Ultimately we can't know other funds motives and have to rely on our own research and rationale. So far I don't see any reason to fear a reverse merger any more than I did a month ago.

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    3. Haven't really looked at the reduction of unhelpful funds, thanks a lot. Tangs basis, as far as I know, was around 60-70 cents so taking profits at this point would definitely make sense.

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  16. Earnings must’ve gone well?

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    1. I'm still reading the 10K, but one thing I noticed right off the bat was they removed the following from their forward looking statements on 2nd page
      ● the timing of our planned clinical trials of our drug candidates and the reporting of the results from these trials;
      ● the timing of our regulatory filings and approvals for our drug candidates;

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    2. I'm traveling, haven't looked closely, but again don't like the verbiage, sounds like the founder/interim-CEO doesn't want to give up the ship.

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    3. Overall I think the 10k is positive. Actual forward burn rate is a bit hard to pin down, but cash burn in Q4 seems reasonable (though they sold a $15M license to Sun Pharma). Most importantly the changes over the previous 10k emphasize finding partners for remaining drugs, and plays up the value of the KINect platform and their patent IP. This implies they are attempting to sell both, which would be a reasonable next step towards liquidation or company sale.

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  17. Summary from the 4Q23 10-K (released 27/02/2024):

    - Seems okayish - all drugs are on standstill, the contingent liability has unwound, BUT saying "we'll continue the Discovery platform".
    - Re-iteration too is that Neal is a "interim CEO" with no timeline on a permanent replacement
    - Neal has the option to buy 497k shares at $1.20 - big incentive to get the SP up (also has 142k RSU's). Both vest equally over the N15M with a CoC and BoD award discretionary clause

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  18. Yesterday it was announced that William Powell (a non-executive director) just bought 14.5k shares at $1.23-$1.25, increasing his stake in the business by 100% to 29k shares.

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    1. Not exactly a huge buy for a board member, a bit surprised by the pop today unless I'm missing some news?

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    2. This market is sometimes confusing, insider buy and the stock gets a nice bump. In scenarios like these do we just sell and accept the profit or do we hold and let the thesis play out. Troubling times my friend!

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    3. Ha, very troubling. I'm just holding for now, awaiting some news, maybe that'll go against me, but occasionally you really catch a home run with these busted biotechs.

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    4. Well Zacks just upgraded it to a buy;) https://finance.yahoo.com/news/aclaris-acrs-upgraded-buy-heres-170012981.html

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    5. Isn’t the timing of this insider purchase a tad bit concerning here? Insiders are usually restricted from purchasing stock ahead of imminent news. The purchase could be a signal that the timeline might get extended (reducing the IRR).

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    6. Maybe a little bit of concern, but not really at the same time? It was a small buy so I don't put much into it, but at the same time, these processes don't take that long, even if they started now, it would be a 90 day thing.

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  19. Powell (Board member) resigned and Reasons (Board member) will not be up for reelection. Both have been in the company for a few years. What do you think about that?

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    1. I don't want to read too much into it, but I'd lean that it is a positive, might mean the strategy is changing and they won't decide to continue development of their pipeline.

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    2. Certainly interesting. Powell doubled his stake on the 6th of March - and then announces he is resigning from the board two weeks later. IMO it reads as if he is expecting a liquidation, or a value-accretive deal, where in both cases he is likely to be replaced.

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  20. Heard through the grapevines Amadeus said mgmt told him review should be concluded by EOM.

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    1. Hopefully its good new and not that there is no sale

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  21. Saw this from the Toff Cap weekly blog - Nuvation (net cash broken biotech) was up +70% on announcing a merger with Anheart. Suggests "risk on" appetite perhaps, esp. when it comes to Late-stage Oncology assets.

    Nuvation (NUVB US). Busted biotech SPAC with >$600m net cash on balance sheet, trading at negative EV. Currently pursuing last trials. If success, stock is cheap; if failure, NUVB becomes a cash-distribution play. To play out over next ~12 months. UPDATE. Big insider buying recently, while share price under pressure.

    UPDATE (April 8, 2024) To acquire AnHeart Therapeutics. Massive stock price reaction. No clue on the impact, but sell side strongly increased TPs.

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  22. Amadeus here - my thoughts below:

    I've decided to close my position on Aclaris following certain recent developments, as well as recent language emanating from management. 


    This includes:


    1) The indication of a "corporate update" being released alongside 1Q24e results on May 7th - this doesn't sound like something that would be said in anticipation of significant change such as a liquidation, merger or reverse merger


    2) The stake reduction of Tang Capital, and the exit of Forsite - both who are noteworthy sector specialist activists / funds that could have purchased $ACRS outright


    3) Lack of announcement regarding any further reduction of the remaining 50 FTE's



    My conclusion is that at the 1Q24e earnings, management is likely to announce a partial return of capital, alongside that they've found / are looking for a partner for the trial progression of ATI-1777 and that they’ll maintain the 'Discovery' platform (which has not had any success thus far in developing noteworthy candidates). 


    IMO it's ambiguous how the stock reacts to this, and as a result I do not feel confident maintaining risk here. 

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    1. Thanks, appreciate the thoughts, I don't have much pushback on any of it, seems perfectly plausible. My strategy has been to see these through, so I'll hold, but share some of the same concerns.

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    2. Looks like he nailed it. I didn't change my position either. Lets see what happens tomorrow here.

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    3. I'm out now, thesis broken, could work from here but as usual I have no view on the science.

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    4. Strategic review is still under way, for whatever that's worth. A few other small positives includes positive results from current testing, the earnings call was all analysts interested in the drugs progress and potential. They also increased their contingent consideration liability which requires an increase in their expectation of success for the drugs subject to owe royalties to Confluence shareholders. Lastly, they did better at cutting burn rate than I expected.

      That said, liquidation or sale seems extremely remote now. Its just a standard biotech now, and fortunately has enough buzz from biotech investors to keep the price strong.

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  23. Earnings look meh at worse, no? Mainly trying to subscribe to comments so ignore me if appropriate

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  24. big news just hit

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  25. Would you be willing to do an update on Aclaris and what this news means for your thesis?

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    1. I got spooked out of this one, so I don't own it anymore, but I will try to take another look at it and TIL given the good news at both.

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  26. Latest BML 13f is out - they own over 30% of this. Seems like a takeover is coming.

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    1. I've got them with 20% ownership, but yes, does seem like something will happen here. Guessing the Cash buyout plus CVR structure.

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    2. I have re-entered a position in ACRS

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