Quick Pitch: Neoleukin Therapeutics (NLTX)

Neoleukin Therapeutics (NLTX) – Strategic Review – Upside TBD

Yet another busted biopharma that trades at a very wide 50% discount to net cash and has just launched a strategic review. In November, the company discontinued the development of its key drug candidate NL-201 and laid off 40% of the workforce. This month, it laid off a further 30% of its workers, including the CEO, and started assessing the strategic options. NTLX board, which seems unusually reputable for a $30m market cap company, is orchestrating the review. At the moment, it’s difficult to assess whether full liquidation is in the cards, however, such a large discount to net cash provides a sufficient margin of safety to wait for the outcome.

Board’s/management’s reputation is probably the key aspect of why I think the strategic review could result in a favorable outcome for shareholders. But maybe that is just wishful thinking. NLTX’s chairman Todd Simpson is a current CFO of Seagen – a $37bn biotech giant that is getting acquired by Pfizer. Director Martin Babler was the president/CEO of PRNB, which was acquired by Sanofi for $3.7bn in 2020. Erin Lavelle was COO of Alder Biopharmaceuticals, which was acquired by H. Lundbeck for $2.3bn in 2020. Having said that, the ownership by insiders is rather insignificant. Aside from the ex-CEO’s 6.6% stake, the remaining insiders own only 3.9% of NTLX. Life sciences-focused hedge fund Baker Bros (has a representative on the board) owns a 7.6% stake. Pictet Asset Management has a further 5% each. Note: these ownership percentages are based on the fully diluted share count of 55m, accounting for pre-funded warrants and RSUs.

The company hasn’t really been a success story so far. Since becoming public through a reverse merger in 2019, NLTX burned through c. $120m in cash and its main drug candidate went down the drain already during the preliminary data of a Phase 1 study. NLTX shares trade materially below the $8.40 and $15.25 equity offerings in 2019 and 2020.

NLTX is engaged in the design/engineering of proteins, which are supposed to have superior pharmaceutical qualities compared to native proteins. The company uses its own computational platform to design proteins for treating cancer and autoimmune diseases. The company decided to suspend the development of its leading candidate NL-201 after 1 year of running a phase 1 trial. Management claimed that the benefit/risk profile indicated the company’s resources are better used in creating a new generation of development candidates. The remaining pipeline of NLTX is at an extremely early stage (discovery/pre-clinical).

NLTX currently trades at a $35m fully diluted market cap. My calculations to estimate the net cash balance as of today and at the likely end of the strategic review are detailed below.

  • $96m – cash and short-term investments at the end of 2022.
  • Less $10m for restructuring costs including lay-offs, severance, etc. Management estimated restructuring charges to amount to $6.3m-$8.3m for November’s lay-offs and discontinuation of the NL-201 and then an incremental $2.5-$3.0m announced in March with a further 30% workforce reduction. It is not clear how many of these expenses have already been incurred during Q4 (aside from the $1.4m incurred during the quarter for severance). Management expects the majority of these costs to be expensed during H1’23. I am taking the sum of management’s high-end estimates less the $1.4m.
  • Less $7.5m for the cash burn till March, when the additional 30% of the workforce was laid off. This estimate is based on a $30m/year cash burn rate, which was projected in November’s PR (management said cash they have enough cash for 3 years).
  • This should leave cash today at c. $78.5m, taking into account the full hit from the restructuring charges.
  • Assuming the strategic review will take half a year, I deduct a further $10m of cash burn for the next 2 quarters. This comes on top of the above-indicated restructuring charges. With the reduced workforce, $20m a year cash burn is probably conservative enough.
  • This results in an estimated cash balance of $68.5m by the end of Q3.

Management so far has not announced anything about a full wind-down of the company, so I am just speculating here, but the liquidation scenario would obviously be very favorable for NLTX shareholders. Deducting a further $10m for accounts payables, $2.5m for lease termination penalty (one-year rent worth), and $5m for additional winddown costs, would result in liquidating distributions of $51.5m or $0.93/share. I think this estimate should be on the conservative side as there is probably quite a bit of double counting in my calculations (e.g. some of the restructuring charges might already included in accounts payables as of Dec’22).


9 thoughts on “Quick Pitch: Neoleukin Therapeutics (NLTX)”

  1. Do you think the “March reduction” is for a further 30%, or a further 70%?
    Language in most recent 10-K might point to the latter, but that seems a bite “extreme”;

    “As a result of the restructuring plan approved by our Board of Directors on November 12, 2022 in connection with our decision to discontinue development of NL-201, we reduced our workforce by approximately 40%. In connection with the decision to focus on strategic alternatives, our Board adopted a second restructuring plan on March 6, 2023, further reducing our workforce by approximately 70% of our remaining employees. We expect these restructurings to be completed by the end of the second quarter of 2023.”

    • It seems that you’re most likely correct. Thanks for pointing it out, I’ve somehow missed this text in the 10-K. Meanwhile, the PR was a bit vague and hence I conservatively assumed that it probably must’ve been ‘a further 30%’ reduction. My cash burn estimate for the period after March definitely looks too conservative right now, which makes the case a bit stronger.

      • Agree, language is a bit confusing. Besides, small errors that increase margin of safety is a lot better than the other way around 🙂

  2. Hi, excellent writeup – just a quick question, where did you estimate the 5mm in winddown costs from?


    • No strong argument behind the $5m figure for the wind-down costs. It is A sort of ‘educated’ guess, likely to be more on the conservative side. I have seen somewhat similar figures in previous microcap liquidations, but it also depends on what other expenses are deducted before the winddown costs are calculated. E.g. in this case most of the severance /lay-offs are already expensed during the two restructurings announced by management, likely leaving fewer expenses for the final wind-down (if liquidation will ever happen).

  3. Hi, really great read. What would be your adjusted burn rate given the 70% reduction in March. Also, shouldn’t the company only have about 2.5 years left rather than 3, assuming they have enough cash until end of Q2′ 2025? Just trying to wrap my head around these assumptions. Thank you

    • I would still use the figures I indicated the in the write-up to come up with a more conservative estimate of cash burn going forward. So as I indicated “I deduct a further $10m of cash burn for the next 2 quarters.” Whether there are 30% or 18% of the legacy personnel left probably has only a limited effect on the eventual outcome.

      The 2.5 vs 3 years – I think you have misunderstood my note. I used that quote by management only to estimate the run-rate cash burn during Q4’22 and Q1’23.

  4. NLTX shares are now trading close to my estimate of the potential liquidation value. Up almost +40% from this quick pitch one month ago. My calculations are likely to be on the conservative side (Q1 report will shed more light on the cash burn and liabilities), however, it is not yet even clear if the liquidation is even in the cards. I think the risk/reward is far less favorable at the moment.

    • New 10-Q out, cash burn seem under control. Does it make sense to use fully diluted share count here?
      Almost all of the stock options seem worthless (5.3 MM). I think a share count of 43 – 44 MM seems more reasonable – and in that case, it still trades quite a bit below liquidation value


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