Three biotechs trading below net cash

RAIN, AVIR and FIXX

I have dug into failed, or semi failed biotechs lately. I think the way to play these things is to get in when there is one or more activists accumulating shares at a large discount to net cash. Notable activists are Tang Capital, Orbimed, BML capital and Foresite. You probably also want overall large institutional ownership of say >50%, since it makes voting against bad deals and liquidating the company a whole lot easier.

The biggest risk by far is some terrible reverse merger so that management can keep collecting a salary. This risk is mitigated by large institutional ownership and a small cash balance of well under $100m. 

So I took a position in Rain therapeutics (RAIN). RAIN has a bid out by Tang capital (14.6% holder) for $1.25 + a CVR for 80% of proceeds or licensing of RAIN’s remaining programs. Currently shares trade at ~$1.05. BML just took a 4.77% position as well recently, so activists control nearly 20% of the shares. I think realistically there is about $1.3-1.4 of cash that can be paid out in a liquidation. Management holds about 12% of shares outstanding. I think there is a good chance that activists can get >50% of shareholders to vote against a reverse merger if it were to materialise.

I also took a position in Atea Pharmaceuticals (AVIR). This one hasn’t yet announced strategic alternatives, but Tang and BML have been accumulating. Cash burn is about $30m per quarter and they have a Covid antiviral drug in phase III and antivirals against various other diseases in earlier phases. Net cash is about $600m or over $7/share. So even if they burn say another $150m of net cash in another 5 quarters, and then a further $75m before liquidating, there is still plenty of upside. They will get results of their trials in 2024, so we will know more by then. 

Tang capital which now owns just over 4% has already tried to take AVIR private in May this year for $5.75/share + a CVR. And was refused by management. BML owns ~6%.

The nice thing about AVIR is that their antivirals could have significant value as well. Their Covid antiviral is potentially a better Paxlovid in a multibillion $ market. And if results keep disappointing, Tang might make another bid, sending the share price up again. I don’t think they will sit there passively watching this company burn away all their cash.

Finally I took a tiny 1% stake in Homology (FIXX). There is about $1/share of cash in a liquidation, some IP and a call right to sell 20% of their JV with Oxford Bio Media solutions. The JV might be worth the current market cap alone. Clarkstreetvalue’s blog has more info.

Unfortunately management has decided to do a rather terrible reverse merger. The combined entity will have $115m of cash and FIXX holders will only own 25% of it. And the new drug IP seems hardly exciting. So shares have sold off to just over $0.5. While deal value pre CVR was $1.38. My hope is that an activist will step in here and save the day, since there should be a pretty strong economic incentive to do so? I think mere news that an activist has taken a stake would send the shares higher. This is obviously a very speculative bet as the CVR could also be worthless. And combined entity shares will probably sell off further if the merger does close.

Since these are all quite speculative, I am keeping my position size small. Readers of this post should do their own due diligence before buying or selling anything, since I have been wrong before and cannot guarantee all information in this write-up is 100% factual. And I may buy or sell the above mentioned stocks at any time.