Sunday, June 30, 2024

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.

Tuesday, June 11, 2024

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