Current price: $3.2
Expiration Date: Q2 2019
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
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.
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.