Since all my speculative M&A ideas seem to be falling flat on their face in the current market environment, it is time to go back to a broken biotech that appears set to liquidate. IMARA Inc (IMRA) ($43MM market cap) is a clinical stage biopharmaceutical company that announced back in April their decision to discontinue further development of their sickle sell disease treatment (IMR-687) and initiate a process to evaluate strategic options. The stock then crashed and traded at about half net current asset value. In 2022, that's nothing exciting on its face, there are lots of broken biotech stocks trading well below cash that it is difficult to parse between them for actionable ideas other than taking a basket approach.
But IMARA is interesting because today they announced via an 8-K (no press release) that they've sold IMR-687 to Cardurion Pharmaceuticals for $35MM, plus some contingent payments if things go well. Excluded from the asset sale is IMARA's cash pile:
Excluded Assets. Notwithstanding the provisions of Section 2.1, no right, title or interest is being sold, assigned, transferred, conveyed or delivered to Cardurion in or to (a) any property and assets of Imara that are not Purchased Assets (including any and all amounts of cash and cash equivalents of Imara), (b) any rights or claims of Imara under this Agreement or any of the Ancillary Agreements, (c) all assets of Imara exclusively related to IMR-261 and (d) all assets of any Third Party with whom Imara enters into a transaction on or after the Execution Date pursuant to which it becomes (or will become) an Affiliate of such Third Party (collectively, the “Excluded Assets”).
Prior to this surprise asset sale (I normally assume a broken biotech's IP is worthless), IMARA had a net current asset value at 6/30 of ~$60MM and 26.3 million shares outstanding, or $2.30/share in net cash. After the asset sale closes, that number jumps up to $3.65/share (pre-cash/expense burn), yet the shares only trade for $1.67 today. Hidden in the 8-K, the company mentions the below:
In connection with stockholder approval of the Asset Sale and the plan of liquidation, the Company intends to file a proxy statement and other materials with the SEC. Stockholders of the Company are advised to read the proxy statement and any other relevant documents filed with the SEC when they become available because those documents will contain important information about the Asset Sale and the plan of liquidation.
They did a few other things that hint this it for the company, they amended their retention plans to pay 50% out now on the execution of the asset sale and 50% on the closing of the asset sale, versus paying out on any subsequent reverse merger or other action. And it appears their advisors are done too. The current price seems far too cheap if the company is going to return their cash to shareholders, I bought some shares today.
Disclosure: I own shares of IMRA
timing? could full liquidation be on hold until if/when they get those contingent payments on IMR-687? I suppose they could pay out the bulk of the cash in the near term regardless.
ReplyDeleteThat's my thinking, but nothing they put out confirms it, we'll have to wait for the proxy statement. But typically you see a large distribution relatively early on in the liquidation and then a long tail, the contingent payments could be shoved in a liquidating trust, be non-traded like a CVR.
DeleteThis looks great, and relatively clean as these things go. Wish I'd checked in earlier today!
DeleteSpeaking of liquidations, suspicious and otherwise, have you looked at VNET? I have just started; lots of "interesting" stuff to them w/China aspect, power concerns, auditor & board changes recently, valuations way down in their industry. $8/share offer on the table; trading at ~4.58. Some people were pounding the table on their prospects at prices 4x higher, but I'd be happy if this deal went through.
Thanks, don't know VNET but I'll take a look at it. Although I'm probably one of those investors contributing to the wide Chinese arb spreads because I'm generally scared off.
DeleteNobody ever went bankrupt avoiding Chinese arb opportunities, that's for sure! Rightly or wrongly, I do have a little more confidence in this one just because consensus (in the few ponds I've looked) seems to be that it's a dire takeunder; would much rather have questionable ethics working for me, rather than against. Citi's advisory presence maybe comforting, though not sure it should be. BLCT was my one foray into this the past year; that worked out.
DeleteCan't remember whether I mentioned/whether you've looked at FSP: a slowly-liquidating office REIT that maybe has a little bit more of margin of safety now that they've switched to variable dividend. Uninspiring assets, but they are maybe doing the right thing and might be at half of NAV or less.
SQFT went to a variable dividend too (their old payout made no sense) and cratered as well; was in the weird two-way warrants, which sadly barely budged.
I’m holding FSP, are you? I remember someone mentioned it as a comp in the ONL thread, maybe it was you. Management are definitely *saying* the right things… but their capital allocation history is suboptimal.
DeleteCan’t hate a company trading at half of book, selling off assets for more than book value, and I like that it screens horribly.
Maybe MDC has a bad taste in his mouth after the ONL debacle.
What's the right cap rate for office? Back of envelope, looks like FSP is trading for a 9% cap rate? Interesting idea, don't love that the two sons of the CEO are executives, but they do appear to be saying/doing the right things as you both stated.
DeleteOffice cap is the zillion-dollar question, and I have no answer. Office space could be another no-capex-generates-eventual-shortages story (though I doubt it). I suspect a lot of people are watering their weeds, which may be a decent strategy for companies with so-so assets: sell the best at okay prices before the whole market downrates even more, hold onto the worst in case the whole market uprates. But liquidations and depressed gateway-asset cos are the only things I feel I have even a chance of understanding.
DeleteCongrats ADL, as usual, nice VNET call.
DeleteThanks. We'll see; I count no chickens!
DeleteAccording to the CBRE H1 2022 cap rate survey, which is of course already out of date as rate expectations and continued to rise, but provides useful context, for Suburban Class A office, cap rates for stabilized assets in Dallas were 5.75% - 6.75%, 6.50% - 7.25% in Houston, and 6.75% - 7.25% in Denver (just picking out some larger FSP markets). For Class A value-add, those ranges are 7.00% - 8.25% for Dallas, 8.50% - 9.50% for Houston, and 7.25% - 8.25% for Denver. I pegged FSP's Bloomfield sale around a 7% cap rate.
DeleteOffice REITs are optically cheap everywhere though so its hard to get excited by too many of them. Not sure this is the rational response but in the face of EVERYTHING looking cheap it's hard not to think that my view is the one that's wrong.
For example, City Office REIT, which is in similar-ish markets to FSP (but better IMO) and has similar suburban-focused assets (but i'd argue better), also trades at a 9 cap / $205 PSF. If you believe that management didn't overpay for their 3 brand-new post-COVID trades, the "legacy" portfolio, which they bought for ~7% cap in 2015-2018 trades at a ~13% cap / $125 PSF (!!). A tenant exercised their purchase option in Dallas at a 6.1% cap rate, they are using the proceeds to buy back shares.
Feels cheap, right? But then you have Kilroy (KRC) - West Coast Gateway, youngest public portfolio - trading at a 7.5% cap / $630 PSF... And that values the entire balance of their construction in progress development pipeline at zero. If you think that's worth the capital they've put in, the operating portfolio is trading at a 9.4% cap / $450 PSF. Oh and thrown in there are 1,000 multifamily units in LA / San Diego - they don't break out their MF NOI but it would be worth <4% cap...
Paramount Group (PGRE) - trades at an 8% cap as well / $540 PSF for a 70% NYC / 30% SF portfolio.
Douglas Emmett (DEI), whose West LA portfolio is in arguably the most supply-constrained sub-markets in the US (rivalled only by maybe West End London in the world IMO) trades at a 6.8% cap. Did I mention that ~20% of their NOI is multi-family in West LA and Honolulu? If you value that at a 4.25% cap / $580k per unit, the office portfolio trades for an 8% cap / $375 PSF.
Thanks for coming to my TED Talk / enduring my rant!
Thanks RAV, your thoughts are always welcome, appreciate the comment.
DeleteThanks, RAV! I did a similar but I'm sure less exhaustive survey and basically came to the conclusion that I don't know what's right in terms of valuation; any investment thesis would have to do with unpriced-in capital returns and sentiment change. So I have bought calls in a few things but am not making it a major theme because I suspect that even if I devoted a lot of time to the office market I'd still end up saying "I don't know."
DeleteRAV, I forgot to thank you for your comment, I really appreciate it. I bailed out of FSP at a loss 9/27 to buy some GTXAP, TWTR and later some stinker DMS, and didn't get back into office anything, but I'm somewhat tempted based on sentiment once again.
DeleteThere's probably an argument to be made to pay up for a quality portfolio, if the sector is going to go through some pain... The performance and valuations of class A malls vs every other kind of mall over the last decade or so being the mental model that pops into my head.
But that would mean I was making a macro call or thinking I knew the market better than other folks, and I really have no reason to think I've got any edge in valuing office properties.
Further, I've found that its way easier for me to be very, very wrong valuing an "asset play" when the business that employs a high degree of financial leverage, so maybe I just stay out of the office game.
Not an expert on the space but an aspect of ONL I like is that the total debt is pretty close to the contracted cashflows over the next few years and it has got the small-vs-remainco-broken-spinoff-in-a-hated-industry dynamic going. Seems like they have a reasonable runway to reinvest cash into tenant improvements on new leases without changing the leverage picture much.
DeleteLegendary.
ReplyDeleteI got in around 2.1 and managed to sell 150 5$ 4/21/23 covered calls for .25 a pop, which I think is probably a rather optimistic price for the call buyer, given the certain cash is worth 3.75 at best, and there’s a possibility of liquidation prior to call expiry.
That's great. I didn't even think to check if there were options available on this, great call.
DeleteThank you for this call. I looked into it yesterday after your post and the math/logic was very clear to me and I purchased some shares (although it spiked soon after so I had to stop). As an ex-lawyer, I would just have to caution w/r/t the "plan of liquidation" language; it's entirely possible that the lawyer used a precedent document (lawyers do this for 99% of docs) and forgot to take out the "plan of liquidation" language because of sloppy work. I've noticed a typo so the document isn't perfect. But the retention amendment is good enough proof for me that the Company will attempt to liquidate after selling their assets.
ReplyDeleteThanks, that is a good word of caution. Could be boilerplate language.
Deleteregarding liquidation, the following from the latest 10q: "On April 12, 2022, the Company’s Board of Directors approved a reduction of the Company’s workforce (the “Workforce Reduction”) by approximately 83% across all areas of the Company, to a total of six remaining full-time employees" - i.e. make of that what you will.
DeleteHave you looked at Metacrine (MTCR, $20 mln mkt cap)? All stock deal, 25% above net cash guided to be $26 mln at closing. (BML Cap is in on this one as well.)
DeleteOn MTCR, I have yes, very interested in it. Usually I would stop reading about a biotech merger after seeing it was a stock-for-stock deal, but here the consideration isn't finalized until the closing based on the 10 day WVAP which makes it almost like a exchange offer or something like that. You get a 25% discount (there is a collar which might make it less) on EQ, so then the question becomes what's the value of EQ post merger and how much will the selling pressure from MTCR shareholders drag it down? And why would EQ pay a 25% premium to cash versus selling their own shares in a secondary? I'm not sold on it yet, but close.
Delete(I should add I'm long MTCR). All good points, which I agree with. My best guess is that EQ gets to refinance debt at more favorable terms than what they could get right now. Their existing $10 mln facility begins to amortize principal in the Q4. By retiring their existing facility they keep MTCR's $15 mln (which includes an interest only extension) with access to $10 mln more and get to keep $5 mln more in cash upfront with the debt swap. It's more cash up front to keep the lights on which costs them a premium in "non-cash" stock. Also, maybe, they think that MTCR's IP is worth something (similar to IMRA) even though the program is turned off.
DeleteThanks, that makes a lot of sense too.
Deletevery interesting MTCR spread, thanks for thoughts. Will MTCR shareholders get a view at the EQ Lupus data before having to vote on the transaction? I'm struggling to see what the downside case here would be? EQ sell-off in the window between vote and share delivery? How long of a time period is that typically?
DeleteEQ is below the collar range, so I believe you also have some market exposure to EQ. But yeah, I'm sort of thinking about it like a split off transaction where you have to worry about the selling pressure once EQ shares end up in former MTCR shareholders accounts.
Deleteagree, seems interesting since you have some ~20-25% cushion in EQ share price to break-even and if EQ falls out of bed before the vote, can just walk away from deal. But to your point, will have 35% increase in share count, so that is no joke. skew seems good but probably can't get too big
DeleteIs Imara agreeing to taking some of the sale proceeds in the form of milestone payments consistent with a management/board expectation that a liquidation is likely? Would have thought that could raise liquidation costs meaningfully by creating a need to keep the company alive longer.
ReplyDeleteMy guess is they'll either create a CVR to for those milestone payments, or just stick them into a liquidating trust that will be non-traded like other liquidations with a long tail. Shouldn't prevent them from distributing a large portion of the cash before then.
DeleteThanks a lot for sharing this idea.
ReplyDeleteWould be curious how you think about what I view as the two key risks here:
1. Cardurion sale / deal risk - this is still subject to a shareholder vote / with outs in the contract.
I admit this seems like a low / small risk.
Mitigants seem to be that: 1) this appears to be a clean way to exit an underperforming drug (given results of the clinical trials) and board seems to be supportive (given approval of deal and retention package to CEO and CFO for getting deal done).
Board members are also biopharma investors that own a substantial portion of the stock - so they may be incentivized to maximize their value recovery here.
2. What is the risk the management team keeps this thing running (rather than liquidating) just to continue to pay G&A/salaries? Or try to do a moon-shot deal? In other words, capital allocation risk.
This one concerns me the most and is where you may not get to realize the net asset value in the company.
Incentives for the CEO to keep this thing running or go for a moon-shot: he earns $750k in cash a year and owns a meaningful amount of out of the option stock options.
Thanks again.
#1 is certainly a risk, hard to handicap it for me.
Delete#2 I still think this is a liquidation, if you read the Asset Purchase Agreement there are several non-boilerplate mentions of Permitted Dissolution Action which leads me to believe that the "plan of liquidation" language is in the 8-K is intentional. That would be a big legal oversight too.
Interesting - thanks for the color / follow-up.
DeleteHolding $IMRA from when it was a net-net and continue to hold. Bought more when the sale was announced. Yet another biotech with a pipeline not worth negative amounts of money.
ReplyDeleteThe price is still fairly low.
Looking for more biotech net-nets with strategic alternatives announced all the time.
It is a theme I like too, so if you have any you particularly like, please share!
Delete$SESN, $ABIO, $PCMB (not as interesting for various reasons). Are a few I own.
DeleteThanks, I'll add those to my watchlist.
DeleteUgh. SESN with a nice transaction that demonstrates what I don't want to see happening with IMRA. $150m in cash on the balance sheet but they do a nice reverse merger where (no doubt) most of the value is generated on the other side of the transaction. Shares down ~16% premarket.
DeleteI think (could be wrong) the setup with SESN was a little different, still had "late-stage" assets they believed in but needed a partner to come in and inject some more cash to get them over the finish line.
DeleteYeah, agreed. I don't think a liquidation was really in the cards here. Still, there's probably a non-zero chance that Imara also pulls off something like this. Which is the only thing that prevents me from sizing it larger. But probably also the only thing that keeps the price as low as it is ..
Delete$Sesn deal is terrible. Can’t believe they had 42 bids and they picked this one. A good percentage of the time in even these stock for stock deals the target company will still pop huge enough for you to exit with a decent gain.
DeleteThanks for the post. Curious if you guys ever took a look at CBIO? Seems kind of interesting at this price.
ReplyDeleteIs the basic math $2.06/share initial liquidation proceeds estimate, minus the $1.43/share special dividend, gets you to $0.63/share versus trading at $0.50/share? Decent spread, but then timing and illiquidity.
DeleteNot a liquidation yet, but another one I'd add here is SIOX. I don't think they owned their IP and most of their NOLs are Swiss, where taxes are low, so they're probably worth much either.
DeleteYup. $2.06, and maybe some potential for upside. "We look forward to making an initial distribution of $45.0 million as soon as practicable, pending resolution of the stockholder litigation. In the meantime, we will continue to pursue the monetization of the Company’s remaining assets, which we hope will generate additional value for our stockholders.”"
Deletecbio wild card is their last remaining asset. could be 20-30m to right buyer. could be a zero in this environment too.
ReplyDeleteInteresting, thanks.
Deletehttps://www.sec.gov/Archives/edgar/data/1672619/000119312522250252/d370237dprem14a.htm
ReplyDeletePrelim proxy out, maybe "Plan of Liquidation" was just a legal/boilerplate mistake. No real mention of it in my first glance through the proxy.
Liquidation is on the table still as a high likelihood. Could be a dividend then reverse merger.
DeleteUnlike the number in a proxy, that $2.06, I would not take too seriously. The statement was made when an activist was accosting them. I won't be surprised if that is a very optimistic number. I am not saying that it is not a valid number, just that one needs to be a bit cautious.
ReplyDeleteif you are a holder and want them to liquidate, reach out and tell them so. info@imaratx.com https://imaratx.com/contact-us/
ReplyDeleteHas anyone here been in touch with IMRA management? I just reached out to see if I can get some questions answered.
ReplyDeleteThe Asset Purchase Agreement leaves many important items undefined with [**] standing in. Do you think these are intentional redactions?
Basic things like "initial support period" and "Milestone Event" are left undefined. It makes it hard to know when to expect payments.
I reached out on Friday, haven't heard back.
DeleteI saw that they terminated their lease as of August. (Bullish). But...they still show it on the website?
DeleteMaybe whoever did the website was sacked. I'll give them a ring.
I haven’t done the math, but this merger seems like a good outcome. Better capitalized
ReplyDeleteI'm disappointed that they chose this route, hasn't been the market where reverse mergers get a pop. So I hope the market agrees with you.
DeleteSo far, so good.
DeleteOne positive, all the Enliven investors (plus new ones) are participating in the PIPE. Many of them are brand name biotech investors. Could provide some support to the shares for those of us that want to exit.
DeleteI decided to exit AH at $3.50 since I can't fully value Enliven's assets and the liquidation story has changed. Thanks MDC for sharing this situation, I'm not thrilled with what mgmt chose to do, but the setup was fantastic and will still exit with a tidy return. Much appreciated!
DeleteOh wow, didn't realize it spiked that high, great exit. We'll see what tomorrow brings, but I'll likely follow and sell.
DeleteNice investment case of Imara that materialized in the end - even though not via a liquidation. The value wouldnt have been much higher anyways than 3.5-3.6 conservatively speaking so everyone selling around 3.4-3.6 made the best possible out of the initial case without taking further development risks of the Enliven. Thanks all for the case and the vivid discussions - up to the next one!
DeleteGreat point, we got the liquidation value in the end. I sold this morning. Thanks everyone for the lively discussion, as I always say, maybe uniquely on the internet, I appreciation my comment section.
DeleteThanks for originally flagging this one! It's extra gratifying that this will help push forward useful research too, great that management could do this much better than liquidation.
DeleteThanks MDC!!! Appreciate you!!
ReplyDeleteHave you looked at ANGN? Similar situation
I hadn't looked at that one, does rhyme with the theme. Appreciate the idea.
DeleteI guess we sold too early! Has anyone done valuation work on this new IMRA?
ReplyDeleteWhat is there to do? By far the most important part of the puzzle is the value of Enliven and there is zero public information about it.
DeleteMDC, great call on SIOX. They are liquidating. Even after the run up to 40 cents, it seems cheap. They have a book value of 48 mil as of Sept '22. Don't know how many employees are left but doesn't seem like there are any significant liabilities like leases. Since RSU's also seem to have been accounted for. Assuming they can distribute between 40 and 45 million to share holders, with share count around 74 million, it would bring the distribution to 54 cents to 60 cents. What is your take? Am I missing something big?
ReplyDeleteThanks. This one I didn't think it made sense for a reverse merger since most of the NOLs were Swiss (where taxes are low) and they gave up any IP they had. I think this should make it a pretty easy liquidation? Your range is probably right. I have a small tracking position, might dig in today and write-up a post but no promises.
Delete