Thursday, July 20, 2023

Pieris Pharmaceuticals: Broken Biotech, Quirky Accounting, Possible Value Nuggets

The dumpster diving continues, this one is a bit messier and riskier.

Pieris Pharmaceuticals (PIRS) is a clinical stage biotechnology company targeting treatments for respiratory diseases and cancer indications.  In late June, the company announced that their partner, AstraZeneca (AZN), in their lead product candidate, elarekibep, discontinued its Phase 2a trial and this week we found out that AstraZeneca also terminated their R&D collaboration agreement with Pieris.  Getting a read out on elarekibep's Phase 2a trial was the company's top strategic priority, so much so that they limited investment in their other assets, now without that partnership, the company is left in a difficult position where they are burning cash and can't raise capital in the current environment.

In comes the strategic alternatives announcement where they disclosed a 6/30 cash balance of $54.9MM and a reduction in workforce of 70%.  The CEO's (4.8% owner) comments were rather specific:

"We are pursuing strategic options across three main areas following the recent developments that have impacted our ability to independently advance our respiratory programs," commented President and CEO Stephen Yoder. "One track is accelerating partnering discussions of PRS-220 and PRS-400. A second focal area is diligently selecting the best possible development partner and deal structure to re-initiate clinical development of cinrebafusp alfa, our former lead immuno-oncology asset, which has shown 100% ORR in five patients in a HER2+ gastric cancer trial that was discontinued for strategic reasons. Third, we will explore whether our balance sheet, position as a public company, and other assets are of strategic value to a range of third parties.” Mr. Yoder continued, "While the challenges we recently experienced across our respiratory franchise have forced us to make very difficult personnel decisions, I cannot express enough gratitude to our departing colleagues for their dedication, collaborative spirit and integrity."

I appreciate the honesty of "position as a public company" being of strategic value, that points to a reverse merger being high on the list, which isn't ideal.

Pieris has a lot of partnerships, in addition to AstraZeneca, Pieris has current collaboration deals with Genentech (now part of Roche), Seagen, Boston Pharmaceuticals and Servier.  These are in addition to the assets mentioned in the above quote.  PRS-220 and PRS-400 are wholly owned and controlled, PRS-220 is currently in a Phase 1 trial in Australia and PRS-400 is still pre-clinical.  Plus they have cinrebafusp alfa (don't ask me to pronounce that) which previously had a successful Phase 1 study, they were initiating a Phase 2, but stopped to redirect corporate resources to the failed AstraZeneca program.  In PIRS's own words in the latest 10-Q, before the strategic alternatives announcement:

In July 2022, we received fast track designation from FDA for cinrebafusp alfa. In August 2022, we announced the decision to cease further enrollment in the two-arm, multicenter, open-label phase 2 study of cinrebafusp alfa as part of a strategic pipeline prioritization to focus our resources. Cinrebafusp alfa has demonstrated clinical benefit in phase 1 studies, including single agent activity in a monotherapy setting, and in the phase 2 study in HER2-expressing gastric cancer, giving the Company confidence in its broader 4-1BB franchise. In April 2023, clinical data showing an unconfirmed 100% objective response rate and promising emerging durability profile was presented at the American Association of Cancer research annual meeting. These data provided encouraging evidence of clinical activity for this program and we are considering a range of transaction to facilitate the continuation of cinrebafusp alfa, including an immuno-oncology focused spinout to traditional partnering transactions. 

Between the strategic alternatives press release and the language in the 10-Q, it doesn't appear Pieris is just beginning the process, but rather they've been looking for ways to raise capital all along by selling these three assets (because they needed cash to get to their previous mid-2024 AstraZeneca readout timeline), here there might be quicker asset sale catalyst than others in the broken biotech basket.

But as usual, I have no real thoughts on the science behind any of this, but among the partnerships and the wholly owned programs, there might be some value nuggets above and beyond the cash on the balance sheet.

The partnerships do create some quirky accounting. Pieris has received upfront payments in each of these deals for the licensing rights and some R&D collaboration on future development, they account for the upfront payment by creating a deferred revenue line item for the revenue received but where services haven't been performed (like R&D spend).  While this shows up as a liability, as you read through the lengthy description of each partnership, it appears (feel free to push back on this) like their partners can't claw back funds and its not a true debt or liability.

One could probably figure out the margin on this deferred revenue over time by doing some data mining, but with the 70% reduction in workforce, likely over indexed to the R&D team, it doesn't appear the company is too concerned about not being able to recognize this revenue or having it clawed back.

Running through my back of the envelope math, I come up with the following liquidation estimate (reminder, this is likely not a liquidation):
The shares outstanding number is a bit wonky, the company has preferred stock outstanding to their largest investor, Biotechnology Value Fund, that is convertible at 1,000 shares of common for each pref share.  I believe that's fully converted in the 93.6MM number that was reported in BVF's latest 13D.  But please check my math, I have low confidence in that number, but it's hopefully right within a few million shares.

In order to account for the deferred revenue, I put in 2 quarters of 30% R&D burn for ongoing partnership work.  While this one doesn't look super attractive on my typical math, with all the different irons in the fire, I'm guessing there is some value to their IP (might make an interesting CVR in a reverse merger).  I made this a small position this week.

Disclosure: I own shares of PIRS

Tuesday, July 18, 2023

MEI Pharma: Flawed Deal w/ INFI, Activist Target

MEI Pharma (MEIP) ($50MM market cap) is a fledgling clinical stage biotech that has a pending merger with Infinity Pharmaceuticals (INFI) ($18MM market cap), the merger is facing activist pushback from a shareholder group (14.8% stake) led by Cable Car Capital and Anson Advisors.  

Last November, MEI Pharma's development partner (Kyowa Kirin) on their primary drug candidate (Zandelisib) walked away after the FDA provided feedback on the need for a new clinical trial design that would be costly, the partnership ended and MEI Pharma laid off a good portion of their employees.  The company does have two additional programs, both in Phase 1b trials with expected readouts around year-end.  In February, in an attempt to restock their development pipeline, MEIP entered into a stock-for-stock merger agreement with INFI where INFI shareholders would end up with 42% of the new company (to be renamed Kimbrix Therapeutics - KMBX) despite only bringing $4MM in net cash to closing compared to $80MM from MEIP (using the minimum net cash amounts in the merger agreement).  INFI has one product in their pipeline, Eganelisib (to be used in combination with Keytruda) for patients with a type of skin cancer, that desperately needs capital to fund a phase 2 trial.  As usual, I have no view on the merits of the science, but it is clear why INFI wants to do this deal, without it, INFI will run out of cash quickly and be forced into a quick asset sale or liquidation.  From INFI's Q1 10-Q:

If the Merger is not completed, we will need to raise additional capital in order to successfully execute on our current operating plans to further the development of eganelisib. If the Merger is not completed, we will explore other plans to mitigate the conditions which raise substantial doubt about our ability to continue as a going concern. We consider one of the following courses of action to be the most likely alternatives if the Merger is not completed:
Pursue another strategic transaction. We may resume the process of evaluating a potential strategic transaction, including the sale of the company or its assets. Based on our prior assessment, we do not expect that we would have the necessary time or financial resources to pursue another strategic transaction like the proposed Merger.
Wind down the company. If the Merger does not close and we are unable to enter into another strategic transaction, our board of directors may conclude that it is in the best interest of stockholders to cease normal operations and wind down the company through bankruptcy or dissolution proceedings. In such case, there would be no assurances as to the amount or timing of available cash remaining, if any, to distribute to stockholders after paying our obligations and setting aside funds for reserves.

MEIP's intentions are less clear as the company trades well below cash.  The agreed stock-for-stock exchange ratio is 0.052245 MEIP shares for each share of INFI, at current prices, the spread is approximately 100%; the market has serious doubts this merger will be approved and/or significant concerns about INFI's value on a deal break.  Last week, the company postponed their shareholder meeting to July 23rd, presumably because they don't have enough votes, and this week, the activist group filed a preliminary consent solitication seeking to replace the entire board.  Despite having the support of the proxy advisory firms, this merger seems doomed to fail.  However, MEIP does have two readily apparent alternative options:

1) The activist group did previously submit a proposal to buy the shares they don't already own for "cash consideration of not less than $8.00 per share" plus a CVR for the disposition of MEIPs remaining clinical assets.  Management has rejected this proposal.

2)  As part of MEIP's strategic alternatives process, they did evaluate a liquidation, from the S-4 (6/2/23):

 Liquidation Value

The pro forma DCF analyses imply a significant premium to both MEI’s standalone DCF valuation range and current trading price. Torreya also compared the implied value of MEI as presented in the pro forma DCF analyses to the estimated liquidation value of MEI. To calculate the liquidation value, management provided its best estimate for the cash available to shareholders upon a hypothetical liquidation. Based on discussions with management, a hypothetical liquidation could occur in the second quarter of 2023, and after paying all wind-down obligations, a fully wound-down MEI entity would be left with $82.8 million of available cash. This would imply a liquidation value of $0.62 per share. Given that the pro forma DCF represents a significant premium of up to 134% to the liquidation value, and up to 52% in the scenarios with required equity fundraising, Torreya believes the DCF supports their opinion that the exchange ratio is fair to MEI shareholders.

That analysis was pre-reverse split, post-split the liquidation value per share would be $12.40.  Similar to MGTA, the liquidation analysis assumes an unrealistic scenario where the company could be wrapped up within a few months with minimal expenses.  A more realistic scenario is as follows:

To be a bit conservative, I'm using the minimum net cash amount required if the deal closed in July of $78MM.  This is likely too low, management's projected (versus the minimum to close the deal) net cash level as of 6/30 was $92.8MM, but MEIP is spending money on this merger and fighting off the activists, makes sense to be a little conservative.  And then MEIP would escrow $10MM for any contingencies and still be able to make an initial distribution of $10+, well above where the shares trade today.  I bought shares recently.

The biggest risk I see, even if the deal breaks and the activist group fails to remove the board, MEI Pharma could continue on with their two phase 1 product candidates while burning cash.

Other thoughts:

  • Infinity Pharmaceuticals (INFI) on a break might be interesting in a very speculative way.  The company doesn't have any real debt the liabilities, the related to sale of future royalties line item on the balance sheet is only payable on the receipt of any royalties to assets they've previously sold (and aren't Eganelisib).  Even in a potentially conflicted sale, MEIP did assign significantly more value to INFI's IP than the market.
  • Daniel Gold stepped down as CEO on 6/2 and was replaced by former General Counsel and COO David Urso, probably a non-event as INFI management would take over the reigns, but shows a little lack of confidence in seeing the deal through to completion.
  • Another probably nothing-burger, but MEIP and INFI do share a board member, Sujay Kango who orchestrated the original meeting between the two companies, he then excused himself according the background section in the S-4.

Disclosure: I own shares of MEIP

Wednesday, July 12, 2023

AVROBIO: Another Broken Biotech, Clinical Assets Potentially Worth Something

AVROBIO (AVRO) (~$76MM market cap) is the latest broken biotech that is trading below net cash to announce they are pursuing strategic alternatives.  AVROBIO is a clinical stage gene therapy company that sold one of their assets, AVRO's cystinosis gene therapy program, to Novartis in May for $87.5MM in cash, while retaining their HSC gene therapy for Gaucher program which they had previously announced intentions to initiate a Phase 2/3 trial later this year.  With the strategic alternatives announcement, AVROBIO announced they were pausing development efforts (and laying off 50% of their workforce), but the remaining IP assets likely have some positive value unlike others in the broken biotech basket.  If any readers have expertise in this area or insight into the potential value, please comment below.

Doing my quick back of the envelope math on what a liquidation scenario would like (to be clear, a liquidation wasn't mentioned as one of the options they were considering, but I still find it helpful):

The above is likely overly punitive in this scenario but I wanted to be consistent with other similar ideas.  As part of the asset sale, AVROBIO did sign on to provide support to Novartis for 12 months under a Separation Services Agreement, which might be why they still need to retain 50% of their workforce.  Again, their remaining IP likely still has value, if they can sell it for $10+ million, then we're looking at closer to $2.00 per share.  A reverse merger seems to always be the first option, with the market rallying, maybe those come back in vogue as well.

Disclosure: I own shares of AVRO

Tuesday, July 11, 2023

Vertical Capital Income: NAV Slashed Ahead of Carlyle Closing

Another day with egg on my face.  Today, Vertical Capital Income (VCIP) announced that ahead of their pending closing with Carlyle, the fund had liquidated most of their portfolio of residential mortgage whole loans (which was a condition of closing) for a 17% discount to their last reported NAV on 6/30, a full 11 days ago.  In their own words:

Based upon the expected proceeds from this sale, which resulted in aggregate proceeds lower than the book value of the combined assets due to the significant  sale needed to facilitate the Transaction, the Fund has adjusted its net asset value per share ("NAV") from $9.96 as last reported on June 30, 2023, to $8.27 as of today.

Huh?  Seems like there must be a typo or a word was deleted between significant and sale as there's an extra space in there.

The portfolio assets are residential mortgages, most of them are fixed rate, rates have moved slightly up in recent weeks but not enough to justify that discount.  The old management, Oakline Advisors, is kind of an odd shell that is probably checked out at this point and the board of trustees barely own any stock (0.18% as a group).  The incentives to execute a full competitive auction to get best execution just probably weren't there, someone got a steal.  Carlyle doesn't care either, they just want to be handed a bank account with cash in it, doesn't matter to them how much is in the bank account, they're going to go through with their tender and subsequent investment at the value of the cash account.  Not sure how management or the board of trustees can get away with having a shareholder vote a month ago to approve the transaction based on such a faulty mark.  But that's above my head.

What does it look like from here? 

Based on the press release, looks like the deal will close by the end of the month, this will all happen pretty quickly.  Shortly after the deal closes, Carlyle (from the management company, not the fund) will pay $0.96/share in cash to shareholders and then will tender for $25MM at NAV.  If we assume the market is fully pricing in the $0.96/share payment, everyone tenders in full, my math comes up with a proforma price of $7.26/share or 88% of NAV.  Please check my math.

The other CLO equity funds trade above NAV.  It will take time (6-12 months?) for Carlyle to ramp the portfolio up from zero, add some leverage, etc., to get to the point where it looks like one of other CLO equity funds.  The world could change in the meantime.  But Carlyle should be incentivized to make this trade close to NAV, they're one of the largest CLO managers, they want the captive CLO equity vehicle to grow that business.  In its current size, VCIF is too small to accomplish that, if it trades at or above NAV, Carlyle will be able to issue shares accretively and everyone is happy.

Disclosure: I own shares of VCIF