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