Monday, April 8, 2024

Asensus Surgical: LOI with Buyer, Highly Speculative

Similar to MRDB, this is pretty speculative.  Asensus Surgical (ASXC) (~$73MM market cap) is a cash burning medical device company that makes robot systems for abdominal surgeries.  Asensus has one surgical system in the market (Senhance Surgical System) and a next generation one in development (LUNA System), unfortunately for the company, they're reaching the end of their cash runway in June, per their own forecast, leaving them in a tricky spot needing to raise capital.

In comes Karl Storz SE, a privately held but sizable German medical device company, with a letter of intent to purchase Asensus for $0.35 per share (versus a $0.27 share price today), or roughly a $95MM equity check.  Karl Stroz is also providing Asensus up to $20MM in a bridge financing to ensure the company has enough capital to make it to closing.  The two are now in an exclusivity period and have ten weeks from 3/28 (6/6 by my math) to reach a definitive agreement.  The loan distributes $1MM per week during that period and then $10MM on the signing of a definitive agreement.  The spread here is pretty wide (~30%), because if Karl Storz backs away during this due diligence period, Asensus is either a zero or would need to raise equity in a punitive way.  Since Karl Storz is now the senior lender, similar to MRDB, the tin hat wearer in me thinks there's a risk they could torpedo the deal and get Asensus on the cheap in distress since any other buyers are shut out during this 10 week period.  There's also a non-small chance that they recut the deal for a lower price.

But Karl Storz is a legitimate buyer, most of Asensus Surgical's systems are installed in the European market, they likely have a fair amount of knowledge of the assets they're buying.  This is a hard idea to size, unless you know something about the product/science (if you're one of these people, please share your thoughts below), as its challenging to handicap if this deal will go through.  I added a small position.

Disclosure: I own shares of ASXC

Monday, April 1, 2024

MariaDB plc: In Default, Highly Speculative, 3 Bidders

This is highly speculative, but I wanted to bring the discussion out of the comment sections of my BFIN post as I found the situation interesting enough to initiate a small position.

MariaDB plc (MRDB) ($32MM market cap) offers enterprise and premium functionality on top of the open sourced (free) MariaDB Community Server database management system ("DBMS").  To distinguish between the company and the open sourced DBMS, I'll refer to the for-profit company itself as MRDB and the DBMS as MariaDB.  The lead developer of MariaDB is Michael "Monty" Widenius who was one of the original developers of MySQL, which was sold to Sun Microsystems, Widenius developed MariaDB in response to concerns following Oracle's acquisition of Sun Microsystems in 2009.  Widenius owns less than 1% of MRDB and is no longer a director/employee of the company itself.

MRDB was a 2022 deSPAC, it announced the definitive agreement with Angel Pond Holdings (POND) on 2/1/22, valuing MRDB at a headline $672MM or a lofty 14x revenue.  Between deal announcement and closing, the market's appetite for risky SPACs changed, upon closing in December 2022, the trust delivered minimal cash to MRDB as over 99% of POND holders redeemed.  Unsurprisingly, cash flow negative MRDB quickly ran into trouble and as of this January, MRDB was in default of their $26.5 promissory note to RP Ventures.  RP Ventures put restrictive covenants in their loan documentation that prevents MRDB from doing almost any major corporation action, including a change of control, without their consent.  Fortunately, MRDB does have several bidders circling looking to acquire the company in whole for cash:

Here are the players, shares trade for $0.45/share today:

  1. Runa Capital (a related party to RP Ventures, also a 7.8% stockholder) made an offer for $0.56/share, later withdrew the offer and provided debt financing instead
  2. K1 Investment Management (PE firm, SaaS focused) made an offer for $0.55/share
  3. Progress Software Corp (PRGS, $2+B market cap) made an offer for $0.60/share
Basic timeline thus far:

The entry of Progress Software as a late bidder somewhat validates that there is value here, but RP Ventures/Runa continue to be hostile to this process, potentially trying to force the company into bankruptcy where as the senior lender they'd be there to pick up the pieces on the cheap.  This is a situation similar to Armstrong Flooring (AFI) from a couple years back where the company's lender gave it a few months to find a deal, there appeared to be equity value (to me at least), but ultimately AFI was zeroed out in bankruptcy.  The appointment of a CRO flags to me that MRDB could face a similar fate.  Either way, due to Irish takeover rules (MariaDB is Ireland domiciled), we should find out soon.

Disclosure: I own shares of MRDB

Wednesday, March 20, 2024

James River Group: E&S Insurer, Broken Divestiture, Strategics Circling

James River Group Holdings (JRVR) is a small (~$295MM market cap) insurer primarily focused on small and middle market casualty risk in the U.S. excess and surplus ("E&S") market.  The E&S market can be an attractive market segment because it doesn't face the same regulatory constraints as the admitted (regulated) market, potential clients typically have to demonstrate they can't get regular policies before entering the E&S market where pricing and policies can be more bespoke (and profitable).  James River is relatively good at underwriting these risks, they've had some hiccups with commercial auto (particularly Uber and food-delivery services), but have maintained a low-to-mid 90s combined ratio over the past decade in E&S.  The company insists that current market conditions are favorable, but like banking, it often takes several years of hindsight to confirm that conclusion.

The recent issue for James River has been their reinsurance segment, JRG Re, where the insurer had to raise capital in 2022 via a $150MM preferred stock issuance to plug a capital hole.  JRG Re was put into run-off in 2023 and then sold to Fleming Insurance Holdings (PortCo of Altamont Capital Partners) for 75% of book value (~$277MM, partially funded via an upstreamed dividend of excess capital).  Fleming has gotten cold feet and refused to close the deal, leading to James River taking the buyer to court to enforce specific enforcement.  Toss in a recent material weakness accounting issue in the mix, which has since been remediated, and you can see why investors have lost faith in the company.

Following the announcement of the JRG Re segment sale in November, James River announced plans to explore strategic alternatives that would include a "sale, merger or other strategic transaction."  In the months since, James River has been linked by insurance industry rags to much larger peers Everest Group (EG) and Arch Capital (ACGL) and more recently to odd-duck Global Indemnity (GBLI).  Global Indemnity reportedly offered an all stock deal valuing JRVR at $15/share (versus ~$8/share today), but GBLI is illiquid (controlled) and a publicly traded partnership, meaning clumsy K-1 tax forms for U.S. investors.  GBLI trades for ~2/3rds of tangible book today versus JRVR at just under 90% of tangible book.  Global Indemnity is similarly an E&S insurer that could potentially drive synergies, but given they're roughly the same size and the partnership dynamics, it's unclear to me and the market how real is that $15/share offer and where might the pair trade if a deal was announced.  Potentially GBLI views this as a way to convert to a C-Corp and boost their liquidity, which could end up benefiting both sides.

Either Arch Capital or Everest Group make more sense as buyers, they both trade well above tangible book, another beaten up E&S insurer that was recently taken private is Argo Group International (ARGO), Brookfield paid 115% of tangible book early last year (I participated in that situation, although not profitably).  A similar valuation for JRVR would equate to $10.40/share or 30% upside from $8.

Insurance Insider is reporting today that GBLI and JRVR have entered into more formal talks to merge, with the situation pretty fluid, I'll leave this as a quick note and see if the crowd has more informed/complete thoughts.

Disclosure: I own shares of JRVR

Wednesday, March 6, 2024

BankFinancial: Shareholder Discontent, Activist Added to Board

BankFinancial (BFIN) is a small ($1.5B assets, $125MM market cap) community bank with 18 branches scattered across the Chicago suburbs.  It was a mutual holding company conversion way back in 2004, unlike many former mutual conversions, BankFinancial is primarily a commercial bank with big chunks of their loan portfolio in Class B/C suburban multi-family properties, commercial working capital lines and equipment leases.  Their deposit costs are surprisingly low at just 1.26% (Q4), over a full percentage point below the average bank, despite the strong deposit franchise, the bank struggles to turn a profit with an ROE in the 5%-7% range due to a high expense base.  The stock trades for a hair under $10/share with a book value of $12.45/share (not mark-to-marking their loan portfolio, all of their securities portfolio is AFS), admittedly not the cheapest community bank.

With regional bank tremors popping up again, BankFinancial doesn't have the same problems plaguing others.  The bank doesn't lend to high rises or do significant construction lending, there's minimal office exposure, multi-family is in Class B/C which isn't as susceptible to overbuilding and they have a strong diverse deposit base.  What they do have is an entrenched CEO, Morgan Gasior has been the CEO since the mutual conversion, and remarkably, at the age of 60, has served as a director at Bank Financial since 1983.

Not entirely sure how that's possible, would have made him 19 at the time, in 1988 he became EVP/COO at 24, BankFinancial is Morgan Gasior and Morgan Gasior is BankFinancial.  I'm guessing there's some nepotism involved, but going back to the original conversion docs, couldn't find any previous relationship ties.  I would be curious to hear the origin story.  Despite being a bank executive for nearly 40 years, he only owns 2.5% of the shares yet collect $600+k in annual compensation.

This story isn't too uncommon in the community bank world, but what caught my attention (in addition to this being a local bank for me) was the Q4 earnings call which quickly went off the rails (courtesy of BamSEC):


And our next question will come from the line of [ Stephen Buckman ] from [ Buckman ] Capital.

Unknown Analyst

I have been a shareholder that took part in the conversion 18, 19 years ago. And I have a more holistic question as well. And that is what is the role of the Board of Directors? And I'm going to refer you to a conference call comment you made on May 2, 2022. And what you said, I'm quoting, is, "Well, first of all, I think we're in a position now where our goal for the third quarter and fourth quarter is to sustain right around $0.23 to $0.26 a share. So I'm going to try to hit that $1 per share in our third quarter and fourth quarter." This is 2022. And then beginning next year, the goal would shift to getting into the $0.30s or somewhere between $0.30 and $0.34. I could go on, but the fact is, 18 years later, the only guy who's made out here is you. Our book value, our stock price, our franchise value are all lower than they were in 2004 when you converted. What is the role of the Board of Directors in terms of your underperformance during this time?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

No, this is the investor conference call. We're here to discuss earnings.

Unknown Analyst

I'm quoting you directly from May 2, 2022 [indiscernible] take a look at the conference call.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I'll just say that, if you want to discuss this offline, we're happy to.

Unknown Analyst

No. No. I'd rather this be in a public forum.

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, we're going to leave it there. I don't think that this is -- that's the right forum for this. If you want to...

Unknown Analyst

Well, your underperformance for 19 years is a matter of public record. And so do you want to address it publicly or do you want to pretend that it doesn't exist?

F. Morgan Gasior BankFinancial Corporation – Chairman, CEO & President

Well, I think we're going to leave it where I said. This is the investor conference call. If you'd like to talk about it off-line, we're happy to do so. But I mean...

Unknown Analyst

And I find that your cowardice in addressing issues that affect all public shareholders is severely -- is staggering. I'll leave it at that. I think you could be doing a much better job. I think you should be looking at strategic alternatives. I'll leave it at that.

And another one:

Unknown Analyst

Morgan, this is [ Charles Winnik ]. On February 5, 2013, you were asked questions on your last call, you received questions about selling the bank and you implied that it was not the right decision because better days are ahead of you. Well, I definitely can't disagree with your assessment, especially considering the performance over the last few years. I don't really see any other avenue that would be more beneficial to shareholders than a sale. And while the earnings outlook has definitely improved, your full earnings capacity still generates returns much less than your cost of capital, which, in effect, destroys shareholder value. Your efficiency ratio is just too high. And while loan growth is always right around the corner, you admit on every call that competition is intense, which I agree, which really just justifies the fragmented nature of the markets and need consolidation. And so, yes, we have improved outlook and hefty capital, but all negatives really speak for themselves.

So, my question really is -- you've got most of your credit issues behind you now. Obviously, can you offer shareholders a credible plan that generates value superior to what you could potentially receive in an M&A transaction?

And finally from Jason Stock, whose fund owns just under 10% of the shares:

Jason Stock

As you know, we've been long-term investors in BankFinancial, and we're generally not the type of investor who likes to be much of a nuisance. But as owners of over 9% of the company, I think it'd be probably irresponsible of me to not pipe in and say that we agree with all the comments that have been made about the outlook for the bank as an independent entity.

Then a week after, Ben Mackovak of Strategic Value Bank Investors, a fund that specializes in community banks was added to the board after accumulating a 5.2% position.  From the 13D filing:

The Reporting Persons acquired the Common Stock reported on this Schedule 13D for investment purposes. The Reporting Persons purchased the shares based on the belief that the shares, at the time of purchase, were undervalued and represented an attractive investment opportunity. The Reporting Persons believe significant opportunity exists to enhance shareholder value by simplifying the business, improving operations, resolving certain non-performing loans, and evaluating strategic alternatives.

Mackovak follows a similar strategy of other community bank activists, he's on the board of some 10 small banks, pushes them to make operational changes, if that doesn't improve the multiple, then pushes for an M&A transaction to unlock value.  He recently went on Meb Faber's podcast and sounds like a smart, sober, capable board member that could crack the BFIN nut.  I don't anticipate an immediate M&A deal here (they have $52.8MM of mark-to-market losses on the loan portfolio an acquirer would need to realize), the bank does have some shorter duration loans that are coming off the books this year that they can put to work at higher rates improving profitability, but the pressure is on as a high expense base is much easier to fix (by selling out) than a flightly deposit base, long duration securities portfolio or credit issues, none of which really apply to BFIN.

Disclosure: I own shares of BFIN 

Friday, March 1, 2024

Limoneira: Citrus Farmer, Pursuing Strategic Alternatives

Limoneira Company (LMNR) ($330MM market cap) is a California based citrus farmer (primarily lemons, secondarily avocados) packager and part-time real estate developer that announced on 12/1/23, they were pursuing strategic alternatives.  From the press release:

Scott S. Slater, Chairperson of the Board, stated, “Over Limoneira’s 130-year history it has grown into one of the leading, sustainable agribusiness companies in the world with over 11,100 acres of valuable lands, real estate properties, and senior water rights. Over the past 18 months, we have developed a strategic roadmap intended to enhance near and long-term shareholder value. Today, we consider ourselves to be in a strong financial position, having recently reduced our net debt position and rightsized the balance sheet through our ongoing strategic shift towards an asset-lighter business model. Given the Board’s belief that there is a disconnect between Limoneira’s public market value and the intrinsic value of our Company’s underlying assets, the Board believes it is the right time to explore all strategic options to prioritize the Company’s growth and stockholder value.”

Last summer, the company hosted an investor day where they laid out their estimated fair market value of LMNR's real estate and other assets:

Today, the stock trades for roughly $18/share, or a 40% discount (60% upside) to the low end of the above NAV (which they cite is based on recent agriculture transactions).  I waited a little while to buy this one (the price has also come in from the post-announcement excitement) as it strikes me as a potentially difficult business to sell leading to an extended timeline:
  1. Agriculture/farming operations aren't know as fantastic businesses, they're price takers not price makers and as a result, can be very cyclical.  They're also capital intensive, although Limoneira is trying to be more of a farm management and packaging company, as seen above, the value is in the land and related assets.
  2. Part of the value is in higher or better uses of the real estate, such as difficult to monetize water rights.
  3. This is a old company, main employer in town (many of their employees live on property in housing owned by Limoneira), as a result, it's probably hard from a personal relationship perspective to be the management team that sells to outsiders.  Easier to maintain the status quo.
But there is reason to believe management does intend to sell, shortly after the strategic alternatives announcement, they let 13D holder Peter Nolan on the board:
Limoneira Chairperson of the Board, Scott S. Slater, stated, “... We are pleased to welcome Peter and believe he will be a valuable asset in guiding the Company as we continue to execute against our strategic roadmap to enhance near and long-term value and commence the exploration of potential strategic alternatives aimed at maximizing value for our stockholders.”

Peter Nolan, Chairman of Nolan Capital, Inc. commented, “I am excited to be joining the Board of Limoneira as it enters this phase of exploring ways to unlock additional value for stockholders.”

Peter Nolan, a former PE executive, owns 6% of the company and his family office has some past experience with real estate and agriculture businesses.  The two events of Nolan showing up on the shareholder registry and strategic process seem related, hopefully he can help engineer a sale here.

Unlike other situations, management doesn't appear to be an obstacle here; this article from the VC Star provides some interesting background on the company, including how it came public after they tripped the SEC shareholder count number and had to list in 2010.  They haven't gained much from being public, probably makes sense for them to be private again.  CEO Harold Edwards is quoted, "The value the market perceives we have versus what we believe is the intrinsic value - there's always been a big difference between those two things.  The idea is that maybe there's a better way for us to operate.  Maybe there's a better ownership structure that isn't public.  Maybe it's private, or maybe it's merging together with another public company."  Guessing we just have to be patient on a sale, maybe mid-to-late summer is reasonable.

Disclosure: I own shares of LMNR

Wednesday, February 14, 2024

Merrimack Pharmaceuticals: Ipsen Milestone Achieved, Liquidation

Merrimack Pharmaceuticals (MACK) ($220MM market cap) is essentially a publicly traded CVR in a c-corp form, I owned the stock briefly in 2017 after the company sold Onivyde to Ipsen and committed to passing through any future milestone payments related to Onivyde to shareholders.  Unfortunately, it didn't have the same protections of a CVR and management ended up diluting shareholders of those future milestone payments by raising equity to pursue their remaining development stage pipeline.  In 2019, the company officially gave up development of new drugs, management was removed and it has been little more than a shell since as the company awaited any milestone payments from Ipsen.

Seven short years later, Ipsen announced that Onivyde was approved by the FDA for metastatic pancreatic ductal adenocarcinoma ("mPDAC"), a particularly awful form of pancreatic cancer.  This approval triggers a $225MM milestone payment to Merrimack, the remaining milestones for Onivyde and another asset sale (to Elevation) are not expected to be reached.  Merrimack waited little time to announce they were formally liquidating pending a shareholder vote in May, with the liquidation distribution range of $14.65 to $15.35/share.

We'll have to wait for the proxy to see how conservative this estimated range is, but to my eye, it looks pretty conservative, with the actual distribution likely to be at the top of the range or even just above.  Below is my math, as usual, it might be wildly off (and any variance to these numbers can swing the expected IRR quite violently), I'm particularly wary of my tax estimate, any tax wizards out there please feel free to chime in below in the comment section.

The company has $215MM in NOLs which virtually matches the Ipsen windfall, but taxes are still due under section 453A of the IRS code, which in my novice read imposes an interest penalty on deferred sales like a milestone payment.  The interest rate applicable has varied across the last 7 years, since I'm just a retail guy, I didn't build out a full model, but I think my number is roughly right, maybe a touch low.  The $0.03 distribution is simply a 50% haircut of my estimated escrow amount to account for any expenses during the liquidating trust lifecycle.

The board at MACK has been controlled by investors/owners since 2019, they've been prepping and preparing for this day since, I don't anticipate any large surprising expenses or much of an escrow.  Congratulations to that team, I've followed at a short distance but never felt fully comfortable betting on an FDA approval.

Disclosure: I own shares of MACK

Thursday, February 8, 2024

Enzo Biochem: Asset Sale, Cheap RemainCo Likely for Sale

Enzo Biochem (ENZ) (~$65MM market cap) in July 2023, closed on the sale of their clinical laboratory division to Labcorp (LH) leaving their subscale but growing Enzo Life Sciences ("ELS") division and a slug of cash at the RemainCo.  Rhyming with other similar setups (most recently PFSW), the company is likely dressing up the ELS division for sale to complete the two-step liquidation of the company.  The ELS segment makes products (picks and shovels for biotechs) for drug development and clinical research, it does about $32MM in sales annually making it an after-thought in the large but mid-to-high single digit growing industry.  Today ELS is roughly breakeven before corporate overhead, while that should improve, after corporate overhead, ENZ as a whole, is burning cash and has little reason to exist.

Comparables of similar size (most are profitable mid-large caps) are a bit hard to come by for the ELS segment (there might be obvious ones that I'm missing, if so, please point them out in the comments), but they do own the real estate for the business (about 56,000 square feet of manufacturing/research space in Farmingdale, NY), just throwing a basic 1x TTM revenue multiple on the ELS business itself and adding the PPE, gets me about a value of $45MM for the remaining business.  Adding in the current NCAV and accounting for further cash burn, I get a proforma value of approximately $1.75/share.

In a bullish scenario, maybe they can get upward of 2x revenue for the ELS segment and it could be a near double from current prices.  This isn't a unique idea, but as I've said before, I think investors tend to be impatient with these setups, it takes longer than investors would think to unwind the operations of segments that on the surface look separate.  As we come up on the first anniversary of the clinical labs sale, a second asset sale in the next quarter or two is a more reasonable timeline.

Other random thoughts:

  • Enzo's former clinical laboratory segment was subject to a ransomware attack last May prior to the close of their deal with Labcorp, lots of sensitive information was stolen including several hundred thousand social security numbers.  Enzo is facing some lawsuits, but hasn't provided any estimated liability at this point.
  • Enzo stopped doing earnings calls after the asset sale announcement, they haven't returned to conducting earnings calls, pointing to their current structure not being the long term model going forward.
  • Steven Pully is the new Chairman of the Board, he's a partner/co-founder of Speyside Partners, an advisory shop that specializes in businesses in transition, he's served on 29 boards, including several that ended up pseudo liquidating, similar to ENZ's presumed path.
  • What's the "ADES risk" here?  Said otherwise, what's the risk the company will be a buyer rather than a seller?  I think that's unlikely since the board and shareholder registry is filled with value and activist investors who have shown up in the last two years, are not emotionally tied to the business like a former founder or CEO.
  • Bradley Radoff, a private investor, owns 8+% of the stock and is on the board of directors.
  • CEO Kara Cannon was previously the COO, after the former CEO stepped down 9/6 she took on the interim CEO title that was later graduated to the permanent CEO.  Her contract will pay her a 0.75% Transaction Bonus on the any sale incentivizing her to go along with the two-step liquidation strategy.

Disclosure: I own shares of ENZ

Tuesday, January 23, 2024

Instil Bio: Stopping Clinical Development, Real Estate Value

Instil Bio (TIL) (~$70MM market cap) is a clinical stage biotech focused on developing tumor infiltrating lymphocyte ("TIL") therapies for the treatment of cancer.  Instil was an early 2021 IPO, at the time it had a melanoma treatment, ITIL-168, that was beginning a Phase 2 clinical trial.  They had ambitious dreams which included building a brand new laboratory and manufacturing facility in Tarzana, California to go along with leased manufacturing space in the UK.

ITIL-168 failed to impress and in December 2022, the company laid off 60% of their workforce and decided to put their remaining resources behind ITIL-306, a pre-clinical treatment for lung, ovarian and kidney cancers.  In early 2023, the RIF was further expanded that resulted in reducing their US workforce by 96% and their UK workforce by 42%.  Additionally, Instil scrapped plans to occupy the newly completed Tarzana facility.  A Phase 1 study was initiated in the UK, but earlier this month Instil announced another 61% workforce reduction in the UK alongside the closing of their UK facilities and a partnership with a Chinese firm that essentially outsources further early development of ITIL-306.

Two wrinkles with this idea:

  1. Instil hasn't fully put itself up for sale or declared strategic alternatives, while they have essentially laid off everyone in a series of RIFs, as far as I can tell Instil hasn't hired advisors to run a formal process at this point.
  2. Instil owns a 128,000 square foot, brand new, never occupied facility (18408 West Onxard St) in Tarzana, California that they've put up for lease or sale.  In the third quarter, they marked down the value of the facility to $132.5MM and have an $82.4MM mortgage loan out against it that matures in July 2027.
If Instil is able to get $132.5MM for the facility (welcome any thoughts from medical/industrial CRE experts) and assuming some further cash burn over the next 12 months, I get a stock that's trading less than half of NAV with no value to their IP.
Note: TIL did a 1-for-20 reverse split in December, some data providers have the old share count.
This company lacks much in terms of public disclosures, they don't hold quarterly conference calls or have much in the way of conference transcripts following their IPO.  Biotech venture firm Curative Ventures owns approximately 30% of the stock and Curative's founder, Bronson Crouch, is the CEO and Chairman of Instil.  While their execution has been poor, seems like they've found religion by prioritizing cash preservation, hopefully a sale or liquidation follows in due time.

Disclosure: I own shares of TIL

Friday, January 19, 2024

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

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

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

Aclaris also reiterates the following business plans:

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

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

Disclosure: I own shares of ACRS

Tuesday, January 16, 2024

HomeStreet: BANC/PACW Style Merger with FirstSun, Cheap Proforma

This morning, FirstSun Capital Bancorp (FSUN) (~$850MM market cap) announced they were acquiring HomeStreet (HMST) (~$200MM market cap) in an all-stock transaction that includes a PIPE investment, lead by Wellington (being done at $32.50 per FSUN, or $14.12 per HMST), that neutralizes the mark-to-market impact of HomeStreet's balance sheet.  FirstSun is an insider controlled (69% insider ownership) C&I loan heavy bank that trades OTC with geographic concentration in Kansas, Texas, Colorado, New Mexico and Arizona.  FSUN will be the surviving entity, with FSUN management in charge (HMST's Mark Mason given a semi-ceremonial position as Vice Chair of the board) and be listed on the NASDAQ post "mid-2024" close, increasing the liquidity of their shares.

The credit quality of HomeStreet's assets has never really been in question, by re-marking them at current values, along with cost synergies, FirstSun will be able to enjoy outsized earnings in the early years of the deal.

HomeStreet shareholders will be receiving 0.4345 shares of FSUN for every share of HMST.  As I write this, there's actually a negative spread, likely because FSUN is OTC and illiquid, but the proforma entity is trading at approximately 5.9x next years estimated earnings, well below peer banks.

At 8x, still below peers but accounting for some of the overearning related to the marks, HMST would be worth $21/share.
I'm going to hang onto my shares, stick this in the same mental bucket as Banc of California (BANC) where a stronger bank takes over a weak one, extracts a lot of synergies and as we get closer to 2025, the market will start to recognize the new earnings profile of the combined bank.  I continue to like regional banks in today's market, for a few reasons:

  1. With short terms rates likely coming down in 2024, banks will attempt to quickly reduce their deposit costs (100% beta) to protect their NIMs;
  2. Commercial real estate exposure is generally overstated by the media/market, it will take a long time to play out giving bank's time to reserve and workout loans;
  3. We'll continue to see a lot of mergers, banks need more diversified deposit platforms to extend deposit duration.
Any other banks out there ripe for a similar transaction structure?

Disclosure: I own shares of HMST

Friday, January 12, 2024

Liberty SiriusXM Group: Tracking Stock, Merging with SIRI

As most know, Liberty SiriusXM Group (LSXMA/K) is the Malone-style tracking stock for Liberty Media's majority ownership interest in SiriusXM (SIRI).  Liberty famously bailed out SIRI following the financial crisis and made a killing on the investment (much of it early in their holding period).  Nearly fifteen years later -- skipping over a lot of interesting history -- in December, Liberty Media reached an agreement to formally split-off their stake and merge it back with SIRI, creating a simplified one-class share structure at the satellite radio provider.  

As almost all tracking stocks do, LSXM has traded at a significant discount to underlying shares it is meant to track, this transaction is meant to collapse that discount, however, even a month after the transaction was announced (and with a relatively quick, "early Q3" close) a large discount remains.  The exchange ratio set forth in the merger agreement is estimated to be 8.4 (might move around ever so slightly) shares of SIRI will be issued to each share of LSXM.  Using the current share prices, the spread is approximately 44.1%.

Said another way, one could effectively buy SIRI for $3.62/share via LSXM today.  Why might this discrepancy exist?  The primary argument I've seen is SIRI shares are overvalued as SiriusXM has pursued a typical Malone-style levered equity model and repurchased a significant amount of SIRI stock, which has artificially increased the price of SIRI and reduced liquidity (and increased the percentage owned by Liberty Media).  That might play a small part in it (but SIRI isn't currently in the market and presumably arbs are shorting SIRI against LSXM), but I believe the larger reason for the spread is still the hated tracking stock structure, many investors don't understand it or simply can't own it (won't find LSXM in many index funds).

Looking at LSXM from a fundamental perspective, you can create SIRI for a fairly cheap valuation that should provide some downside protection post merger completion if indeed SIRI is the overvalued side of the trade.

As always, please feel free to point out where I might be incorrect.  I'm using 2024 estimates from Tikr as management hasn't provided guidance yet.  It should be noted that SiriusXM is in the middle of large multi-year capex spend on revamping their satellites and free cash flow should jump considerably starting in 2025.  Post-close, SIRI should become eligible for more index inclusion, including the S&P 500 where it is currently excluded as a controlled company.  Similar to JXN or others, that could provide support for the shares and add a turn or two to the multiple.

There is some business risk here, SiriusXM will have considerable debt at 3.9x EBITDA and a relatively flat growth profile.  SiriusXM does plan to prioritize deleveraging following the close of the transaction to get back to their 3-3.5x target leverage ratio, before fully turning back on the buyback machine.  While their churn is remarkably low (surprisingly, even during Covid, subscribers didn't cancel despite commutes dropping), their subscriber base is aging and they continue to face competition from Apple, Spotify and others. They are reinvesting in the business to push back on competition, launching a new tech stack, including a streaming only version, but I view these efforts as mostly defensive.  Either way, this is a surprisingly resilient business and should be fairly stable in the near to medium term.

Disclosure: I own shares of LSXMK

Cellectar Biosciences: Positive Data, Warrant Overhang, Biotech Speculation

Cellectar Biosciences (CLRB) is a late-stage clinical biotech company (not a "broken biotech") that recently reported positive data for their lead therapeutic, Iopofosine I 131, for the treatment of Waldenstrom's macroglobulinemia ("WM"), which is an uncommon slow growing type of non-Hodgkin lymphoma.  WM typically inflicts those over the age of 60 and those with WM succumb to the cancer within 5-10 years.  While I try to avoid science plays around here, the results were quite remarkable and provide hope for those with WM who have unsuccessfully tried two prior lines of therapy.  The FDA has granted Iopofosine both orphan drug and fast track designations, Cellectar plans to file a new drug application (NDA) in the second half of this year with an accelerated 6 month approval timeline.

One of the benefits of treatments for rare diseases is the patient population tends to be tightly concentrated within specialized health care communities and due to the R&D development costs, extremely high pricing is norm in orphan drugs to recoup that investment over a small patient population.  Cellectar is in the process of transitioning from a clinical stage biotech to a commercial one (assuming FDA approval), they're outsourcing much of the manufacturing and only spending $25MM to stand up a sales and commercial support team.  The absolute number of patients is relatively small, but again, this will be a high priced therapy (a quick google search, the median orphan drug costs $200k+ annually).

Doing a little back of the envelope math (full warning, this could be wildly off), if 1500 new patients are diagnosed with WM annually and 80% eventually receive a 3rd line treatment, then CLBR's annual patient market segment is about 1200 people.  If 2/3rds of those end up taking Iopofosine at $250k (made up number, slightly above the median orphan drug, I haven't seen management indicate pricing anywhere, please correct me if they have) a piece, that's $200MM in annual revenue.  Additionally, Cellectar is running a Phase 2 study for Iopofosine in patients with multiple myeloma ("MM") and central nervous system lymphoma, plus a Phase 1b study is just kicking off for pediatric patients with brain tumors.  If they're able to repeat the success in WM, this could become a much larger revenue opportunity.

Cellectar has a messy and confusing capital structure.  In September, they raised capital via a private placement for $24.5MM by selling Series E-1 convertible preferred stock that converts to stock at a strike price of $1.82/share (CLRB currently trades for ~$3.40/share), stapled to the Series E-1 prefs were two tranches of warrants, designed to act as milestone payments to provide funding for Cellectar post positive WM study results and the second tranche post FDA approval.  The tranche A (exercise deadline 10 days post positive data, or 1/19) has a strike price of $3.185/share and if fully exercised, will bring in $44.1MM to Cellectar.  The second tranche, tranche B, has an exercise price of $4.7775/share and would bring in $34.3MM if CLRB receives FDA approval and the warrants are completely exercised.  This private placement was designed to be big enough to get the company to its commercial phase where it could potentially be self funding.  CLRB does have additional warrants, one tranche, the "2022 common" is in the money with a $1.96 strike and expires in 2027, the others are all well out of the money and can generally be ignored.

Above is my attempt at the share count math and proforma cash assuming the tranche A & B warrants are fully exercised (to be more conservative, you could take more burn into account since the FDA approval trigging the tranche B warrants won't come until sometime in the first half of 2025).  But I get a current proforma enterprise value in the mid-$80MMs for a therapy that could do $200+MM in annual sales, that seems cheap to me.

Hopefully someone who actually knows the situation reads this post and comments, all feedback welcome.  This is obviously risky, this is a speculative position, outside my typical circle of competence (but always trying to expand) and sized it as such.  One thing that does bother me a bit, management owns very little stock here, but their options could be a significant payday in a sale scenario. 

Disclosure: I own shares CLRB

Thursday, January 4, 2024

AlloVir: Another Broken Biotech

AlloVir (ALVR) (~$74MM market cap) is clinical-stage biotech focused on cell therapy to treat viral diseases. On 12/22/23, AlloVir paused their Phase 3 studies for Posoleucel after advisors concluded the studies were unlikely to meet their primary endpoints.  Alongside the announcement, the company announced, "we will immediately shift our focus to preserve our substantial remaining capital, review our pipeline, and assess strategic options."  AlloVir does have 3 additional pipeline assets:

About AlloVir’s Earlier Stage Virus-Specific T cell Pipeline

Adult Kidney Transplantation

AlloVir has earlier reported the results of its completed Phase 2 randomized, placebo-controlled trial evaluating posoleucel for the treatment of BKV infection in adult kidney transplant patients. After 24 weeks of treatment, 39% of patients receiving posoleucel experienced a ≥1-log viral load reduction, compared to 14% of patients receiving placebo.

Acute Respiratory Infection

The company has completed Part A of a randomized, placebo-controlled Phase 1b/2a trial with ALVR106 in 14 stem cell or solid organ transplant patients. ALVR106 is an investigational allogeneic, off-the-shelf, multi-virus-specific VST therapy candidate designed to target diseases caused by human metapneumovirus (hMPV), influenza, parainfluenza virus (PIV) and respiratory syncytial virus (RSV). Data has been accepted for presentation at a scientific conference in the first quarter of 2024.

Chronic Hepatitis B Infection

ALVR107 is an investigational allogeneic, off-the-shelf VST therapy designed to target hepatitis B virus (HBV)-infected cells and potentially cure patients with chronic HBV infection. Preclinical and IND-enabling studies support the advancement of ALVR107 into a clinical proof of concept study as a next step.

Some of these might be worth something, or not.  The company, unfortunately, didn't give us current cash or formally announce a reduction in workforce (but if you check LinkedIn, many of their employees are "looking for work").  My back of the envelope math:

Someone mentioned to me we should hope the "follow Tang" strategy continues into 2024, he's not on the shareholder registry here (yet), but coming up with a similar offer to what he's been throwing around, I get something like $0.83/share in cash plus a CVR for any legacy asset proceeds.  There is a good amount of cash burn risk here since we don't have much guidance from management, but the time between strategic alts announcements and deal announcements seems to be shortening in these broken biotechs.  A poorly thought out reverse merger is always a concern too, however there are some real shareholders here, hopefully they provide some sanity.

Disclosure: I own shares of ALVR