Current Price: $0.67
Expected Price: $1.00+
Expected timeline: Q4 2023
NEW INVESTMENT THESIS
The pitch below was published on the 24th of March and has since played out. The strategic review has now ended. This week the company entered into a reverse merger with Neurogene which has a Phase ½ clinical-stage product for Rett syndrome, a rare genetic disorder.
I think NLTX is oversold as arbitrageurs, who expected the strategic review to end in liquidation, are rushing for the exits. This presents a buying opportunity as I think the downside is well protected at the current levels. It will take a few months for the reverse merger to close and, in the meantime, the market might start viewing the prospects of the post-merger company differently. Merger consideration (16% of the combined company + CVR for any other assets aside from cash) might prove to be more valuable than the current market price. There is also a small chance shareholders will reject the merger and the company will opt for liquidation instead, this scenario could result in 50%+ upside from the current prices.
The key points of the current thesis are:
- The merger values the combined company at $1.04 per NLTX share and the company will have $0.58/share in cash ($200m total).
- Concurrent with the reverse merger, new and existing shareholders are contributing an incremental $95m above the current NLTX prices.
- All three portions of the CVR (sale of legacy assets, savings from lease obligation, and sales tax refund) might eventually pay out, however, quantifying these payouts is difficult/impossible.
- Merger documents indicate that two-thirds of the combined company (and likely a big portion of the private placement) will be owned by Baker Brothers, one of the most successful biotech investors with $23bn AUM.
- Baker Brothers’ 26% stake in Acadia Pharmaceuticals, which owns worldwide rights to the only approved Rett syndrome drug, gives them significant insight into the Rett syndrome drug development landscape. This investment is Baker Brothers’ fourth-largest holding, and it is clear that they believe in Acadia’s potential to develop and commercialize new treatments for Rett syndrome.
- Neuren Pharmaceuticals, an Australian-listed biotech that developed and licensed the drug to Acadia, currently sports a market cap of US$1.3bn. While NLTX/Neurogene is unlikely to reach such a valuation, it is indicative of the potential prospects of Neurogene’s development program.
See more details in the comments below starting with comments on the 19th of July 2023.
PREVIOUS QUICK PITCH
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%. 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).