Singular Genomics Systems: Exclusivity Period w/ Deerfield, Spread Remains

Singular Genomics Systems (OMIC) ($60MM market cap) is an early stage medical device company, they have one commercial product (G4) and one in development (G4X) that is a promising next generation genome sequencer.  The company burns quite a bit of cash, approximately $25MM a quarter, but with the commercial launch of G4X in Q2 2025, OMIC could be coming to an inflection point with revenues coming in 2025.  Prior to bidders appearing, the stock traded at a massive discount to cash.

Recent Events:

• Back on 9/12, long time investor in OMIC and large health care fund, Deerfield Management, made a $10/share bid for OMIC.  Shares traded for approximately $5.60/share before the offer.
• Following Deerfield's bid, on 9/19, our friend Kevin Tang lobbed in his own $12/share bid, he owns just under 15% of the company.
• Presumably there was a fairly competitive bidding process (and likely at least one additional bidder other than Deerfield or Tang, Tang doesn't really want the IP normally it seems which would cap him out here) following 9/14 because on 11/4, we found out that Deerfield's latest bid is a whooping $24/share and has entered into an exclusivity period with OMIC to finalize a definitive agreement.

From Deerfield's latest 13D:

As previously disclosed, on September 5, 2024, Deerfield Private Design Fund IV, Deerfield Mgmt IV and Deerfield Management (collectively, “Deerfield”) submitted a non-binding proposal (the “September 2024 Proposal”) to the special committee of independent directors of the Company (the “Special Committee”). The September 2024 Proposal related to a proposed acquisition through a special purpose vehicle to be established by Deerfield of all of the outstanding shares of Common Stock not already owned by Deerfield or any other stockholders or members of management that Deerfield invites to “rollover” their current equity shares. Following negotiations with the Special Committee in a competitive process, Deerfield proposed an increased purchase price of $24.00 per share (the Original Proposal, as so modified, the “Modified Proposal” and the transaction contemplated thereby, the “Modified Transaction”), and following such proposed increase, on October 31, 2024, the Company and Deerfield entered into an exclusivity agreement to facilitate completion of Deerfield’s due diligence and the preparation and negotiation of definitive agreements in respect of the Modified Transaction.

Downside could be pretty considerable here, but we do have a high quality counterparty in Deerfield, competitive process and despite the sharp increase in the bid, I still have Deerfield picking up OMIC below an estimated NCAV at deal close  if you exclude the leases.

Including the operating lease, NCAV is closer to $20/share.

To me this is a similar trade to Asensus Surgical (ASXC), a cash burning business being led into the arms of a creditable buyer that knows it well.   I bought shares around $21.50, or a 11.6% spread to the $24.00 current bid.  Depending on where this trades it might not be actionable.  I'd probably be a buyer below $22.00, we'll see where the price settles in anticipation of the next piece of news.  There's a slight chance of another bump, but not counting on that.

Disclosure: I own shares of OMIC

Athira Pharma: Perceptive Working on a Reverse-Merger?

Athira Pharma (ATHA) ($24MM market cap) is a biotech focused on treatments to restore neuronal health and slow neurodegeneration.  On 9/3, the company announced its Phase 2/3 trial of fosgonimeton for mild-to-moderate Alzheimer's Disase did not meet its primary or secondary endpoints.  Rather than waiving the white flag and launching a strategic alternatives process, two weeks after, they announced Athira was going to focus on its earlier stage ALS treatment, ATH-1105, along with a 70% workforce reduction-in-force.

But that doesn't mean that other discussions might be happening behind the scenes, a 70% RIF is pretty large and sort of signals you're a cash shell.  Perceptive Advisors (14% owner) revised their 13D last week (thanks for the tip from a commenter), and included the line:

Consistent with their investment intent, each Reporting Person may from time to time discuss with the Issuer’s management, directors, other shareholders and others, the Issuer’s performance, business, strategic direction, capital structure, product development program, prospects and management, as well as various ways of maximizing stockholder value. Representatives of the Reporting Persons are engaged in discussions with the Issuer’s management and other third parties with respect to a potential extraordinary transaction involving the Issuer and other third parties. There is no assurance that any such transaction will develop or materialize, or if it does, as to its timing or whether the Reporting Persons will participate.

This sure sounds like Perceptive is trying to arrange a reverse merger transaction with Athira Pharma as the shell.  This idea is a little riskier, Athira hasn't declared strategic alternatives and has some pretty significant cash burn, time isn't on Perceptive's side to a get a deal done.  If we get well into 2025 and there's no deal, the cash burn might push the company to raise equity and pursue the original plan.

Here's my back of the envelope math on Athira:

The fairly small cash balance available to a reverse merger candidate could be an issue (I typically don't look at ones much smaller than this one), but as we saw with ATVE, some of these deals have been structured in a way where the reverse-merger candidate is really only interested in the public listing shell and legacy cash can be paid out as a special dividend to original shareholders.  

Disclosure: I own shares of ATHA

ESSA Pharma: Another Broken Biotech

ESSA Pharma (EPIX) ($72MM market cap) is the latest addition to the broken biotech basket.  EPIX is a clinical stage pharmaceutical company that was previously focused on developing therapies for the treatment of prostate cancer.  On Thursday (10/31/24), the company announced they were terminating all of their clinical studies and an initiating a review of strategic alternatives.

In the press release the company gave us 9/30 cash numbers:

Liquidity and Outstanding Share Capital

 

·

As of September 30, 2024, the Company had available cash reserves and short-term investments of $126.8 million and net working capital of $124.3 million (unaudited figures). The Company has no long-term debt facilities.

·

As of September 30, 2024, the Company had 44,388,551 common shares issued and outstanding, and there were 2,920,000 common shares issuable upon the exercise of prefunded warrants at an exercise price of $0.0001.

This one is fairly clean, although we don't have a severance charge estimate (the company has 50 employees), EPIX hasn't been burning much cash, only approximately $7MM a quarter prior to the termination of their R&D program.  My back of the envelope math is pretty straight forward, I'm assuming about $20MM of the expenses to wind down the company from here or get it to a place where a reverse merger can be done, feel free to make your own assumptions.

My liquidation value is about 40% higher than where shares traded Friday following the news.

Disclosure: I own shares of EPIX

HomeStreet: Likely Deal Break w/ FSUN

Unfortunately, this year I'm getting crushed in a game of Battleship, every speculative merger or in this case announced merger gets blown up (TH & BOOM being the other recent ones).  An astute commenter on my original HomeStreet (HMST) post noticed that FirstSun Capital Bancorp (FSUN) left out any mention of their pending acquisition of HomeStreet in their Q3 earnings release that came out on Monday (10/28) as an ominous sign.  After the market closed on Tuesday (10/29), the two banks jointly announced the deal as-is will be rejected by FSUN's regulators:

DENVER & SEATTLE--(BUSINESS WIRE)-- FirstSun Capital Bancorp (FSUN) (“FirstSun”) and HomeStreet, Inc. (HMST) (“HomeStreet”) announced that, based on discussions FirstSun and its subsidiary, Sunflower Bank, N.A. (“Sunflower”) have had with the Federal Reserve and the Texas Department of Banking, that regulatory approvals necessary for the mergers with HomeStreet and its subsidiary, HomeStreet Bank to proceed have not been obtained and FirstSun and Sunflower have been asked to withdraw their merger applications. FirstSun and HomeStreet are discussing the pursuit of an alternative regulatory structure for the merger. The parties are also discussing terms on which they would terminate the merger agreement if no alternative structure is feasible. There can be no assurance that an alternative regulatory structure may ultimately be feasible.

Rewinding time six months, following Q1 earnings, the two re-traded their merger agreement due to HomeStreet not adequately hedging their loan book as interest rate expectations coming into the year were for many Fed Funds rate cuts, but those expectations were scaled back significantly.  In that revised deal, FSUN also disclosed they were changing the charter structure of the primary bank subsidiary, Sunflower Bank, to a Texas state chartered bank that would be regulated by the Texas Department of Bank versus the OCC. 

Presumably the motivation behind the change was to get easier treatment after the OCC was embarrassed following the failure of New York Community Bank (NYCB) this past spring due to their significant rent-controlled NY multifamily exposure that had fallen in value (HMST has a large Class B/C multifamily loan book in Los Angeles County).

In FSUN's own words:

Neal E. Arnold FirstSun Capital Bancorp – CEO, President, COO & Director

"Let me also briefly explain the regulatory shift for us. We will remain a Fed-regulated bank holding company as previous. However, we've also decided to proceed with an application to have the pro forma bank also be primarily regulated by the Federal Reserve and the state of Texas Department of Banking.

After discussion with our respective Boards, we decided this is a better long-term path for the combined organization. We believe the Fed and the state of Texas have a firm understanding of our business and the nature of our CRE risks.

In our discussions with the OCC in Washington, it became obvious that we would not gain near-term approval given their recent experience with multifamily and CRE positions. We believe their position also resided in the fact that they were not the primary regulator for HomeStreet. The Fed is taking a very different approach, in part due to the changes we have made through the transaction. Our belief is that CRE is not the same across all categories and all geographies. And it's particularly distinguished when comparing West Coast multifamily and East Coast, New York multifamily. We've had a significant interaction with the state of Texas and the Fed, and we believe there's a pathway for this merger application to be approved."

Following this news, HomeStreet stock is down by a 1/3rd today to $9.30 per share.  To be clear, HomeStreet is still a mess, the bank is zombie that is just treading water with minimal net interest margin that is fully eaten up by their non-interest expense.  However, the loan and securities book seems to be at least credit-good, they've had minimal losses and FSUN along with their advisors have had a few different looks at it and have agreed (from the 5/1 call) :

Robert A. Cafera FirstSun Capital Bancorp – Executive VP & CFO

"So Matt, thank you for the questions. And yes, we are reaffirming the credit mark here. We actually had an outside firm assist us independent third-party review the portfolio at HomeStreet, and actually a sizable percentage of the portfolio, 75-plus percent there. And we would echo, market had made some comments on the underwriting of the HomeStreet portfolio. We would echo those comments relative to everything that we found through the process, both upfront and post announcement in terms of the strength of the underwriting on the portfolio here.

So we remain encouraged by the performance here. And as a matter of process on the underwriting side at HomeStreet practices, there is sensitivity analysis. We actually utilized our independent third-party to revalidate the sensitivity analysis side of what the credits would look like in the current rising interest rate environment. And all that led us to the same conclusion on credit mark."

And in HomeStreet's most recent earnings release:

"In the third quarter our ratio of nonaccrual assets to total assets and our total loan delinquencies remained low at 0.47% and 0.69%, respectively. Our credit quality remains strong and we have not identified any potentially significant credit issues in our loan portfolio.”

And previously in the merger break press release:

“We are disappointed that the regulators are unwilling to grant the regulatory approvals necessary for the merger to proceed,” stated Mark Mason, Chairman, President and Chief Executive Officer of HomeStreet. “Importantly, HomeStreet has been advised by its regulators that there were no regulatory concerns specifically related to HomeStreet that would have prevented approval of the merger.”

So while the rate environment hasn't been kind to these loans, it doesn't appear on the face they're in any real trouble of permanent losses as long as HomeStreet is able to hold.  The multifamily loans have an approximate 2.5 year duration, some are reaching their pricing date, its not a super long duration portfolio that will leave them stuck for years.  In a slide deck, HMST provided the below update:

They've got a plan to sell some MF loans, hopefully prove out the marks, and the last bullet makes it fairly clear they'd be open to another M&A transaction.  I still think it makes an attractive acquisition target as they're in attractive retail/deposit markets and an acquirer could buy HMST at a significant discount to tangible book and enjoy that accretion over time as loans mature.

Other thoughts:

• HMST puts out an "estimated tangible fair value per share" metric that attempts to fair value the loans and their debt (I might exclude the debt) to give a more mark-to-market look at book, it was $18.52 at 9/30, or about 2x the current share price.  GAAP tangible book value is $28.13 per share.
• Mark Mason is still in charge, he's a controversial banking figure for good reason, so that adds some hair to situation, his capital allocation skills are bluntly terrible.  In reading the deal proxy, it also appears that an ongoing role for him was an important consideration.
• Presumably, activist Blue Lion Capital (1.3% owner) is still around, they've been vocal about the deal, especially around change of control payments to Mark Mason.
• FSUN did raise capital already to make the deal work, points to their commitment to make the deal work, I wouldn't fully count out another recut transaction that would be at a nice premium to today's share price.
• In the original strategic alternatives process, HomeStreet did receive two other legitimate offers that made to the final round of bidding, one for $15.19 per share in cash and the other for $13.50 per share in cash.  Again, validating the idea that others have due diligenced this portfolio and that there should be buyers for HomeStreet if the deal with FSUN expires in mid-January without a newly structured deal.

While HomeStreet is certainly a far lower quality bank than First Horizon (FHN), the situation rhymes a bit in that regulators are blocking the deal for reasons largely outside of the target's control, as a result, the stock is forced sold by arbitragers possibly creating an opportunity to pick up shares on the cheap.  I bought a few more shares today.  But full warning, this is much riskier than FHN.

Disclosure: I own shares of HMST (also short some Nov $15 calls I wrote a few months back)

Aerovate Therapeutics: Broken Biotech, Shell Company? Potential Liquidation

I'm a little late posting this one, but as mentioned in the comment section of my Mid-Year update, I did add Aerovate Therapeutics (AVTE) ($55MM market cap) to my broken biotech basket.  Back in June, Aerovate, a one-shot-on-goal biotech, announced poor topline results from the Phase 2b portion of their AV-101 study for the treatment of pulmonary arterial hypertension (PAH).  A few weeks later, the company announced they were laying off 78% of their staff, costing them $5.6MM, $3MM of which will hit in Q3 and Q4.  Then another week later, AVTE officially announced they were exploring strategic alternatives:

Aerovate has engaged Wedbush PacGrow as the company’s exclusive strategic financial advisor to assist in the process of exploring strategic alternatives, which may include but are not limited to, an acquisition, merger, reverse merger, business combination, liquidation or other transaction.

Notably, they listed a liquidation as a possible outcome, generally we don't see a liquidation called out in the initial strategic alternatives announcement.  One reason might be they don't have any other product candidates, from their latest 10-Q:  

Overview

We are a biopharmaceutical company. Our initial focus was on advancing AV 101, our dry powder inhaled formulation of imatinib for the treatment of pulmonary arterial hypertension, or PAH, a devastating disease impacting approximately 70,000 people in the United States and Europe. On June 17, 2024, we announced topline results from the Phase 2b portion of our Phase 2b/Phase 3 Inhaled Imatinib Pulmonary Arterial Hypertension Clinical Trial of AV-101, or IMPAHCT. Topline data showed that, while AV-101 was generally well tolerated across all dose groups, the study did not meet its primary endpoint for improvement in pulmonary vascular resistance compared to placebo for any of the studied doses or show meaningful improvements in the secondary endpoint of change in six minute walk distance. We also reviewed data from several additional secondary endpoints of the Phase 2b portion of IMPAHCT, which also failed to show meaningful improvements. Based upon these results and in agreement with the independent study advisory committee, we halted enrollment and shut down the Phase 3 portion of IMPAHCT as well as the long-term extension study. AV-101 for the treatment of PAH was our only product candidate in development. At this time, we do not intend to resume development of AV-101 or any other product candidates. In July 2024, we announced the decision to conduct a comprehensive review of strategic alternatives focused on maximizing shareholder value. We also engaged Wedbush Securities Inc. (Wedbush PacGrow) as our exclusive strategic financial advisor to assist in the process of exploring strategic alternatives, which may include but are not limited to, an acquisition, merger, reverse merger, business combination, liquidation or other transaction.

I'm still trying to get my arms around how the new SEC shell company rule is going to play out after going effective July 1, 2024, but it appears that these one-shot-on-goal type biotechnology companies, like AVTE, without other assets might fall into the shell company bucket and could be pushed towards a liquidation as a result.  Others that are continuing development at the same time as pursuing strategic alternatives might make for better reverse merger candidates, which have generally worked out well this year.  But I'm not a lawyer, and thus not entirely sure if this new rule means much to this part of the market since biotechs generally don't make outlandish SPAC-like revenue projections regulators are trying to stamp out.  If others have more intelligent thoughts, as usual please share.

My back of envelope liquidation math:

AVTE is pretty clean, there are minimal dilutive securities outstanding, minimal operating lease remaining and likely the IP value is worthless.  I still struggle a bit with estimating wind down expenses, feel free to use your own estimate, but at today's price, AVTE seems to be relatively cheap compared to my estimate of liquidation value.

If they do go the reverse merger route, there's some nice option value, interestingly RA Capital owns ~32% of AVTE and engineered a successful reverse merger at ELYM with Tenet Medicines that's seen the stock go up almost 200% since that deal was announced in April.

Disclosure: I own shares of AVTE 

Howard Hughes: PSH Considering a Take-Private Offer

Just a brief news post, I'll use the comment section to update my thoughts as this situation develops.  Last night, 8/6, Pershing Square (37.5% owner) updated their 13D in Howard Hughes (HHH) ($3.2B market cap) disclosing the following change:

“The Reporting Persons are and intend to continue evaluating the possibility of various potential alternatives with respect to their investment in the Issuer, including a possible transaction in which the Reporting Persons and/or one or more of their affiliates (either alone or together with one or more potential co-investors) may acquire all or substantially all of the shares of Common Stock in the Issuer not owned by them and their affiliates and in connection therewith take the Issuer private (a “take-private”). Jefferies LLC began advising the Reporting Persons on August 6, 2024 in connection with this evaluation. The Reporting Persons may discuss their evaluation and the potential alternatives, including a potential take-private, with one or more prospective co-investors, which discussions are expected to be conducted on a confidential basis. In the event the Reporting Persons explore such a potential transaction, there can be no guarantee that an agreement regarding such potential transaction can be reached and/or consummated.

I find the timing rather odd so soon after the spinoff of Seaport Entertainment (SEG), the spinoff was designed to remove some of the complexity and cash burning assets from Howard Hughes, return it to a pure play master planned community developer story.  In theory, HHH then might re-rate closer to its NAV of $100+.  If the plan all along was really to dump Seaport Entertainment, come in to scoop up HHH on the cheap, why is Pershing Square backstopping the SEG rights offering?  Just strange to spend $30 million in cash expense to spin SEG, backstop SEG, and then take HHH private so soon after.  Should have just bought it before the spin and save the legal bills.

Possibly this is the result of Ackman pulling the IPO of his closed end fund after selling a stake in his GP raising expectations for growth, he could need an investment vehicle or non-securities assets to redomicile Pershing Square Holdings Ltd to the United States and avoid being under the 1940 Act.

As for the potential price or structure, I'm prepared to be disappointed, NAV is likely well over $100 per share, but is unlikely to be realized in a transaction.  As a reminder for those newer to the company, back in 2019, Howard Hughes did run a full strategic process that failed to produce a buyer willing to pay the asking price.  Have things changed much since?  Brookfield (who notoriously don't pay fair value) was involved in the GGP restructuring and was an HHC shareholder for a while, but otherwise, Pershing Square might be the only buyer so I'm not getting my hopes up for a large premium.  The language in the 13D suggests a cash offer to go-private, that's preferable in mind than some convoluted structure where Howard Hughes shareholders trade discounted HHH shares for discounted PSHZF in some share-for-share merger.

Disclosure: I own shares of HHH and SEG 

HilleVax: Failed Vaccine Trial, Pre-SA, Trading Below Cash

HilleVax (HLVX) (~$85MM market cap) is a clinical-stage biotech that focuses on developing vaccines, their initial focus has been on a vaccine (HIL-214) designed to treat severe acute gastroenteritis events in infants.  On Monday, the stock crashed below cash as HilleVax announced their HIL-214 trial did not meet its primary endpoint and showed no clinical benefit observed across secondary endpoints.  Unfortunately, little other disclosures were made; there was no announcement of seeking strategic alternatives, no workforce reduction and no estimate of current cash.  The only mention of a go forward strategy was the line:

The Company plans to discontinue further development of HIL-214 in infants and is exploring the potential for continued development of HIL-214 and HIL-216, HilleVax’s Phase 1 ready vaccine candidate, in adults.

The piece about continuing to explore the potential development of HIL-216 is slightly concerning as broken biotechnology companies go.  HIL-214 (the failed vaccine) was licensed from Takeda (which owns 14% of HLVX), HIL-216 was a separate licensing agreement with a Chinese pharmaceutical company, Kangh, and thus management might make the argument the HIL-214 failure shouldn't cloud the potential for HIL-214.  However, as we've seen with many others, often the board along with their advisors determine that the cost of capital is too high to continue on their own and they'll likely decide to pursue strategic alternatives.

Running through my typical back of the envelope liquidation math:

HilleVax does have an ATM in place they leaned on pretty heavily in Q1 to raise approximately $15MM, if they continued into Q2 (which you can tell they did a bit based on the change in share count from 3/31 to 5/6 when the last 10-Q was published) it would only add upside to the math.  The risk is really in the burn rate going forward from here (also note, my Q2 number above is an estimate based on Q1) since we don't have any indication from management on their plan, my $50MM in a total guess but using some experience from the last dozen or so of these, hopefully it is directionally correct.

There could be two catalysts here, one on the announcement of strategic alternatives and another on the ultimate conclusion, but HLVX is a bit riskier than others that are further along in their wind down process.

Disclosure: I own shares of HLVX