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?
ReplyDelete