Year End 2024 Portfolio Review

Welp, it was bound to happen, but I underperformed the broad U.S. market by an embarrassing amount this year.  My portfolio lost -6.39% compared to the S&P 500's 25.02% gain in 2024, however my lifetime-to-date IRR is still hanging in just above 20%.

I spent the last couple weeks going back through my portfolio, reaffirming the thesis for each, below are the elevator style pitches for my current holdings (didn't have enough time to discuss closed positions, if you have any questions on those, feel free to comment):

Rumored M&A:

Coincidentally, these are all land bank companies where the strategic review processes are getting a little long in the tooth, creating varying levels of anxiety in each situation.

• CKX Lands (CKX) is an illiquid microcap that owns land in Louisiana that it primarily monetizes via oil and gas royalties.  About 500 days ago, the company announced a review of strategic alternatives and this past spring updated CKX had received interest from multiple parties, but that was close to 9 months ago now.  A commenter posted on 12/4, an email from Gray Stream (Chairman & President, who is working on an expired contract) confirming that CKX Lands is not involved in the Project Cypress sequestration effort, but also that strategic alternatives "efforts and discussions are still ongoing in earnest.  We hope to have a material update soon."  I do worry that a no deal announcement will significantly hurt the stock, it trades very little on a daily basis, is semi-popular in small cap value circles and a no-deal would signal a dead money stock for years to come.  If it doesn't get sold after this long process, when will it?  Let's hope something is in the works and announced soon.  My best guess is still something gets done, but my expectations are for a lower premium, something in the $15-17/share range.
• Howard Hughes Holdings (HHH) is now a pure-play master planned community real estate developer following the spinoff of Seaport Entertainment Group (SEG).  A week after the spinoff, Bill Ackman's Pershing Square Holdings (37.5% owner) updated their 13D to state their interest in taking the company private.  It's five months later, we don't have much of an update, Bill is busy discussing politics and his investments in Fannie and Freddie on Twitter, which is a bit concerning.  I thought something would be done by now (had some December call options that unfortunately expired worthless, still have a few January calls that are out of money), there's not going to be another bidder for the company that can pay a full price, management would be best to take a fair deal from Pershing Square versus continuing to trade at a discount into eternity.  My current best guess, they come to a deal for $90-95/share sometime in January.
• Limoneira (LMNR) is a lemon grower and packager that is increasingly moving acreage to avocados, but that will be a several year transition.  Limoneira also has a real estate development arm which has a JV developing homesites from their former agricultural land.  13 months ago, the company announced they were pursuing strategic alternatives, we haven't seen too much of an update, other than mentions of "significant interest".  In August, the company added a new incentive agreement with senior management to provide bonuses for a transaction over $28/share ("Base Share Price") with escalators up to $40/share ("Target Share Price"), and then even greater escalators above that.  Shares trade today below $25/share after the stock dipped a bit following 2025 guidance disappointed a bit, but the long term story seems in place.  I'm still anticipating a deal above $28/share, my only concerns is it could be a complicated deal (resulting in an attractive headline premium, but the market valuing it at a discount), management has mentioned exploring OpCo/PropCo structures as part of this process.

Spinoffs:

• Enhabit Inc (EHAB) is a mid-2022 spinoff of Encompass Health (EHC), like many spins, Enhabit was spun with too much debt and a management team that didn't appear ready for life as a public company.  They stumbled right out of the gate and attracted activist investors who pushed for a sale.  No sale appears on the horizon near term (insurers like UHC were previously buyers, but they're tangled up in other issues right now), but at ~8.5x EBITDA (when similar comps have been sold for mid-teens multiples or higher) it seems relatively cheap.  The home health and hospice sector should have similar tailwinds to senior housing with the aging population, but home health has the added benefit of being more cost effective and keeping seniors in their homes.  Enhabit has a lot of leverage, 4.8x EBITDA, would like to see that come down to more tolerable levels for public markets, this isn't my highest conviction idea, but does seem like a reasonable setup to outperform from the initial spin disappointment.
• Inhibrx Biosciences (INBX) is the spinoff of Inhibrx Inc, basically a restart of the development engine after selling INBRX-101 to Sanofi.  New INBX has two ongoing trials, the further along one, a registration-enabling phase trial for INBXR-109 should have a data readout in mid-2025.  I'm just along for the ride, no thoughts on the pipeline, just letting the spin play out over 1-2 years post Sanofi transaction.
• Seaport Entertainment Group (SEG) is the Howard Hughes spin, they did complete their rights offering and now we look forward to their first earnings call in March which will be their management's first chance to tell their story to the market.  There's a lot of wood to chop here, yes, SEG owns a full Manhattan block, but its extremely underutilized (seen plenty of pictures on Twitter of it near empty).  I do like the management team that was brought in to run SEG, but also cautious on the speed of change, my best guess is a mixed use tower at 250 Water in the Seaport District is the first development project undertaken.  With two mega resorts opening this year and a new casino/stadium complex being constructed at the former Las Vegas Tropicana site, assigning any value to the Fashion Show air rights seems a ways away.

Broken Biotech Basket:

• On 11/8/24, AlloVir (ALVR) announced a reverse merger agreement with privately held Kalaris Therapeutics, this proposed merger includes no oversubscribed PIPE, special dividend or CVR to current AlloVir shareholders which are features of deals that have recently gotten a post announcement pop.  Instead, AlloVir will be bring essentially all of the proforma cash ($100MM) to closing and receive 25% of the company, putting a fairly lofty valuation on Kalaris, which only just commenced enrollment in a Phase 1 trial.  $100MM cash on 115.5 million ALVR shares is roughly $0.86/share, despite that, shares currently trade for $0.42/share.  ALVR shareholders owning 29.4% have already pledged their support for the merger, the deal is expected to close in Q1, voting this one down might be difficult, but it seems too cheap to sell now.  There might be some tax loss selling happening and once the deal closes, maybe we get some uplift from continued shareholder rotation as the story gets out.  But now very low conviction.
• On 10/31/24, Aerovate Therapeutics (AVTE) announced a reverse merger agreement with privately held Jade Biosciences, unlike AlloVir, this merger includes a special dividend of virtually all of AVTE's remaining cash at close (estimated at $65MM or $2.25/share, but that might be conservative) and a large $300MM oversubscribed PIPE.  Post closing, AVTE shareholders will only own 1.6% of the combined company.  This is a liquidation that's structured as a reverse merger, the best kind of outcome.  The plan is to hold through the special dividend / merger and then exit shortly after as those that didn't get their full allocation in the PIPE might bid up the shares.
• ESSA Pharma (EPIX) recently announced the termination of their License Agreement, further solidifying their pursuit of a liquidation or reverse merger.  Other than that, nothing has really changed since my write-up in early November, the spread between my estimated liquidation value of ~$2.15/share is about 20% above where the $1.79/share it trades today.  Tang Capital and BML Capital are both just under 10% holders here, the cash pile here is a healthy $100+MM, this is probably my current favorite in the basket.
• Ikena Oncology (IKNA) snuck in a reverse merger transaction before year end, announcing on 12/23 a deal with Inmagene Biopharmaceuticals that includes a CVR plus an oversubscribed $75MM PIPE from both current IKNA investors and new names.  This reverse merger hasn't been well received by the market, I'm a bit surprised by that given the PIPE, but there will be limited return of capital here (maybe a token special dividend if the cash at close is above $100MM) compared to AVTE.  The PIPE values IKNA at approximately $120MM or $2.40+/share, despite that, shares currently trade at $1.64/share.  The deal is targeted to close in mid-2025, I would anticipate the price will rally a bit from here into the close as the shareholder registry turns over.
• Nothing has really changed at Athira Pharma (ATHA) since my early November write-up, shares are down mid-single digits since, it might be a bit more attractive now as we wait for a potential deal with 14% holder Perceptive Advisors.  This one is a little more risky, rather than waiving the white flag following a failed clinical trial, Athira has stated they're doubling down on their development pipeline.  Shares trade at $0.59/share, a wide discount to my estimated liquidation value of $0.86/share.
• HilleVax (HLVX) reported a failed clinical trial in July along with a vague intention to "explore the potential for continued development" of their pre-clinical assets, but on 12/5, we received further validation this situation is a regular-way broken biotech seeking strategic alternatives with the announcement HLVX was doing a 70% reduction in force, including three executive officers.  There's still work to do before this is a clean shell, cash burn is higher than I expected as R&D expenses didn't come down much in Q3 despite halting the trial in early July,  HLVX also still has yet to terminate their significant operating lease.  Shares still trade at a discount to my updated liquidation value of approximately ~$2.50/share.

REITs:

• ACRES Commercial Realty Corp's (ACR) share price performed surprisingly well (+60%) this year despite the slow motion train wreck that is commercial real estate.  ACR had a few foreclosures this year, but mostly sidestepped the worst of it, although 23% of their loan portfolio is rated 4 or 5, the quality loans can refinance out of their bridge loans but the junk can't.  This commercial mREIT is essentially in runoff at the moment, they haven't had much if any new origination this year and their CRE CLOs are outside of the reinvestment period.  They do have a handful of owned real estate positions where they've guided to monetizing at a profit over the next several quarters in order to soak up their tax assets.  Once the tax assets are exhausted, the plan is to turn the dividend back on, hopefully re-rate from ~$16/share somewhere closer to ~80% of the $27.92/share book value.  That's possibly a 2025 story.
• Creative Media & Community Trust Corp (CMCT) is a total dumpster fire caught up in a death spiral of preferred redemptions into common stock that then get puked out, which encourages others to puke it for the tax loss.  On the positive side, CMCT was able to refinance their hotel property which is one of the several assets they plan to put asset level debt on to repay their non-compliant credit facility.  We'll see if tax loss season ending will cause the stock to recover, from the action on 12/31, that might be the case, but a bit too early to tell.  My current plan is to own this a little longer than just for a January effect bounce, think the real juice could be if they are able to stabilize and show progress in the strategic shift to multi-family.

Miscellaneous Special Sits:

• Enzo Biochem Inc (ENZ) is a two-step liquidation, after selling their clinical lab division to Labcorp in mid-2023, they're left with a subscale unprofitable life sciences division.  The market seems to be losing in faith that ENZ will actually be able to monetize their remaining division and return cash to shareholders, in mid-December, ENZ released their fiscal Q1 results disclosing a 20% revenue decline due to "general continued headwinds in the life sciences tools space" without much other detail on the ongoing strategic process, which wasn't confidence inspiring.  On the positive side, ENZ did appoint Jon Couchman to the Board, he has previous liquidation experience.  Following my experience with PSFW, a similar two-step liquidation that took a long time to fully play out, I'm willing to give this one some space too.
• HomeStreet (HMST) is a zombie bank, their balance sheet is upside down as a result of the Fed taking rates up to combat inflation.  HomeStreet had a deal with FirstSun Capital Bancorp (FSUN) to be sold in a stock-for-stock deal that valued HMST at approximately $15/share, but regulators balked at the deal, especially as FSUN forum shopped their regulatory/charter structure from the OCC to a Texas state charter.  The primary concern of Texas regulators was HMST's commercial real estate exposure (they have a significant slug of Class B/C multifamily loans in the LA area, regulators have been spooked on that market since NYCB had their struggles this past spring).  The FirstSun deal broke, HMST has responded by selling $990MM of their commercial real estate portfolio (about 20% of the CRE exposure) to Bank of America for 92 cents on the dollar, which is 4 cents lower than where they've marked the fair value of their overall loans held for investment on their balance sheet.  The longer HMST stays standalone, the worse, hopefully they get pushed into the arms of a new merger dance partner here soon at a similar ~$15/share valuation.  Many are predicting 2025 as the year of regional bank mergers, hopefully HMST is one of the first taken out.

Legacy Positions:

• While significant holdings for me, Green Brick Partners (GRBK), Mereo BioPharma Group PLC (MREO) and to a lesser extent Par Pacific Holdings (PARR), these legacy positions are not really active actionable ideas in my mind.  Happy to chat with others fellow investors, but for now I'm just letting these investments play out and defer capital gains taxes.

Performance Attribution:

Current Watchlist:

As always, interested in hearing new ideas, please post in the comments, in the spirit of sharing, here's my current watchlist with a few notes on each.  The blue are the busted up biotechs that I've been looking at, but didn't make it into the portfolio yet for one reason or another.

Current Portfolio:

Additionally, I own a fifteen or so CVRs and non-tradeable liquidation stubs, most of these are marked at zero.  I withdrew funds from this account in the second half of the year to reallocate elsewhere in my personal balance sheet.  Despite the tough year, still love markets and discussing investment ideas with others.  Thank you as always for reading and happy new year.

Disclosure: Table above is my taxable account, I don't manage outside money and this is only a portion of my overall assets.  As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.

Howard Hughes: Updated Thoughts After Investor Day

I wanted to bring Howard Hughes Holdings (HHH, fka HHC) ($4.1B market cap) back up front as they just had their investor day this past Monday where they laid out a $118/share NAV and its been 3.5 months since Pershing Square filed their 13D without much of an update.  I believe it is likely that Ackman takes it private at somewhere between $95-$105/share.

Below are management's NAV slides:

Note the use of the phrase "conservative sum of the parts" in the second bullet. I'm sure lawyers took a close look at this deck before it was published and the company will need to justify a discount to this number in a private sale transaction (which they can and will, not suggesting it'll go for $118).

The bulk of the NAV is in the land, which is a little squishy and unlikely to be valued properly by public market investors, it's not often that land banks trade at NAV.  However, as the below slide shows, most of their land value is located in Summerlin outside of Las Vegas, where land sales to homebuilders have been strong for some time and the MPC long reached critical mass.

The nascent MPC of Floreo in Arizona, where the land value is least stress tested, is only 7% of the MPC NAV.  Additionally, mortgage rates remain stubbornly high despite the Fed starting to ease short term interest rates, it doesn't seem like we'll get a quick snap back to where existing home inventory jumps back to normal levels in the near term.  Leaving the only game in town new inventory.

However, if you look under the hood (below), about 1/3rd of the MPC NAV is commercial acreage:

Howard Hughes has noticeably pulled back on development in last year or two due to near zero office demand and increased construction costs, but there's been minimal change to the asset value of their commercial land real estate, that doesn't quite add up.  Additionally, they've only just started their first office building in Bridgeland, commercial properties are years (decade?) off in Teravalis/Floreo, it's hard to square that math in my head even with healthy discount rates.

They also bumped up their Hawaii (and now also Woodlands) condo price per square foot up significantly as they've recently announced the last two buildings (located near the beach, would replace part of the land occupied by their sales center at the IBM building) as ultra luxury.  Just a few years ago, this price per square foot would seem unattainable, high rise development is a risky endeavor, keeping the discount rate constant while bumping up the price 60% doesn't immediately scream "conservative sum-of-the-parts" valuation to me.  But they've done extraordinarily well in Ward Village, breezed through several potential economic headwinds since development there started over 10 years ago.

For the operating assets, they do appear to be on the conservative side.

Their office assets are primarily located in growing desirable areas without some of the headaches of large gateway markets and their occupancy levels show that at 88%.  The lagger in their portfolio is Hughes Landing in the Woodlands, they're moving their headquarters once again, this time just inside the MPC from the Town Center to Hughes Landing in order to focus on it (there's also a luxury multi-family asset being built there) and free up the premium space they previously occupied in the OXY buildings.

So net-net, operating properties are probably a little undervalued, the commercial land and condos slightly overvalued given the timing of those cash flows and risks involved in development.  We know that Ackman can't pay $118/share, he's a fiduciary to his own investors who would be backing the deal, somewhere between $95-$105 seems right to me (no hard math, just a guess).  He owns 37.5% of the company, while there's likely a process ongoing to identify other bidders, its hard to imagine another bidder willing to pay more (otherwise they would have back in 2018-2019 when then HHC ran a similar strategic alternatives process, presumably without Ackman has a bidder since he didn't update his 13D at the time).

Ackman has an attachment to Howard Hughes (he's essentially the company's founder and has added to his ownership stake along the way, during Covid and through a 2022 tender offer more recently) that I think the market is underestimating, his Forbes cover is often mocked, but the byline to the 2015 article is about how he's going to turn Howard Hughes (not Pershing Square) into his version of Berkshire Hathaway.  He's been an outspoken supporter of President-Elect Donald Trump and Republicans in the 2024 election, with the red sweep he's likely confident in the economic climate going forward, possibly bulled up on animal spirits wanting to secure a big win.

In his fund's quarterly update call yesterday, he said, "..we don't think that Howard Hughes is going to develop a real franchise today as a public company."  He's really the only one who can change that with his ownership level and the structure of HHH, he'll take it private within 1-2 months and do well with it.

Disclosure: I own shares of HHH and some calls on HHH

Creative Media & Community Trust: Forced Selling After Preferred Conversion to Equity, Highly Speculative, Option-Like

Creative Media & Community Trust (CMCT, fka CIM Commercial Trust) (~$20MM market cap) is a tire fire of a REIT (externally managed by CIM Group) that owns a mixture of traditional office, "creative office", multi-family and a hotel, the majority of which are located in California.  I owned CMCT briefly back in 2021 as it was the target of an activist campaign, CIM Group eventually thwarted the activist by doing a dilutive rights offering (and backstopping the rights offering) at $9.25 (the shares trade for $0.23/share today) to cement voting control.  After the rights in 2021, management owned 45+% of the company.

As most know, the commercial real estate market has struggled significantly as the result of slow return-to-office trends, higher for longer interest rates and some location specific issues to the Oakland/Bay Area market where several of CMCT's chunkier assets are located.  

Here's a quick snapshot of the company's assets:

CIM Group had an ongoing preferred stock issuance program going at CMCT, it was a way to increase assets (and thus external management fees) without issuing common stock at below NAV and CIM also had an affiliate act as a placement agent to collect additional fees.  As the real estate asset value dropped at CMCT and preferred stock issuance didn't slow (CMCT was issuing preferred stock as recent as earlier this year), the common stock felt the pain and was upside down.  Additionally, their bank credit facility is no longer in compliance with its financial covenants.

Earlier this year, CMCT tried to sell a handful of assets in order to raise cash and payoff the credit facility, but the buyer wasn't able to close:

CMCT recently explored the sale of several high-quality assets to improve its common equity ratio. The offer CMCT received reflected what the Company believed to be the fair value of these assets, but the buyer was unable to close. As a result of this and the recent decline in interest rates, CMCT has decided to shift its focus to refinancing rather than a sale of these assets.

CMCT's preferred stock is convertible into common shares at the option of the issuer. Subsequentially to the failed asset sale, in September, CMCT decided to "improve its common equity ratio" by converting some preferred stock to common:

As part of its program to improve its common equity ratio, the Company is suspending its Series A1 Preferred Stock offering and announcing the redemption of approximately 2.2 million shares of Series A Preferred Stock and approximately 2.6 million shares of Series A1 Preferred Stock, with the redemption price to be paid in shares of common stock in accordance with the terms of the Series A Preferred Stock and Series A1 Preferred Stock, respectively. 

In total, they redeemed $118.9MM (~$345MM is remaining) of preferred stock with 60,526,804 common shares, or at a price of $1.96/share.

Preferred stock holders (probably RIA's in the HNW channel) naturally puked the stock out (they only had 22.8 million shares outstanding before the preferred conversion, nearly 4x'ing the shares outstanding to motivated sellers), when the price dropped due to the forced selling, it created tax loss selling and further spiraling down the drain to $0.23/share where it trades today.  The new plan, to refinance at the property level and repay the credit facility is outlined in the most recent 10-Q:

Management plans to address any possible future event of default under the 2022 Credit Facility by entering into new financing arrangements to repay amounts outstanding under the 2022 Credit Facility. The Company is in the process of obtaining refinancing for the Company’s hotel in Sacramento, California (the “Sheraton Refinancing”). If completed, the Company intends to use the proceeds of the Sheraton Refinancing to repay part of the amount outstanding under the 2022 Credit Facility and to pay for the Hotel Renovation described above. In addition, the Company is in the process of obtaining refinancing (the “Los Angeles Refinancing”) for three of its properties in Los Angeles, California. If completed, the proceeds of the Los Angeles Refinancing, along with a portion of the proceeds from the Sheraton Refinancing, are anticipated to be in an amount sufficient to repay all amounts outstanding under the 2022 Credit Facility, with the rest to be used for general corporate purposes. The Company expects that each of the Sheraton Refinancing and the Los Angeles Refinancing will close by the end of the first quarter of 2025.

Management of the Company believes that its plans to repay amounts outstanding under the 2022 Credit Facility are probable based on the following: (1) the Company has executed term sheets with the respective lenders under the Sheraton Refinancing and the Los Angles Refinancing; (2) the Company expects that both the Los Angeles Refinancing and the Sheraton Refinancing will close by the end of the first quarter of 2025; (3) the favorable loan-to-value ratios (“LTVs”) of the properties that are the subject of the Sheraton Refinancing and the Los Angeles Refinancing and (4) the Company’s plans and efforts to date to obtain additional financing to be secured by two properties that it owns (in addition to the Sheraton Refinancing and the Los Angeles Refinancing), and the favorable LTVs of these two properties. Management’s plans are intended to mitigate the relevant condition that would raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the interim financial information contained in this Quarterly Report on Form 10-Q is issued. The accompanying consolidated financial statements have been prepared assuming that the Company will continue its operations as a going concern and do not include any adjustments that might result from the outcome of events described in this paragraph.

Potentially there's some value here if the company is able to switch from recourse to non-recourse debt and ride out any real estate recovery.  CMCT does have a series of potential development sites, (through CIM) access to co-investors for project specific capital (so they won't need to raise it at the CMCT level, because they can't), there's a world where they don't file for bankruptcy and they can limp along far enough to make to the other side of their transition to "creative office" and multi-family.  The underlying asset value of the company haven't changed much since the preferred conversion (likely only improved slightly as short-term rates come down and more companies call employees back into the office) and they're going to save roughly $8 million per year in preferred dividends as a result of the conversion.  Yet the stock is down ~90% from the conversion price.  Could this be a potential January effect beneficiary?  Again, super speculative, but I think it might.

In attempt to determine how much if any value is here, one way is to back into an implied cap rate of 5.8% based on the last-twelve months of net operating income, not particularly cheap.  Howard Hughes (HHH) just had an investor day where they laid out their NAV using an 11% cap rate for their office properties.

Another way, CMCT pays CIM Group a base management fee based on the NAV which is determined by a third party, they used to disclose NAV, but I haven't seen it called out for year-end 2023.  But based on the quarterly fee (0.25% of Net Asset Value Attributable to Common Stockholders) you can back into the NAV.

Of course all the normal caveats apply to the NAV, there's an inherent conflict of interest to inflate it when your management fees are calculated off it.

The bet here is that CMCT is indeed able to refinance their properties and extract value embedded in their assets, reinvest those cash flows into new multi-family buildings and no longer be a bankruptcy candidate.  Any slight positive change in the outlook for California commercial real estate could make this turnout to be a multi-bagger, the opposite is true as well, if CRE continues to stink it up, this will be a zero or effectively so through more dilution of the remaining preferred shares.

Risks/Other thoughts:

• This very likely could be a zero, it is a call option disguised as common stock on commercial real estate values improving and interest rates continuing to fall.
• CMCT could convert more preferred to common and crash the stock again.
• CMCT pays their dividend in shares now, so don't get excited over the appearance of a big dividend yield.
• They have a small SBA lending operation that lends into the mom and pop owner/operator hotel market, this along with their hotel they've called out as being non-core and potentially look to sell those assets to reinvest in more multi-family developments.
• After the conversion, management now only owns 15% of the company.  Remember, they were buyers at $9.25, odd that they tanked their own position to such a degree, but now with less ownership, might be even more likely to do it again to save their management fee income.

Disclosure: I own shares of CMCT (about a ~2% position, and sworn to myself I won't average down)

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

Mid Year 2024 Portfolio Review

** Note, I'm a little late in posting my mid-year review as I was unplugged a bit for the last couple weeks.  Back dating the post to its usual spot.**  

My blog portfolio is essentially flat year-to-date with a gain of 2.99%, well behind the S&P 500 with a gain of 15.29%.  The broken biotech basket performed well but was generally offset by declines in a lot of my legacy holdings and just malaise in my speculative M&A ideas (crossing my fingers that M&A picks up in the second half).  Long term performance remains solid at a 21.75% pre-tax IRR.

Closed Positions:

• Quite a bit of churn happened in the broken biotech basket, I sold Eliem Therapeutics (ELYM), Homology Medicines (FIXX), Graphite Bio (GRPH), Kinnate Biopharma (KNTE), Reneo Pharmaceuticals (RPHM), Cyteir Therapeutics (CYT), AVROBIO (AVRO) and Theseus Pharmaceuticals (THRX) as each of these had some sort of buyout or reverse merger transaction.  If there was a CVR component, I held through the merger and sold shortly after.  Some of these rallied significantly post reverse merger, but in attempt to stick to the original thesis, I generally sold after the shareholder base turned over a bit.
• I got spooked out of both Instil Bio (TIL) and Aclaris Therapeutics (ACRS) -- although I made a nice profit on ACRS -- as both management teams don't appear to be following the reverse merger and/or buyout with a CVR strategy.  Instil Bio has yet to sell their new manufacturing facility and I don't have confidence in the property valuation, plus TIL included the line of their intention of "Exploring opportunities to in-license/acquire and develop novel therapeutic candidates in diseases with significant unmet medical need."  Aclaris announced alongside their Q1 results "we have decided to progress ATI-2138 into a proof-of-concept Phase 2a trial in patients with moderate to severe atopic dermatitis", however this one might be worth looking at as BML Capital Management has accumulated a significant stake and could push ACRS to revisit their go-forward strategy.
• Sio Gene Therapies (SIOX) made their liquidating distribution and is now pushed into the non-traded bucket.  Similarly, Merrimack Pharmaceuticals (MACK) made its liquidating distribution, the remaining penny or two is now in a non-traded liquidating trust.
• Pieris Pharmaceuticals (PIRS) announced they are pursuing a similar strategy as MACK did, minimizing corporate expenses in an effort to extend their cash runway long enough to capture any milestone payments among their disparate portfolio of development partnerships.  I sold to capture a tax loss, but will continue to monitor this one for a re-entry, if any of their milestones do hit, the return could be a multiple of the current market cap.
• MariaDB (MRDB) and Asensus Surgical (ASXC) were similar situations, cash burning companies with potentially valuable IP that was subject to a non-binding tender offer, if the tender fell through, both could be worthless.  Luckily for me, both deals went to a definitive agreement and I sold each as the spread tightened to a normal range.
• First Horizon (FHN) was added shortly after their transaction with TD Bank broke in middle of the short lived bank crisis last year, this spring FHN passed over the long-term capital gains mark for me and I booked the profit.  I could see FHN being an acquisition target for one of the super regional banks trying to use an acquisition as a springboard into a higher regulatory tier category.
• I should probably leave the traditional merger arbitrage trades to the experts, I exited Spirit Airlines (SAVE) after the judged ruled against the merger on anti-trust grounds, Albertsons (ACI) hasn't gone to court yet, but under the current administration, likely faces a similar result.  Unlike Spirit, Albertsons is cheap on a standalone basis and their PE sponsor Cerberus is likely to seek liquidity in other ways if their merger with Kroger (KR) fails.
• NexPoint Diversified Real Estate Trust (NXDT) and Transcontinental Realty Investors (TCI) both fall into a similar bucket for me, real estate companies trading at very wide discounts to their NAV, but with management in no hurry to close those gaps (or simply unable to in the current interest rate regime / real estate market).  NXDT has seen some recent insider buying that improves the story, but it has been several years since the old closed end fund converted to a REIT and little has been done to simplify the portfolio or tell the story.

Previously Undisclosed Positions:

• I've initiated a small position in DMC Global (BOOM) which owns three separate and distinct industrial businesses.  The company has announced a strategic review to sell two of the three businesses, leaving behind a multi-family residential building products business (Arcadia).  I didn't buy earlier in the story because it is unclear to me why Arcadia is chosen one to remain in the public shell, but the situation changed when Steel Partners (savvy, NOL maximizing conglomerate) lobbed in a $16.50/share offer (shares currently trade sub $14).  BOOM has acknowledged the offer and stated they'll consider it as part of their greater strategic alternatives process.

Current Portfolio:

I will be doing some reshuffling of my personal balance sheet, likely withdrawing cash from this account in the near future so keep that in mind when I post the year end results.

Since this is a pretty brief update, thought I'd include my current watchlist with a little blurb on each, as always, feel free to share any ideas or provide any pushback.

Disclosure: Table above is my taxable account/blog portfolio, I don't manage outside money and this is only a portion of my overall assets. As a result, the use of margin debt, options or concentration does not fully represent my risk tolerance.

Vanda Pharmaceuticals: 2 Bidders, Entrenched Management, Upcoming Business Catalysts

Vanda Pharmaceuticals (VNDA) (~$365MM market cap) is a biopharma company with a number of drugs either already being commercialized, on the cusp of commercialization or in late stage trials.  I have no idea if any of these are valuable franchises (as always, if you have any insights, please share them):

• Hetlioz -- commercial treatment for the treatment of Non-24-Hour Sleep-Wake Disorder in the U.S., it is facing generic competition as of December 2022 and has a few legal battles in its attempt to get additional approved indications
• Fanapt -- recently approved for biopolar disorder, launching commercialization in Q3 2024
• Ponvory -- recently acquired from Johnson & Johnson (this came from Actelion Pharmaceuticals) for $100MM, treatment for multiple sclerosis, launching commercialization in Q3 2024
• Tradipitant -- treatment for gastroparesis, PDUFA date set for 9/18/24
• Misaperidone -- treatment for schizophrenia and bipolar disorder, new drug application expected to be submitted in early 2025

On top of that grab bag of drugs (to my untrained eye, they don't appear to have a coherent strategy), Vanda has approximately $5.40/share of net cash and marketable securities on the balance sheet after subtracting out all liabilities (shares currently trade under $6/share).  Where things get a bit interesting, Vanda has received two unsolicited bids from potential buyers, both of which have received the cold shoulder from the board, as a result the buyers went public trying to get shareholders to exert pressure:

5/7/2024: Vanda Pharmaceuticals Confirms Receipt of Revised Unsolicited Takeover Proposal from Future Pak -- offer was for $7.25-$7.75 in cash per share, plus a CVR.  Future Pak seems like an odd buyer as the company is a privately held pharma contract manufacturer and packaging business that has the financial backing of private credit provider Colbeck Capital Management.  The board rejected the proposal:

Vanda Pharmaceuticals Inc. (Vanda) (Nasdaq: VNDA) today announced that the Company’s Board of Directors (the “Board”) carefully reviewed the revised unsolicited proposal from Future Pak, LLC (“FP”) to acquire the Company for $7.25 to $7.75 per share in cash plus certain Contingent Value Rights (“CVRs”) and, after having consulted with the Company’s independent financial and legal advisors, unanimously concluded that the proposal substantially undervalues the Company, creates significant risk and uncertainty and is not in the best interests of the Company and its shareholders. Accordingly, the Board has rejected the proposal.

In reaching its conclusion, the Board evaluated all aspects of Vanda’s business, including its clinical development pipeline, expanding commercial presence and significant cash balance, as well as the speculative nature of the CVRs given the uncertainty surrounding the achievement of the commercial milestones under FP’s management. The Board believes the revised unsolicited proposal is yet another opportunistic attempt to purchase the Company’s shares at a discount to Vanda’s intrinsic value.

The Board and management team remain confident that Vanda’s robust revenue, strong cash position and efficient operations position the Company well for significant long-term growth and value creation far in excess of the consideration offered by FP.

6/6/2024: Vanda Pharmaceuticals Confirms Receipt of Unsolicited, Non-Binding Indication of Interest from Cycle Group Holdings -- offer is for $8 in cash per share with no CVR component.  Cycle seems a little more credible than Future Pak, they have a few commercial drugs in the market already, in their press release, they included the following explanation for making their bid public:

Cycle issued the following statement regarding its proposal:

“Our proposal for Vanda delivers immediate, compelling and certain cash value for Vanda shareholders with a highly attractive premium. Cycle’s proposal represents a better outcome for shareholders, who would receive all-cash upfront value exceeding that of Future Pak’s cash portion of its latest offer announced May 7, 2024. It would also benefit patients, as Cycle has a proven commercial strategy in the U.S., a strong distribution footprint and an established track record of delivering medicines and individualized support to patients suffering from conditions with high unmet medical need.

While we would have preferred to reach an agreement privately, Cycle is publicly disclosing our proposal for the benefit of Vanda shareholders and to encourage Vanda shareholders to express their views on this proposal to the independent directors of the Vanda Board of Directors.

Given our familiarity with Vanda, its brands and our extensive knowledge of the industry, we believe we can efficiently and quickly complete our diligence. Once we receive access to the required information, we believe that we can complete our due diligence within 2-3 weeks and reach a definitive agreement shortly thereafter.

We stand ready to work immediately with Vanda’s Board and management team to reach an agreement that would provide a compelling premium and certain cash value today for all Vanda shareholders.”

Vanda has acknowledged receipt of the offer, but as of this writing haven't rejected it yet.

Why isn't the board engaging?  Management seems very entrenched here, the co-founder (Mihael Polymeropoulos) is the CEO and Chairman of the Board.  He employs a number of family members at Vanda and does own 3+% of the stock.  Given the near term regulatory catalysts, it could be argued that these are opportunistic bids, but if they run a full a process, maybe they can get an even higher number or Polymeropoulos could partner with a firm that would back a bid for him to take it private.  I've sized this relatively small, it could be more attractive at a higher price if VNDA's board does the right thing and engages with the bidders.

Disclosure: I own shares of VNDA