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:
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
I found an article that effectively summarizes the SEC's new stance on biotech reverse mergers: https://www.orrick.com/en/Insights/2024/01/Recent-SEC-Positions-Impact-Biotech-Reverse-Merger-Activity
ReplyDeletePersonally, I tend to avoid biotech companies that announce strategic alternatives due to the high likelihood of a reverse merger. However, I would consider investing in such companies if there is a large controlling shareholder who shows an "expression of interest" or "indication of interest" in the Schedule 13-D purpose of transaction section.
With the new SEC rules, I might be able to add another filter to my investment strategy by focusing on biotech's that have only one drug that has failed, like Aerovate. It’s an interesting time to invest in biotech's announcing strategic alternatives.
Hey MDC - Thanks for the write-up. I wrote up AVTE as well a couple months ago and arrived at similar conclusions to yours. I particularly think RA Capital's involvement is positive after the successful outcome at ELYM. Just figured I'd share in case of interest/helpful to you: https://centraltendency.substack.com/p/on-aerovate-therapeutics-avte-as
ReplyDeleteThank you for the write up. I'm curious how you or others go about estimating the timeline for liquidations? Or have any sources of evaluating average times on these types of situations (given many variables...)
DeleteI typically (arbitrarily) assume a 1yr timeline for any liquidation, reverse merger, etc., usually from the point of a strategic alternatives announcement or major RIF. There are quite a lot of variables to your point, but in my experience, I've found 1yr to be a prudent assumption (with a fair amount of transactions taking place faster)
Deletewe spoke months ago about this one, you see the same path on RAPT therapeutics since the last 10Q where they notified 43% reduction on workforce?
ReplyDeleteHave you looked into this one?
ReplyDeletehttps://ir.kezarlifesciences.com/news-releases/news-release-details/kezar-board-unanimously-rejects-unsolicited-concentra-proposal
I have, like it, currently on my watchlist. A pretty good strategy might be to figure out which ones Tang will lob in an offer on, sell when he does, then buy back when the company rejects his offer and the market is somehow surprised/disappointed.
DeleteHi MDC,
ReplyDeleteThank you so much for your write-up. Your blog is always an outstanding resource for investors looking to take things to the next level.
About Aerovate, the stock has dropped significantly since Monday, October 20th. I’m wondering if this could be a reaction to the 8-K published on October 17th, though in that case, you'd expect the effect to have been seen on the 18th.
I’d love to hear your thoughts on this.
Thanks in advance
AVTE is a micro cap biopharma cash-shell company and it only dropped like 5% since the 20th, thats just average volatility. Any effect from an 8K is immediate, wether or not its efficiently priced in afterwards, the effect happens instantly. Additionally the 8K was just a must-disclose type of 8K, nothing that would actually have an impact on the stock price.
DeleteGot it. Thank you
DeleteI agree with the other commenter, just normal market movements.
DeleteThank you very much, both
ReplyDeleteHi MDC, thanks for your interesting writeups. I have followed quite a lot of your broken biotech theses, I'm always at first attracted to the high prospective IRRs, the very likely hard catalyst and the margin of safety, but then I remember the uncertainties involved re cash burn surprises, potential reverse mergers that lengthen the time horizon, etc. plus the chances of mgmt doing sth stupid (M&A, continue spending on R&D...) and I end up putting these in the too hard pile... Was wondering if you could maybe do some recap on your experience with the broken biotech netnet theme, like how often do they tend to work out, what does the average IRR look like, how often do they surprise to the upside/downside, what are the typical surprises... Anyhow, thanks for sharing your great work
ReplyDeleteI meant that for MDC but also for any of the other participants here who have done work on these situations. There's great discussion in the comment sections
DeleteThat's a good idea, possibly could be a big part of my year end post. My broken biotech basket has carried me this year, most of my other ideas have been dogs.
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DeleteNice development today. Thank you
ReplyDeleteReverse merger announced - VANCOUVER, British Columbia and SAN FRANCISCO, Oct. 31, 2024 (GLOBE NEWSWIRE) -- Aerovate Therapeutics, Inc.(AVTE) (“Aerovate”) and Jade Biosciences (“Jade”), a privately held biotechnology company focused on developing best-in-class therapies for autoimmune diseases, today announced that they have entered into a definitive merger agreement for an all-stock transaction. The resulting entity will focus on advancing Jade’s portfolio of novel biologics, including JADE-001, a promising anti-APRIL (“A PRoliferation Inducing Ligand”) monoclonal antibody (“mAb”) for IgA nephropathy (“IgAN”). Upon completion of the merger, the combined company plans to operate under the name Jade Biosciences and trade on Nasdaq under the ticker symbol “JBIO.”
ReplyDeleteNice result here. Plus a special dividend that will be $2.25+/share, the PIPE is priced at $0.25/share.
DeleteAnother win for busted biotechs led by RA Capital.
A great development - thank you. Are you cashing out or do you think the market is materially underpricing the share of the ownership in the new entity? It’s speculation at this point but curious in your thoughts
DeleteTax handling obviously depends a lot on your personal situation but this one actually looks like a nice candidate for charitable giving with the post-merger JBIO shares. Thanks to the special dividend they'll go all the way to 0 cost basis so they get especially tax efficient to donate after they hit a long term holding period.
DeleteThanks for the idea.
DeletePerceptive just filed amended 13D on ATHA: "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."
ReplyDeleteTrades below cash
Has anyone looked into EPIX ? On the list for this weekend but looks promising. As per PR "“Senior management, together with the board of directors, are actively focused on preserving capital and will initiate a strategic process to explore and review a range of strategic options focused on maximizing shareholder value.”
ReplyDeleteI did buy it yesterday, like this one. I'll do a quick write-up on this weekend.
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