ESSA Pharma (EPIX) ($72MM market cap) is the latest addition to the broken biotech basket. EPIX is a clinical stage pharmaceutical company that was previously focused on developing therapies for the treatment of prostate cancer. On Thursday (10/31/24), the company announced they were terminating all of their clinical studies and an initiating a review of strategic alternatives.
In the press release the company gave us 9/30 cash numbers:
Liquidity and Outstanding Share Capital
| · | As of September 30, 2024, the Company had available cash reserves and short-term investments of $126.8 million and net working capital of $124.3 million (unaudited figures). The Company has no long-term debt facilities. |
| · | As of September 30, 2024, the Company had 44,388,551 common shares issued and outstanding, and there were 2,920,000 common shares issuable upon the exercise of prefunded warrants at an exercise price of $0.0001. |
This one is fairly clean, although we don't have a severance charge estimate (the company has 50 employees), EPIX hasn't been burning much cash, only approximately $7MM a quarter prior to the termination of their R&D program. My back of the envelope math is pretty straight forward, I'm assuming about $20MM of the expenses to wind down the company from here or get it to a place where a reverse merger can be done, feel free to make your own assumptions.
My liquidation value is about 40% higher than where shares traded Friday following the news.
Disclosure: I own shares of EPIX
Do you think their ip is worth anything? Also, where is Kevin Tang when you need him?
ReplyDeleteNever know, I don't see him on the share register yet, but could be trying his playbook here again. If he does make a bid, likely smart to sell on that news, he hasn't had much success actually get to a definitive agreement.
Delete"he hasn't had much success actually get to a definitive agreement" - as I've learned to my sorrow.
DeleteI think your expectations is a little off. A) It wont take 3 quarters to sell the company. B) Cash burn is significant lower now due to termination of all trials. C) They have IPs, 3rd gen which they have come significant far with, which adds value to a buyer/merger.
ReplyDeleteAlthough I agree with your whole sentiment here, that there is value investing here. Disclaimer: I am also shareholder in EPIX :)
Should have signed in before I wrote that message, but exciting times ahead for this company. Its always darkest before dawn as they say
DeleteA) Some of these are taking longer than expected, think it is good to be conservative on the timeframe
DeleteB) You're probably right, but we don't have severance numbers, without that, I just included the R&D expense in the cash burn numbers too.
C) Thanks, I hope you're right, I know nothing about the IP, its cheap regardless.
How do you conclude the third generation Antien will have value, when the first two have had zero value?
DeleteGood point. We dont know if the preclinical 3rd gen have any value. Wishful thinking I guess
DeleteIn my experience, marking down the IP to 0 has worked out much better than otherwise. Unless you're intimately familiar with the science, it has seemed like a gamble to assign any value to the pipeline.
DeleteThanks, MDC. How/where do you find the pre-funded warrants (genuine question - asking to learn. Thanks again.)?
ReplyDeleteThey gave it in the press release, part of the section I copy and pasted into the post. It's also in the 10-Q.
DeleteWould flag this is a PFIC which comes with tax complications unless in a retirement account
ReplyDeleteFrom the 10K-
"ESSA believes it was classified as a passive foreign investment company (“PFIC”) for the taxable year ending September
30, 2023 and believes it may be classified as a PFIC for the current taxable year and in future taxable years."
It will be some paperwork, but wouldnt using the MTM election be sensible here? Assuming they liquidate, you aren't paying seesawing taxes on some long term holding that doesnt provide the funds to pay any taxes.
Deletehttps://www.hrblock.com/expat-tax-preparation/resource-center/income/investments/pfics-foreign-mutual-fund-reporting-requirements-for-u-s-expats/?srsltid=AfmBOopeaOi_uk1E91VnwnodiohN6iNJwREDDJI-A1ROqSVurKNFQM6T
Mark-to-Market (MTM): With an MTM election, your PFIC’s yearly increases in value are taxed as ordinary gains. At the end of the year, the marketable stock you hold is then treated like you’d sold and repurchased it at its fair market value on that last business day. The value on the last business day of the year will determine the ordinary gains and losses of the fund. Something to note is that if you want to go this route, you need to make that election in the first year. If you don’t, your PFIC will default to being taxed as excess distribution.
New to these but surprised by the discount it still trades at this morning. Is the big risk here, since EPIX hasn't announced a reduction-in-force yet that, they just keep the employees and buy a new drug pipeline? Otherwise can't understand the large discount. Just overall curious if you have any thoughts on the risks here? Thanks.
ReplyDeleteThe primary risk is just time/cash burn, takes longer than expected to do a deal or liquidate. Reverse-mergers are en vogue right now, but that's not always the case, just a year ago or so reverse-mergers would be sold off immediately the day of announcement, now they pop, just sort of depends on the market environment at the time. Also why I prefer a basket approach, don't think there's an easy framework to determine which of these will work better than others.
DeleteFor many of these small drug companies, management owns almost Zero shares. Have literally never bought a share in the open market. It would be almost irrational for management to agree return cash to shareholders, and cancel their jobs.
DeleteThat's true, some biotechs will announce a failure and then they'll point to a promising early stage therapy that they'll refocus on instead. That's more the behavior of management wanting to keep the paycheck. Here, they've terminated all their trials and R&D, different posture that should reduce that risk.
Deletethey will do a review and if they can find a good reason why to advance the gen 3 product they will
ReplyDeletethey are still posting stuff on linkedin which i don’t like in these cases
ReplyDeleteLast post I saw was last week before the 10/31 filing https://www.linkedin.com/posts/essa-pharmaceuticals_masofaniten-our-lead-drug-candidate-is-activity-7255201416338681856-GMVp
DeleteBML with a 9.4% ownership https://www.sec.gov/Archives/edgar/data/1373604/000137360424000105/epix13g.htm
ReplyDeleteThis is a good start !
DeleteTang 13D - 9.7% https://www.sec.gov/Archives/edgar/data/1633932/000121465924018630/e117241sc13d.htm
ReplyDelete