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

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

Instil Bio: Stopping Clinical Development, Real Estate Value

Instil Bio (TIL) (~$70MM market cap) is a clinical stage biotech focused on developing tumor infiltrating lymphocyte ("TIL") therapies for the treatment of cancer.  Instil was an early 2021 IPO, at the time it had a melanoma treatment, ITIL-168, that was beginning a Phase 2 clinical trial.  They had ambitious dreams which included building a brand new laboratory and manufacturing facility in Tarzana, California to go along with leased manufacturing space in the UK.

ITIL-168 failed to impress and in December 2022, the company laid off 60% of their workforce and decided to put their remaining resources behind ITIL-306, a pre-clinical treatment for lung, ovarian and kidney cancers.  In early 2023, the RIF was further expanded that resulted in reducing their US workforce by 96% and their UK workforce by 42%.  Additionally, Instil scrapped plans to occupy the newly completed Tarzana facility.  A Phase 1 study was initiated in the UK, but earlier this month Instil announced another 61% workforce reduction in the UK alongside the closing of their UK facilities and a partnership with a Chinese firm that essentially outsources further early development of ITIL-306.

Two wrinkles with this idea:

1. Instil hasn't fully put itself up for sale or declared strategic alternatives, while they have essentially laid off everyone in a series of RIFs, as far as I can tell Instil hasn't hired advisors to run a formal process at this point.
2. Instil owns a 128,000 square foot, brand new, never occupied facility (18408 West Onxard St) in Tarzana, California that they've put up for lease or sale.  In the third quarter, they marked down the value of the facility to $132.5MM and have an $82.4MM mortgage loan out against it that matures in July 2027.

If Instil is able to get $132.5MM for the facility (welcome any thoughts from medical/industrial CRE experts) and assuming some further cash burn over the next 12 months, I get a stock that's trading less than half of NAV with no value to their IP.

Note: TIL did a 1-for-20 reverse split in December, some data providers have the old share count.

This company lacks much in terms of public disclosures, they don't hold quarterly conference calls or have much in the way of conference transcripts following their IPO.  Biotech venture firm Curative Ventures owns approximately 30% of the stock and Curative's founder, Bronson Crouch, is the CEO and Chairman of Instil.  While their execution has been poor, seems like they've found religion by prioritizing cash preservation, hopefully a sale or liquidation follows in due time.

Disclosure: I own shares of TIL

Aclaris Therapeutics: Strategic Review for Broken Biotech, Big Discount to Cash

Aclaris Therapeutics (ACRS) (~$85MM market cap) is a clinical-stage biotech company focused on developing novel drugs for immuno-inflammatory diseases.  In November, the company announced their lead candidate, zunsemetinib, did not meet its primary or secondary endpoints in a Phase 2 trial for the treatment of moderate to severe rheumatoid arthritis, the stock dropped 80+% on the news.  Earlier this week, Aclaris announced their CEO was stepping down and the company was initiating a strategic review:

Concurrent with today’s announcement, Aclaris also announced that it is conducting a strategic review of its business to determine how to optimally deploy its capital to maximize shareholder return. On a preliminary unaudited basis, as of December 31, 2023, Aclaris’ aggregate cash, cash equivalents and marketable securities was approximately $182 million.

Aclaris also reiterates the following business plans:

• ATI-1777: Aclaris is seeking a development and commercialization partner for ATI-1777, its investigational topical “soft” JAK 1/3 inhibitor. Aclaris recently reported positive top-line results from its Phase 2b trial in atopic dermatitis.
• ATI-2138: Aclaris is assessing the most effective pathway including the lead indication for ATI-2138, its Phase 2 ready investigational oral covalent ITK/JAK3 inhibitor. Aclaris announced positive results from its Phase 1 MAD trial of ATI-2138 in 2023.
• Discovery: Aclaris plans to continue to advance discovery programs through KINect®, its proprietary drug discovery platform.

I don't love the verbiage they use here, from the sounds of "optimally deploy its capital" and "reiterates the following business plans" it appears the initial desire is to continue their research and development pipeline.  However, this situation seems ripe for an activist, indeed Tang Capital and BML Advisors both own 6+% of the shares each.  Tang Capital could throw out an offer, similar to RPHM, and change the direction of the strategic review.

My back of envelope liquidation estimate:

As usually, these are very much swag estimates, ACRS does a nice job of breaking out their R&D expense by program, feel free to get more granular in your estimates.

On the positive side (from an investment perspective), the company did do a 46% reduction-in-force in December, halted zunsemetinib development and appear mostly in a standstill on ATI-1777 and ATI-2138 as they decide on next steps.  On the negative side, the co-founder is now the interim CEO, he might not want to sell and might rather continue on developing new drugs, but the activist shareholders and high cost of capital will hopefully change his mind.  This is on the riskier side of the broken biotech spectrum, but remains at a pretty attractive discount to net cash.

Disclosure: I own shares of ACRS

HomeStreet: BANC/PACW Style Merger with FirstSun, Cheap Proforma

This morning, FirstSun Capital Bancorp (FSUN) (~$850MM market cap) announced they were acquiring HomeStreet (HMST) (~$200MM market cap) in an all-stock transaction that includes a PIPE investment, lead by Wellington (being done at $32.50 per FSUN, or $14.12 per HMST), that neutralizes the mark-to-market impact of HomeStreet's balance sheet.  FirstSun is an insider controlled (69% insider ownership) C&I loan heavy bank that trades OTC with geographic concentration in Kansas, Texas, Colorado, New Mexico and Arizona.  FSUN will be the surviving entity, with FSUN management in charge (HMST's Mark Mason given a semi-ceremonial position as Vice Chair of the board) and be listed on the NASDAQ post "mid-2024" close, increasing the liquidity of their shares.

The credit quality of HomeStreet's assets has never really been in question, by re-marking them at current values, along with cost synergies, FirstSun will be able to enjoy outsized earnings in the early years of the deal.

HomeStreet shareholders will be receiving 0.4345 shares of FSUN for every share of HMST.  As I write this, there's actually a negative spread, likely because FSUN is OTC and illiquid, but the proforma entity is trading at approximately 5.9x next years estimated earnings, well below peer banks.

At 8x, still below peers but accounting for some of the overearning related to the marks, HMST would be worth $21/share.

I'm going to hang onto my shares, stick this in the same mental bucket as Banc of California (BANC) where a stronger bank takes over a weak one, extracts a lot of synergies and as we get closer to 2025, the market will start to recognize the new earnings profile of the combined bank.  I continue to like regional banks in today's market, for a few reasons:

1. With short terms rates likely coming down in 2024, banks will attempt to quickly reduce their deposit costs (100% beta) to protect their NIMs;
2. Commercial real estate exposure is generally overstated by the media/market, it will take a long time to play out giving bank's time to reserve and workout loans;
3. We'll continue to see a lot of mergers, banks need more diversified deposit platforms to extend deposit duration.

Any other banks out there ripe for a similar transaction structure?

Disclosure: I own shares of HMST

Liberty SiriusXM Group: Tracking Stock, Merging with SIRI

As most know, Liberty SiriusXM Group (LSXMA/K) is the Malone-style tracking stock for Liberty Media's majority ownership interest in SiriusXM (SIRI).  Liberty famously bailed out SIRI following the financial crisis and made a killing on the investment (much of it early in their holding period).  Nearly fifteen years later -- skipping over a lot of interesting history -- in December, Liberty Media reached an agreement to formally split-off their stake and merge it back with SIRI, creating a simplified one-class share structure at the satellite radio provider.  

As almost all tracking stocks do, LSXM has traded at a significant discount to underlying shares it is meant to track, this transaction is meant to collapse that discount, however, even a month after the transaction was announced (and with a relatively quick, "early Q3" close) a large discount remains.  The exchange ratio set forth in the merger agreement is estimated to be 8.4 (might move around ever so slightly) shares of SIRI will be issued to each share of LSXM.  Using the current share prices, the spread is approximately 44.1%.

Said another way, one could effectively buy SIRI for $3.62/share via LSXM today.  Why might this discrepancy exist?  The primary argument I've seen is SIRI shares are overvalued as SiriusXM has pursued a typical Malone-style levered equity model and repurchased a significant amount of SIRI stock, which has artificially increased the price of SIRI and reduced liquidity (and increased the percentage owned by Liberty Media).  That might play a small part in it (but SIRI isn't currently in the market and presumably arbs are shorting SIRI against LSXM), but I believe the larger reason for the spread is still the hated tracking stock structure, many investors don't understand it or simply can't own it (won't find LSXM in many index funds).

Looking at LSXM from a fundamental perspective, you can create SIRI for a fairly cheap valuation that should provide some downside protection post merger completion if indeed SIRI is the overvalued side of the trade.

As always, please feel free to point out where I might be incorrect.  I'm using 2024 estimates from Tikr as management hasn't provided guidance yet.  It should be noted that SiriusXM is in the middle of large multi-year capex spend on revamping their satellites and free cash flow should jump considerably starting in 2025.  Post-close, SIRI should become eligible for more index inclusion, including the S&P 500 where it is currently excluded as a controlled company.  Similar to JXN or others, that could provide support for the shares and add a turn or two to the multiple.

There is some business risk here, SiriusXM will have considerable debt at 3.9x EBITDA and a relatively flat growth profile.  SiriusXM does plan to prioritize deleveraging following the close of the transaction to get back to their 3-3.5x target leverage ratio, before fully turning back on the buyback machine.  While their churn is remarkably low (surprisingly, even during Covid, subscribers didn't cancel despite commutes dropping), their subscriber base is aging and they continue to face competition from Apple, Spotify and others. They are reinvesting in the business to push back on competition, launching a new tech stack, including a streaming only version, but I view these efforts as mostly defensive.  Either way, this is a surprisingly resilient business and should be fairly stable in the near to medium term.

Disclosure: I own shares of LSXMK

Cellectar Biosciences: Positive Data, Warrant Overhang, Biotech Speculation

Cellectar Biosciences (CLRB) is a late-stage clinical biotech company (not a "broken biotech") that recently reported positive data for their lead therapeutic, Iopofosine I 131, for the treatment of Waldenstrom's macroglobulinemia ("WM"), which is an uncommon slow growing type of non-Hodgkin lymphoma.  WM typically inflicts those over the age of 60 and those with WM succumb to the cancer within 5-10 years.  While I try to avoid science plays around here, the results were quite remarkable and provide hope for those with WM who have unsuccessfully tried two prior lines of therapy.  The FDA has granted Iopofosine both orphan drug and fast track designations, Cellectar plans to file a new drug application (NDA) in the second half of this year with an accelerated 6 month approval timeline.

One of the benefits of treatments for rare diseases is the patient population tends to be tightly concentrated within specialized health care communities and due to the R&D development costs, extremely high pricing is norm in orphan drugs to recoup that investment over a small patient population.  Cellectar is in the process of transitioning from a clinical stage biotech to a commercial one (assuming FDA approval), they're outsourcing much of the manufacturing and only spending $25MM to stand up a sales and commercial support team.  The absolute number of patients is relatively small, but again, this will be a high priced therapy (a quick google search, the median orphan drug costs $200k+ annually).

Doing a little back of the envelope math (full warning, this could be wildly off), if 1500 new patients are diagnosed with WM annually and 80% eventually receive a 3rd line treatment, then CLBR's annual patient market segment is about 1200 people.  If 2/3rds of those end up taking Iopofosine at $250k (made up number, slightly above the median orphan drug, I haven't seen management indicate pricing anywhere, please correct me if they have) a piece, that's $200MM in annual revenue.  Additionally, Cellectar is running a Phase 2 study for Iopofosine in patients with multiple myeloma ("MM") and central nervous system lymphoma, plus a Phase 1b study is just kicking off for pediatric patients with brain tumors.  If they're able to repeat the success in WM, this could become a much larger revenue opportunity.

Cellectar has a messy and confusing capital structure.  In September, they raised capital via a private placement for $24.5MM by selling Series E-1 convertible preferred stock that converts to stock at a strike price of $1.82/share (CLRB currently trades for ~$3.40/share), stapled to the Series E-1 prefs were two tranches of warrants, designed to act as milestone payments to provide funding for Cellectar post positive WM study results and the second tranche post FDA approval.  The tranche A (exercise deadline 10 days post positive data, or 1/19) has a strike price of $3.185/share and if fully exercised, will bring in $44.1MM to Cellectar.  The second tranche, tranche B, has an exercise price of $4.7775/share and would bring in $34.3MM if CLRB receives FDA approval and the warrants are completely exercised.  This private placement was designed to be big enough to get the company to its commercial phase where it could potentially be self funding.  CLRB does have additional warrants, one tranche, the "2022 common" is in the money with a $1.96 strike and expires in 2027, the others are all well out of the money and can generally be ignored.

Above is my attempt at the share count math and proforma cash assuming the tranche A & B warrants are fully exercised (to be more conservative, you could take more burn into account since the FDA approval trigging the tranche B warrants won't come until sometime in the first half of 2025).  But I get a current proforma enterprise value in the mid-$80MMs for a therapy that could do $200+MM in annual sales, that seems cheap to me.

Hopefully someone who actually knows the situation reads this post and comments, all feedback welcome.  This is obviously risky, this is a speculative position, outside my typical circle of competence (but always trying to expand) and sized it as such.  One thing that does bother me a bit, management owns very little stock here, but their options could be a significant payday in a sale scenario. 

Disclosure: I own shares CLRB