Realm Therapeutics (RLM) – Expected Tender / Liquidation – 60% Upside

Current price: $3.2

NAV/share: $5.1

Upside: 60%

Expiration Date: Q2 2019

Proxy document

 

I started looking at this situation last week when share price was somewhat lower pending shareholder approval of the asset sale (approved on the 15th of March). I did not expect such a positive market reaction to voting result as I considered the approval to be guaranteed given non of the shareholders objected openly and the sale price was fair - $10m for a royalty stream that generated $1.1m in 2018 and $0.9m in 2017, out of which shareholders did not see a penny as all of it was eaten by ongoing operating expenses. However, even with the latest share price move, there is still plenty of upside left (60% upside to cash on the balance sheet).

Realm Therapeutics, a failed clinical stage biopharma company, will be a cash-shell after the sale of its only remaining royalty asset. NAV per ADS will stand at c. $5.1 vs current market price of $3.2. It is not yet clear what will the company do with this pile of cash - strategic review is ongoing since September and based on management's comments there are a number of parties interested in buying out the shell or doing a reverse merger. Outcome of the strategic review is expected by early Q2 2019. Importantly, one of the shareholders (6% owner) is pushing the company to launch tender offer at GBP0.15/share (equivalent to $5.3 per ADS).

Shareholder base is rather concentrated with top 10 owning c. 70% of the stock. Majority of these are life science investors that acquired their stakes at significantly higher prices when RLM was still running a couple of drug development programs (discontinued in Sep 2018). Nevertheless, due to concentrated institutional ownership the risk that management/board misallocates the funds or does some dumb value-destructive reverse-merger is materially reduced - any subsequent transaction will require shareholder approval and with drug development programs discontinued, these shareholder likely want to get back what is left of their initial investment.

RLM has dual listing in London AIM and NASDAQ (each ADS equivalent to 25 ordinary shares). Shares will be delisted from AIM together with the royalty sale.

The main risk here is that following the royalty sale management either does nothing for prolonged period of time or acquires/reverse-merges into some value destructive business. The first one is unlikely as 'multiple indications of interest' were mentioned in every single update on the strategic review. And the second one is unlikely as any transaction would be conditioned on approval by the concentrated shareholder base. In any case there seems to be sufficient margin of safety here even for some unexpected decision as the spread between NAV and the market price is 55%.

 

Management's comments on plan going forward

From the latest strategic review update:

The Company remains in discussions regarding the Formal Sale Process which may subsequently result in either a takeover offer for the Company or an acquisition constituting a reverse takeover under AIM Rule 14, or, if a suitable strategic transaction (which, for potential offerors, may involve a takeover offer for the Company) is not identified, a potential winding down of the Company and distribution to Shareholders of the Company's remaining assets following satisfaction of all applicable liabilities and obligations. At the current time discussions are ongoing with a number of interested parties (including potential offerors), some of whom are interested in a reverse takeover transaction (which would involve an acquisition of a business or corporate entity in the life sciences sector, where the potential offeror would acquire the benefit of the Company's Nasdaq listing and cash) and others, who are potential offerors, are interested in making a takeover offer for the Company (in order to access the Company's cash).

In all cases, interested parties (including potential offerors) have made it clear to the Company, during the course of the ongoing discussions, that they have no interest in the Assets which are the subject of the Assets Disposal, but are primarily interested in the cash balances of the Company.

Directors <...> anticipate providing an update on the process in early Q2 2019

 

Cash Burn

Company reported cash balance of $20m as of the 31st of Oct 2018 and then $18.8m at the end of Dec 2018. That's $1.2m in two months, however it is not clear if part of this was used to reduce payables ($2.5m as of Jun 2018) and whether any royalty payments were received during the period. These two months also included higher than normal operating expenses due to ongoing strategic review / sale process and involvement of various consultants. If RLM remains as shell for prolonged period of time I would expect admin expenses to be a fraction of the above.

 

NAV Calculation

RLM NAV

The main unknowns here are Q1'19 cash burn as well as any remaining liabilities that have not yet been paid before the end 2018. I believe the figures I have used are conservative.

Also, in case of liquidation or sale of the company there might be additional expenses related to severance payments (CFO and CEO will be entitled to 12 months of salary which amounts to $0.7m + unknown amounts for other employees) or further admin/professional service expenses. Assuming these total up to $3m, NAV per ADS is reduced to $4.5 (or GBP0.14/share) - still sufficient margin of safety.

There are also significant number of warrants and options outstanding, but all of these seem to be way out of the money.

93 COMMENTS

  1. fishwithwings

    I think another risk is that shares are offered as payment in a takeover scenario.

    1. dt

      That’s what I am referring to in discussing risk of reverse merger instead of liquidation.

  2. value_investor

    It looks like the shares / ADR’s will be delisted on March 26th or 27th. Is it still OK to buy them on Monday, March 25th ?

  3. iFindValue

    @value_investor just saw this as I was gleaning through the sec filing:

    “For the avoidance of doubt the Company does not propose to cancel the admission to trading of its American Depositary Shares (each representing 25 Ordinary Shares) on Nasdaq.”

    1. value_investor

      @Terence

      Many thanks for this timely piece of update !!

      If we own ADS and it is delisted on Nasdaq, then

      1 : Do we still get a liquidation distribution if the company decides to do it after their strategic review ?
      2. Will we be able to trade the ADS in OTC markets ?

      Thanks in advance.

      1. dt

        If RLM gets delisted from NASDAQ it most likely will still be traded just as an OTC stock.

        Also the stock is unlikely to be delisted from NASDAQ before the outcome of strategic review is announced.

  4. dt

    20F is really positive and my NAV estimate has increased.

    – Cash as of 31st of March at $27.7m, which is higher than my $26.4m estimate after Q1.
    – Payables at $0.5m instead of $2.5m in my previous calculation (but that is Dec’18, rather than Mar’19 figure).
    – And then on top we have receivables of $2.4m, however it is not clear if part/all of these receivables have already been converted into cash as of Mar’19 or whether these have been transferred/cancelled together with the royalty sale. I did not manage to find any additional info on these neither in 20F nor asset disposal agreement.
    – Quarterly cash burn is uncertain at the moment due to unknown working capital changes.

    Conservative NAV estimate = cash less liabilities = $27.2m or $5.83/share

    Potential NAV estimate = cash and receivables less liabilities = $29.4m or $6.31/share

    I am guessing that actual NAV is somewhere between the two.

    1. fishwithwings

      Thanks for the update. I’m long the stock but do have some concerns about how management allocates the cash. It doesn’t seem to me that they would be incentivized to sell the company as their ownership is not material and they are not very old. They also barely mention a liquidation in the 20F and always mention acquiring a company first. Any thoughts?

      1. dt

        Agree, management’s decision on how to allocate capital is the biggest risk at the moment and that is the reason why the trade exists. I do not think language in 20F differs materially from numerous press releases that have been published on the topic by the company, so do not think that anything has changed from before.

    2. na

      dt,

      What are you including in your “receivables” number? (Shouldn’t you be excluding any royalty related receivable?)

      Also, are you rounding off some of your values? I can’t get to your original estimates without rounding to the nearest 100k. With a company this size, that policy can be misleading.

      Finally, why not include your estimate of severance and other miscellaneous wind-down expenses in your NAV estimate?

      1. dt

        As per my post above in ‘Conservative NAV’ I have completely ignored any receivables and in the ‘Potential NAV’ I have included all of the receivables. As I have already said, I have no idea (there is no clarification in 20F) whether receivables related to royalty will be converted into cash or whether these have been transferred together with the royalty sale.

        And re 100k difference, maybe I have rounded up somewhere, but for my range of estimates ($27m-$30m) $0.1m looks immaterial and has no impact o investment thesis. Other factors at play are much larger.

  5. Alex Rackwitz

    Damn – looks like management did a deal after all apparently “with significant support from our shareholders”

    1. Alex Rackwitz

      RLMs value is based on $20m of cash although the 20F states $27.7m of cash as of 31 March 2019 – strange.

      The exchange ratio is based on 60 day VWAP for Essa which is at a big premium to where the share price currently trades ($3.18 vs current price $2.40)

      So the offer is valued at about $3.45 at current Essa share price (before cash adjustments). And it has 45% of shareholders committed to vote in favour.

      1. na

        Where did you read that the deal has 45% shareholder support?

  6. dt

    Wow, this is a steal of shareholders money in every sense of it, but was definitely one of the potential scenarios, just did not expect it to be so bad.

    Essa Pharma has drug development programs at Phase 1 level or pre-phase 1. Like most pharma company’s it burns. Company has only CAD8.5m of cash left (enough for 3 quarters) and trades at market cap of CAD21m. Essa has been raising and burning capital every single year since inception. I am not able to comment on their drug development programs, but purely judging from share price performance it does not seem other investors see much value.

    Press release mentions only BVF funds supporting the transaction, that’s only 13% of share ownership. None of the other 5%+ shareholders are common for both companies. So there is still hope shareholders will reject this.

    From my reading on schemes of arrangement it seems that 75% approval will be required for this merger to pass (https://www.slaughterandmay.com/media/39320/a-guide-to-takeovers-in-the-united-kingdom.pdf). 75% threshold for me seems to be very hard to attain specifically for this transaction, but I might be misunderstanding the thinking of pharma funds as they are used to throwing loads of cash after high cash burning companies with hope of hitting a home run. So they might see this opportunity differently than those favoring return of cash to shareholders.

    Also I am not fully certain on the 75% approval requirement, so if anyone has more knowledge on UK take-over law and Schemes of Arrangement, please share your thoughts.

    1. nostradamus

      They have appr. 45% in the bag, and need 75%. it was in the 8-K

      The biggest problem for me here is “divided by the 60-day volume-weighted average price (“ VWAP ”) of ESSA common shares as of May 14, 2019 (US$3.19)”; the current EPIX share price is +/- 30% lower.

      I have no clue why RLM shareholders should accept payment at a significant discount in illiquid shares. a ridiculously bad deal. it’s hard to imagine any shareholder with any clue voting in favour of this.

      1. dt

        Found it now – did not notice the 6k section after the ‘about’ and ‘contacts’.

        So they need almost half of the remaining votes – still a high mark to reach.

        1. Alex Rackwitz

          Besides a bad deal, another surprise is the low net cash estimate which unfortunately cannot be voted against.

  7. Vincent

    This is the worst scenario. I read it as the deal needs majority of those who vote. But the total number of votes should be more than 75%. So need 37% of share vote yes at the very least.

    1. dt

      I do not think that is correct – 75% of votes must be in favor of the transaction.

  8. work 22

    Its a terrible deal- but with that many shareholders on board already they might get it. Definitely worst case scenario– bummer. UK takeover law is very complex, and more strict than in the USA. For example, In UK takeover law its important ito note that if you say “this is our final offer” then it is! The bidder cannot return for 6 months if a deal falls apart or they say its their final offer. Would somebody come in for RLM? Seems doubtful, this has been going on long enough. Not sure why they don’t just wind it up and pay out returns of capital. Frustrating.

  9. Terence

    Cash as of 31st of March at $27.7m, per older posts here. But merger agreement says $20.5m. Does anyone know where 25% of the cash went?

    Aside from the 25% “missing cash”, using EPIX 60-day price of $3.20 instead of the current price of $2.30 is another 30% haircut! This is even assuming EPIX has that much value.

    Details of the merger below:

    https://seekingalpha.com/pr/17514709-agreement-reached-essa-pharma-acquire-realm-therapeutics

    “if Realm’s Net Cash Amount is US$20,500,000 (which is the estimated Net Cash Amount) the number of New ESSA Shares to be issued would be 6,749,608 and the Exchange Ratio would be 0.05791 of a New ESSA Share for each 1 Realm Share subject to the Scheme”

  10. na

    This is such a terrible deal. In my most charitable mood, I can not find a way to interpret this deal positively. It is below various interpretations of NAV (~$5), it is below Bavaria’s take-out offer ($4.79), it is even below recent open-market trading prices when using EPIX’s most recent trading price (yesterday’s close implies a price of $3.49 while RLM was trading above this as recently as May 3).

    1. nostradamus

      I just can’t understand why 45% of the votes are in favour of this deal. Why are these shareholders accepting such a grossly ridiculous offer, instead of just forcing a liquidation?

      1. Vincent

        Because they are stake holders in the acquirer. This is pure theft.

  11. Vincent

    BVF Partners, who agreed to vote for the deal, owns over 9% of EPIX. Is there a legal ground that it be considered an affiliate of the bidder, hence its shares shouldn’t count for the vote?

  12. na

    Using:
    – $3.189 as the designated value of EPIX shares,
    – 6.420359 million minimum EPIX shares,
    – 7.933301 million maximum EPIX shares,
    – 5% deal premium to NAV;

    it appears they are estimating a NAV of between $19.5m to $24.1m.

    I estimated an NAV of $24.1m as of April 10, 2019.

    Seems like RLM shareholders could have demanded better than a 5% premium given the uncertainty and illiquidity in EPIX. Add to that, the 60 day volume weighted average price of EPIX ($3.19) seems exceptionally generous given recent trading in EPIX ($2.40 yesterday’s close).

  13. Kevin Chang

    So best case scenario at this point is they dont get the remaining 30% votes?

  14. work 22

    Ironically now there’s an arb here, for those who think the deal with EPIX closes and can be patient…

  15. Ben

    It looks like a large block of about 255k shares at $4.40/share traded after hours today. Any idea what that was all about?

  16. Ben

    Has anyone tried or considered following up on this type of legal option?

    You are hereby notified that Levi & Korsinsky, LLP has commenced an investigation into the fairness of the sale of Realm to ESSA Pharma Inc. (NASDAQ: EPIX; TSX-V: EPI). Under the terms of the merger, Realm Shareholders will be entitled to receive approximately 0.058 ESSA ordinary shares for each Realm Share based upon a 60-day volume-weighted average price of ESSA shares of USD $3.19 per share of ESSA as of the close of trading on May 14th, 2019, subject to a final adjustment based on Realm’s final net cash amount prior to closing of the Acquisition. To learn more about the action and your rights, go to:https://www.zlk.com/mna/realm-therapeutics-plc

  17. Ben

    Assuming the worst case scenario of 6,420,359 shares / 0.05508 exchange ratio, with the current price of ESSA at $2.15/share, and the 25 common shares = 1 ADR, isn’t the worst case price (assuming this goes through) $2.96 of new ESSA? Is RLM trading too low now at $2.59? What am I missing?

    Are folks able to borrow ESSA/EPIX to short?

    1. work 22

      there is a wide arb here. its easier to just think of it as RLM = 1.45 X EPIX. No borrow in EPIX as far as i can see. But since no borrow, that means lots of EPIX sellers after the deal closes.

      As for the legal remedies, there may be a case here- but how much money is there to go around? When shareholders sue a company, they are just suing themselves really. So you need a better deal, not a victorious lawsuit…

    2. DendriteResearch

      There’s no free money here, I don’t think. You could treat it like a merger arb and buy RLM and short EPIX, but what happens if the deal falls through? (I see 10k EPIX shares available at 8.5%). EPIX has probably been dropping because people are doing this merger arb, so it’ll probably pop back up as they unwind those shorts. RLM has been dropping because this is an obviously terrible deal for shareholders, and the fact that management entered into the deal indicates that they are incompetent/corrupt. If the deal were canceled tomorrow, RLM isn’t popping back up to 4. It might pop, but not that far. The market is going to heavily discount that net cash and assume management will find a way to eat it.

      If anything, I think the play is to buy EPIX. If the deal breaks (which I think is very likely), they’ll pop as the shorts try to exit a very illiquid stock. If the deal goes through, they just bought $20M in cash for $12M in new shares. The downside is that extra cash is likely to be burned rather than returned to shareholders, but in the short term at least EPIX ought to do well either way.

  18. work 22

    Somebody just took RLM up intraday on volume to $3.20 (thursday 5/23/19). I wonder if someone thinks they can break the deal? I have no idea- no news headlines I see. Hopefully its possible. EPIX not moving as i write this.

    1. work 22

      thanks. we’ll see. hopefully people are riled up enough to vote against. i will be voting against the deal with what i have left.

    1. na

      There is also a webcast to discuss the fraud on 6/11/19:

      “The Company will host a conference call and audio webcast on 11 June 2019 at 10:00 a.m. EST / 3:00 p.m. London time to discuss the Acquisition. Executives of Essa will participate in the call. Instructions for accessing the call and audio webcast will be announced in due course.”

  19. na

    https://hiddenvalue.blog/2019/05/30/realm-therapeutics-nasdaqrlm-pt-2/

    – “The company announced a transaction, wherein another failed biotech (ESSA Pharma Inc.) will get the chance to acquire our cash for essentially 85c on the dollar.”

    – “However, it is now apparent why. This is a Board beholden to a large US institutional investor that is seeking to bail out another failed bet, by taking advantage of Realm shareholders.”

    – “Failing to monetise the NASDAQ listing which conservatively could have added $0.40 per ADS (and increased the recovery amount by ~9%).”

  20. Ben

    I got a voice message from Georgeson about the annual meeting. Anyone else get a call?

    1. work 22

      Yes, i’m going to call them back Monday and tell them I’m voting AGAINST management and the deal etc. Please do the same! If they are calling, that means the vote is at least close, otherwise they wouldn’t bother calling at all (based on previous experience with deals)

  21. Ben

    I listened to the conference call today and didn’t hear anything particularly new or interesting besides the ISS recommendation for the acquisition. Did anyone else take anything useful away? Also I looked but didn’t see any explanation or justification for ISS’s decision. Do they not publish the results of their analysis?

  22. wlblount

    I own RLM in an IB account. I do not see any notifications about a vote like I would normaly see corp. action notifications.

    1. Vinn

      This one IB sends it to your email adres with a link so you can vote electronically.

  23. nostradamus

    They needed 75%, they got 78,5% so it was very close. On Thursday there’s a court meeting to sanction the scheme: it’s a long shot, but the court could still reject the deal: there is plenty in here to reject, and with such slim voting margins it will be looked at more closely than if this deal would have gotten the usual 99% approval rate. If on Thursday the deal is approved, it’s end of story.

    1. nostradamus

      Court meeting postponed until 8th of July because of “a shareholder opposing the scheme”

        1. Ben

          Does anyone have experience with this type of court and what this might signal?

          1. nostradamus

            Most schemes are not opposed and routinely approved by the court. In this case, there was a opposing shareholder (I think we all know who) represented by counsel arguing why it should not be approved. There are several reasons why it shouldn’t be. Of course there are, the whole deal is hedge fund theft.
            Also, the scheme did get approved by shareholders, but, quite unusual, only by a very narrow margin. If you take out the votes which were obviously made with in conlict of interest, it wouldn’t have been even close to approved.

            Fortunately, all of this has apparently added up to the judge deciding he/she couldn’t just stamp it and be done with it, but that it needs to be closely looked at further. As the judge was never going to reject the scheme right there at the hearing, it’s the best outcome we all could have hoped for. Still nothing of a guarantee though, the judge could obviously still approve anyway.

          2. work 22

            Usually the final court approvals are a rubber stamp process- did the lawyers get all the paperwork in right, etc etc. A deal like RLM with shareholder approval and without any regulatory concerns like anti-trust, to get paused, is very unusual. So anybody’s guess here. Not enough precedents, and also each precedent was case specific anyway. IMHO, its a gamble. I still have a little, though i cut a bunch.

  24. Ben

    Thanks guys for sharing your perspective. There was a major move in RLM (200k volume with a high of 3.39) and EPIX today (90k volume and a high of 2.68). Today was the biggest day in memory. Anyone know who was buying or what was driving it?

    1. nostradamus

      Looked like idiots/pumpers on twitter to me, that did a quick pump and dump based on tweeting uninformed rubbish about a supposed “merger play”.

      1. Writser

        Could be. I had a token amount of shares, when I look in my IB account it looks as if they are delisted now. Are you sure we haven’t missed some court decision?

      2. Writser

        Though I agree that when looking at twitter yesterday it seemed some idiots were busy with this name too. I missed the spike though unfortunately.

        1. nostradamus

          Nasdaq was going to delist Realm for being a shell company. Realm got an extension until the 10th, assuming the merger would have closed by then. It didn’t. Realm said in their latest PR they would be “liaising” (whatever that means) with Nasdaq about this.

          It’s now the 11th. I can’t find Realm on https://listingcenter.nasdaq.com/IssuersPendingSuspensionDelisting.aspx, but it does appear they have been delisted. I don’t think this is related to the court decision.

          1. nostradamus

            Or it’s just IB being weird. I can place an order with another broker. We’ll see.

    2. yak

      No clue what was driving it, but I contributed to the selling volume as it triggered my limit sell. I had been hoping something like this would happen so that I could close my position

  25. work 22

    Has anyone seen any updates or know the court case link? Seems like a while without any info, though lawyers could all be on vacation. Fingers crossed that the old adage “time kills all deals” applies here. We’ll see

    1. DendriteResearch

      EPIX posted a press release that the judge in the case had “reserved judgment”, which means they’ll take some time to review the relevant materials and make a formal ruling later. No idea how long that usually takes in the UK.

  26. Kevin Chang

    EPIX jumped 30% today… must be some news about the merger. At least the shares being exchanged for are closer to the average.

    1. Vinn

      I bought 100 shares short a couple of weeks ago to see if it was possible to get some. Then I forgot about it but yesterday the position got closed by IB because the position had to be closed. Just a guess of course, but perhaps more people with more shares had the same, so they could have had forced closing of short positions as well.

    2. nostradamus

      their share price is theoretical. it went up 30% on $50K of trades over the entire trading day(!). try selling even a small amount and you crash the price.

  27. dt

    Closing RLM out from active ideas.

    This has been a clear fail where large shareholders have unexpectedly agreed to a seemingly value destructive merger.

    Apparently pharma funds have a different mindset (maybe much longer-term thinking or maybe just bailing out other investments) compared to balance sheet investors like me. In the case of RLM, large shareholders have chosen to buy 50 cents for a dollar. My expectations that RLM’s larger shareholders will act more rationally (at least from my point of view) and that interests are aligned with minority retail investors have been proven wrong. High acceptance threshold (75% had to be in favor of merger) did not help either.

    Overall -25% in 6 months and congrats to those who had a chance to sell into the initial price run-up before the merger was announced.

  28. Writser

    I bought a small amount of RLM shares after the court approved the merger and flipped them a few days later for an easy ~8% profit. Bought around $2.60, sold EPIX at ~$1.95 on August, 1. Also July, 10 was a nice opportunity to flip shares or even to go short (if that was possible, I was away from the action). Even in these total cluster fucks there is sometimes a small opportunity.

    But yeah, the whole sale / liquidation has been a spectacular clusterfuck.

  29. Writser

    I didn’t, hence the small size. The Epix ADR was trading as high as 2.79 a few days before closing for a ~35% spread. I as basically betting that I could sell my Epix position before shares would drop more than 35%, which worked out. Maybe a bit risky but my thoughts were that the deal completion was actually a positive for Epix and that there might be some inertia before others started selling. Maybe not a very solid thesis but 35% in a few days is a _huge_ starting advantage.

    I guess everybody was so disappointed with the lack of a favorable court decision (and the lack of a borrow) that they just threw in the towel.

    Even now, two weeks later, Epix shares are still trading around $1.70 which implies a $2.45 RLM ADR price, so even if you bought shares at some random time in July and forgot to sell your Epix position until now your loss would still be very minor.

  30. work 22

    I just dumped my EPIX (RLM) on this spike at $2.20, for a loss, but still today’s liquidity is high and its a chance for those bag holders like myself to get out, if you want to. Today’s event was that EPIX announced they sold 18 million shares at $2 to raise $36 million in funding– which is great in a way and massively dilutive in another. Keeps the company alive I guess if you want to stick around for a long shot biotech.

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