Neoleukin Therapeutics (NLTX) – Reverse Merger – Upside TBD

Current Price: $0.67

Expected Price: $1.00+

Upside: TBD

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).

54 Comments

54 thoughts on “Neoleukin Therapeutics (NLTX) – Reverse Merger – Upside TBD”

  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.”

    Reply
    • 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.

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

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

    Thanks!

    Reply
    • 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).

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  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

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    • 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.

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  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.

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    • 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

      Reply
      • In the calculations above only pre-funded warrants and RSUs were included. RSUs make only a minor difference, however, the amount of pre-funded warrants is significant – 12.7m. The warrants can’t be excluded as they have no exercise price (‘pre-funded’ already) and are straightaway dilutive to NTLX share count.

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  5. Like TALS, NLTX also has seen its price decline quite a bit in the last month. Any reason why? Is this also a good re-entry candidate?

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  6. Over the last 3 weeks, NLTX share price has declined by almost 20% from the peak levels, so I believe the setup might have become pretty interesting once again. While at the moment it’s not clear whether the board is even actively considering a liquidation scenario, full wind-down seems like the most favorable option for NLTX shareholders. My updated liquidation value estimate assuming the company winds up by the year-end, stands at $59m or $1.06/share vs the current price of $0.74/share (43% potential upside). My calculations:

    – $83.4m – cash as of Q1.
    – less $9m – cash burn for Q2, Q3, and Q4. The company burned $13m in Q1, of which $2m was admin-related restructuring expenses. At the end of the quarter, the company has reduced its workforce by 70% to only 17 employees. The $3m quarterly burn estimate going forward seems conservative enough here.
    – less $5.7m for accounts payable.
    – less $2.6m for lease termination expense.
    – less $5m for wind-down costs.
    – less $2m for remaining severance costs.

    This lands the liquidation value at $59m or $1.06/share.

    There is one additional uncertainty regarding how to account for the lingering tail of restructuring expenses from November and March. So far, the incurred restructuring expenses seem to be significantly lower vs the previously provided guidance. The company earlier estimated $6.3m-$8.3m costs for November’s restructuring and $2.5m-$3m for March’s. However, the figures outlined in the recent Q1 report (page 14) are significantly lower:

    In connection with the November 2022 Reduction, the Company expects to incur aggregate restructuring charges consisting of severance payments, benefits, and other employee related costs of $1.7 million, of which $1.4 million was recognized during the fourth quarter of 2022. The remaining $0.3 million was incurred during the three months ended March 31, 2023, all of which is included in research and development expenses in the statement of operations and comprehensive income (loss).
    […]
    In connection with the March 2023 Restructuring Plan, the Company expects to incur additional aggregate restructuring charges consisting of severance payments, benefits, and other employee related costs of $1.8 million, of which $1.6 million was incurred during the three months ended March 31, 2023. The remaining restructuring costs of $0.2 million are expected to be incurred during the quarter ended June 30, 2023 due to future service requirements by certain employees entitling them to receive severance benefits.

    For both the November’s and March’s restructurings, the company has realized a total of $3.3m in expenses so far. The quotes above also imply that there will be no more costs associated with November’s restructuring and only $0.2m of additional costs remain to be recognized for March’s restructuring. This mismatch with the previous guidance is a bit puzzling and it’s hard to believe that the costs could’ve declined by over 50% just like that.

    Thus, I think that these “restructuring charges consisting of severance payments, benefits, and other employee-related costs” indicated above might not fully reflect the full specter of the restructuring expenses and omit certain other costs (e.g. discontinuation of the development program, etc.). The question then is whether these other costs have already been paid or recognized on the balance sheet or not. Given how much time has already passed, especially since November’s restructuring, I think it’s quite likely that the company has already recognized all of the costs and there will be no more additional expenses related to the restructurings. However, if it turns out otherwise, deducting an additional $5-$8m from my liquidation value estimate still leaves a fairly attractive 23%-31% upside.

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  7. With $80m+ in cash, would you think they’re an attractive reverse merger candidate to privates?
    Plus, the strategic review began in March, should be assume ~ 6 months for the review?

    I’ve been looking for indications / clues that the above two points are false.

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  8. Thanks, Dt. Totally agree with you that NLTX looks interesting at these prices. I’m guessing that the remaining restructuring expenses will be minimal. Apart from what you mentioned, NLTX also had a pretty elevated cash burn in Q1, which also suggests that a lot of those other restructuring costs might’ve already been covered last quarter.

    A reverse merger is the biggest risk here, however, the discount to cash is really wide at the moment and management seems reputable enough to hope that they won’t pull off a terrible deal that screws us over.

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  9. Neoleukin & Nuerogene Merger, NLTX down 12% today

    Under the terms of the merger agreement, Neoleukin will issue to pre-merger Neurogene stockholders shares of Neoleukin common stock as merger consideration in exchange for the cancellation of shares of capital stock of Neurogene, and Neurogene will become a wholly owned subsidiary of Neoleukin. Pre-merger Neoleukin stockholders are expected to own approximately 16% of the combined company and pre-merger Neurogene stockholders (including those purchasing Neurogene shares in the concurrent private financing discussed above) are expected to own approximately 84% of the combined company. The percentage of the combined company that pre-merger Neurogene stockholders and pre-merger Neoleukin stockholders will own as of the close of the proposed transaction is subject to certain adjustments as described in the merger agreement, including the amount of Neoleukin’s net cash at closing. In connection with the closing of the proposed transactions, Neoleukin stockholders will also be issued contingent value rights representing the right to receive certain payments from proceeds received by the combined company, if any, related to Neoleukin’s pre-transaction legacy assets or from savings realized by the combined company, if any, related to the reduction of Neoleukin’s legacy lease obligations.

    Upon closing of the proposed transaction, Neoleukin Therapeutics, Inc., will be renamed Neurogene Inc. The combined company will be led by Rachel McMinn, Ph.D., Founder and Chief Executive Officer of Neurogene, and other members of the Neurogene management team. The combined company’s Board of Directors will be comprised of five board members selected by Neurogene and two members selected by Neoleukin. The transaction has been unanimously approved by the Board of Directors of each company and is expected to close in the fourth quarter of 2023, subject to customary closing conditions, including the approval of the transaction by the stockholders of each company.

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  10. NLTX has entered into a reverse merger with Neurogene. That is disappointing, but that is always a risk with biopharma strategic reviews. I do not have an opinion on the pharma aspects of the deal, but I would have clearly preferred liquidation.

    Upon completion of the merger (expected in Q3, subject to both NLTX’s and Neurogene’s shareholder approvals), the combined company will have around $200m of cash, which is expected to provide runway til 2026.

    Existing NLTX shareholders would have 16% of the combined company or pro-rata ownership of $32m of cash. At current prices of $0.74/share, NLTX trades above the pro-rata portion of the cash balance in the combined company.

    NLTX shareholders will also receive CVR representing the right to receive:
    – certain net proceeds, if any, derived from any consideration that is paid to Neoleukin as a result of the disposition of Neoleukin’s pre-Merger legacy assets by June 30, 2029;
    – certain net savings, if any, realized by Neoleukin in connection with the reduction of Neoleukin’s legacy lease obligations;
    – certain net proceeds, if any, derived from Neoleukin’s anticipated sales tax refund from Washington State.

    All 3 parts of the CVR might eventually payout but quantifying these payouts is difficult/impossible. On asset sale, only biopharma peers can tell if the development program is worth anything. The lease obligations stood on the balance sheet at $11.5m as of Q1’23 – if half of this amount could be saved, it would result in an incremental $0.1 per NLTX share. As for tax refund, the amount is not disclosed and CVR document only says: “means the aggregate amount of sales and use tax refunds from the State of Washington received by the Company for the 2019 – 2022 tax years.”

    A real positive here could be the $95m private placement, that is happening concurrently with the merger and which the announcement called as ‘oversubscribed’. However, I was not able to find any information on what valuation the private placement parties are buying in (or what % of the company they will own). It’s a bit annoying that kind of crucial information is not getting disclosed. I have reached out to IR regarding this.

    Neurogene’s founder/CEO Rachel McMinn is a former sell-side analyst in biotech sector. While my prejudice might be incorrect and I do not have the full background of how Neurogene had been founded, I kind of have a feeling that biotechs launched by scientists rather than investment bankers have a higher chance of success.

    Any other thoughts?

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    • from the merger agreement:

      WHEREAS, the Company desires to sell to the Purchasers, and the Purchasers, severally and not jointly, desire to purchase from the Company, an aggregate amount equal to $95,000,000 of (i) shares of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”) and (ii) if applicable, pre-funded warrants, in the form attached hereto as Exhibit A between the Company and the applicable Purchasers, (the “Pre-Funded Warrants”) to acquire that number of shares of Company Common Stock, at a per share purchase price equal to the Purchase Price

      “Purchase Price” means an amount equal to (i) the Company Equity Value (as defined in the Merger Agreement), divided by (ii) the number of Company Outstanding Shares (as defined in the Merger Agreement but excluding the Securities being issued hereunder) as of immediately prior to the closing of offering of the Securities hereunder.

      Looks to me like they are buying at the same valuation. Is that a fair price? I have no clue – one has to have an opinion about the intellectual property, which I absolutely don’t have.

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      • Thanks. But the information disclosed in the merger agreement is not really sufficient to say much. And the more I read it, the more intentional the complicated language and disclosures seem to be. Here are my notes.

        “Company Equity Value” means $200m and is the value of Neurogen prior to the transaction and prior to the private placement. So value of Neurogen as it stands now. By my count Neurogen also has $40m of cash.

        The “Financing Amount” and “Concurrent Investment Amount” is defined as $75m instead of $95m in the press release. In the merger agreement, it is said that:

        Company Pre-Closing Financing. The Subscription Agreement shall be in full force and effect and gross cash proceeds of not less than the Concurrent Investment Amount shall have been received by the Company.

        The $95m figure is only mentioned in the subscription agreement in Exibit C:

        The Company desires to sell to the Purchasers, and the Purchasers, severally and not jointly, desire to purchase from the Company, an aggregate amount equal to $95,000,000

        Why these figures differ and if they are supposed to mean something different (e.g. $95m the expected amount and $75m the minimum amount), I have no clue.

        To complicate matters further, this pre-closing financing also has pre-funded warrants. The exercise price on these warrants equals $0.000001, meaning incremental shares from these warrants will be issued free of charge to the warrant holder. However, neither the number of warrants issued nor the number of shares to be received per warrant have not been defined (or I am not understanding the definition). Here is how it reads in the Subscription Agreement and Pre-Funded Warrant Form (the ‘if applicable’ is really puzzling):

        WHEREAS, the Company desires to sell to the Purchasers, and the Purchasers, severally and not jointly, desire to purchase from the Company, an aggregate amount equal to $95,000,000 of (i) shares of the Company’s common stock, par value $0.0001 per share (the “Company Common Stock”) and (ii) if applicable, pre-funded warrants, in the form attached hereto as Exhibit A between the Company and the applicable Purchasers, (the “Pre-Funded Warrants”) to acquire that number of shares of Company Common Stock, at a per share purchase price equal to the Purchase Price

        Is entitled, subject to the terms set forth below, to purchase from the Company up to a total of [ ] shares of common stock, $0.000001 par value per share (the “Common Stock”), of the Company (each such share, a “Warrant Share” and all such shares, the “Warrant Shares”) at an exercise price per share equal to $0.000001 per share

        Let’s assume the new financiers are putting down $95m and get pre-funded warrants for 10% of additional shares.
        – Neurogen valuation (pre-merger) as per merger docs $200m.
        – Neurogen ownership (pre-merger) by private placement investors would be 34%.
        – This results in 29% ownership by private placement investors of the post-merger combined company.
        – In turn, the $95m payment for 29% of the combined company is equivalent to $0.95 per NLTX share.

        This would seem quite favorable. If we increase warrants to 100% of the private-placement shares (i.e. these investors get double the amount of shares), then their ownership in the combined company increases to 41% and the price paid drops down to $0.67 per NLTX share, or equivalent to current prices.

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      • Also forgot to add that from the merger doc the value of the combined company sums up to $360m or $1.04 per NLTX share:

        – Neurogen = $200m
        – Private placement = $95m
        – Target Neoleukin Therapeutics Net Cash = $66m

        NLTX target net cash at closing is equivalent to $1.54/share (correction: it’s $1.19/share)

        Seems like this merger is inferior to liquidation even by company’s own valuation estimates

  11. I think you forgot to include the prefunded warrants in the $1.54 / share.

    Too lazy here to do the exact work but the parent allocation percentage is defined in the merger docs as the parent valuation ($76m) divided by the aggregate valuation ($200m + $95m + $76m). So as far as I see by definition your stake in NewCo is worth the same as the parent valuation (if you believe in the $200m number, of course).

    Don’t get me wrong, it looks like a bad deal 🙂 but at this point it seems cheap. You’re buying at a huge discount to the PIPE deal and if the deal somehow derails, well, I guess that’s a positive at this point. Only thing I don’t like is the Baker Brothers voting agreement. Seems to make it pretty hard for activists to do anything.

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    • Also, I believe that the $75m is the minimum amount required as per the merger agreement but they can raise more if they want. I.e. page 74:

      “The Subscription Agreement shall be in full force and effect and gross cash proceeds of not less than the Concurrent Investment Amount shall have been received by the Company”

      Reply
    • Thanks for the correction, I have rushed through the numbers. The target net cash at NLTX before the merger stands at $1.19.

      I had the same thought regarding $75m vs $95m. Asked IR to clarify this as well as the pre-funded warrants in the private placement (which at the moment is one of the bigger question marks for me). Their first response was not really helpful (reiterating info in the merger doc) but hopefully, they will get back with more details.

      As for Baker Brothers, I am adding a more detailed comment below.

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  12. This reverse merger has the support of management as well as Baker Brothers, 10% owner of NLTX. In total that would be 16% of diluted shares. As writser suggested above, that might be sufficient to restrict any attempts by any activists to block this transaction.

    I have mixed feelings about Baker Brother’s involvement here.

    Baker Brothers is a fairly diversified Health Care Fund with AUM of $23bn, most of it in public pharma companies. NLTX is a tiny 0.01% of the portfolio. So they could not care less about it. It’s a legacy investment and back in 2016-2019 Baker Brothers owned 40%+ of the company.

    However, from the disclosed agreement with Baker Bros it seems that Baker Brothers has a controlling ownership of Neurogene and will have a controlling ownership of NLTX:

    Beginning on the date of the closing of the Merger and continuing until the earliest date on which the Investors and any of their Affiliates, collectively, no longer beneficially own at least two-thirds of the common stock of the Company (including, pre-funded warrants in the Company, on an as-if-converted basis) that they own immediately upon the closing of the Merger.

    If that is really the case, I find it strange, that this does not get advertised in the reverse-merger presentation. Maybe that is related to Bakers’ willingness to keep a low profile. In the same agreement between Neurogen and Baker Bros, the first section is titled “No Publicity”, where it is specified that the investor’s name will be disclosed only where it is legally required.

    Neurogene’s Series A ($68.5m in 2019) and Series B ($115m in 2020) among others included “an undisclosed leading healthcare investment fund”. The planned $95m private financing also includes “existing healthcare dedicated specialist”. All of these point to Baker Brothers, although I am not entirely sure how these investments translate into 2/3 ownership of the post-merger company (maybe the other investors listed in the Series A/B rounds have since sold to Baker Brothers).

    So on one hand, Baker Brothers are using NLTX listing and cash balance to bring their majority-owned private company public. Their investment in Neurogene pales in comparison to $6m pro-rata ownership in NLTX cash. This clearly does not inspire confidence for the existing NLTX shareholders.

    On the other hand, with the $95m private placement (or part of it) Baker Brothers are putting significant incremental capital into Neurogene, the entity in which they already have significant ownership/control and likely know inside out. It’s a tiny sum in comparison with funds AUM (Neurogene is under 1% of AUM), so maybe they are throwing good money after bad. But…

    … Baker Brothers appear to be one of the most successful investors with a focus on biotech stocks. (Google Bard gave 17.3% return since inception in 2000, but I was unable to verify this). The fund makes high-confidence big swings and its top 10 positions account for 90% of the portfolio. The fund has held positions in some of the biggest biotech winners of the past decade, such as Gilead Sciences, Celgene, and Biogen. Currently, half of the portfolio is in Seagen which is getting taken over by Pfizer.

    It does not mean they do not make mistakes, especially with smaller investments such as Neurogene. But at least this reverse merger seems to be backed by a controlling shareholder with a good and long track record of investing in biotech rather than only a ‘Syndicate of Thought-Leading Investors’ as per merger presentation. So overall, having Baker Brothers on board and currently in control of Neurogene (if my reading of the filing is correct) is actually quite a big positive.

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  13. Some more info on Baker Brothers and pharma comps for Neurogene.

    The top 4 position (at $1.3bn) in Baker Brother’s portfolio is Acadia Pharmaceuticals (ACAD). The fund has 26% ownership in the company and one of the brothers sits on the board.

    Interestingly enough, Acadia has licensed the first Rett Syndrome drug (Trofinetide, now marketed as DAYBUE) that has been approved by FDA just a few months ago. The company already held US rights and has now acquired worldwide rights for the drug (by paying $100m up-front and agreeing on further milestones and royalties).

    So, Baker Brothers should have a very good understanding of the existing Rett Syndrome disease drug development programs and commercialization prospects. They are a very well-informed investor in this space, which leads me to believe that they are not throwing good money after a bad one with the $95 million private placement.

    In terms of revenue prospects for Trofinetide, this is what Acadia management said during the calls:

    In our announcement today, we provided preliminary second quarter net sales of DAYBUE in the range of $21 million to $23 million. We also provided third quarter guidance on DAYBUE net sales in the range of $45 million to $55 million. While it’s still very early days in the launch, at this point, the demand we’re seeing for trofinetide in the Rett community has exceeded our plan.

    Rett Syndrome is a rare neurodevelopmental disorder that affects approximately 6,000 to 9,000 patients in the United States, for which we estimate approximately 4,500 are currently diagnosed. DAYBUE demonstrated the potential to improve a broad range of signs and symptoms of Rett Syndrome that can be distressing for patients and their caregivers.

    We expect the annual average net realized cost of therapy to payers to be approximately $375,000.

    The company that has developed the drug is Neuren Pharmaceuticals listed in Australia. Its key asset is milestones and royalties from the sales of Trofinetide/DAYBUE (annual sales potentially expected to exceed $750m in the US alone). The agreed milestones/royalties are indicated here:

    – For US – https://www.neurenpharma.com/pdf/cba0b52d-87fc-443b-af0b-ee3ba7913297/FDA-approves-Daybue-the-first-treatment-for-Rett-syndrome.pdf
    – For ROW – https://www.neurenpharma.com/pdf/3996f9b2-5e18-48a7-9d46-bac8ff457ae0/Neuren-and-Acadia-expand-global-partnership-for-trofinetide.pdf

    Neuren Pharmaceuticals currently sports a market cap of US$1.3bn. That is probably the sky-high scenario for NLTX/Neurogene – in a few years competition will intensify and the price of the drugs to treat Rett Syndrome will go down (a number of other peers are also working on this disease). So by the time Neurogene’s drug get approved (if that happens) it is unlikely to be as lucrative as DAYBUE.

    At $0.67 per NLTX share, the post-merger Neurogen now trades at $232m capitalization with $200m in cash (all of which will be spent through 2026 on drug development).

    So to my uneducated eye, while there is some upside in a successful drug development scenario, NLTX probably will not be a ten-bagger from the current prices. Mostly this boils down to trusting the judgment of Baker Brothers and buying in below their levels.

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  14. I’ve seen multiple comments using a $200mm + $95mm + $66mm/$76mm valuation, where the $95mm is the private placement and the $66mm/$76mm is the Neoleukin net cash/parent valuation. But from the merger document I assume these two figures are already included in this $200mm?:

    “Combined company is expected to have a cash balance of approximately $200 million at close, *including* approximately $95 million from concurrent private financing by Neurogene’s new and existing investors”

    And

    “*With the cash from both companies at closing and the proceeds of the concurrent private financing*, the combined company is expected to have approximately $200 million of cash or cash equivalents immediately following the closing.”

    Could anyone explain to me where I’m going wrong here?

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    • You are mixing up pro-forma cash balance in the combined company vs the valuation of the combined company.

      Based on the merger document the combined company has additional value (on top of cash balance) from exiting Neurogene development programs. This non-cash value is approximately equal to Series A and Series B financings that Neurogene did back in 2019-2020.

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  15. Baker Bros added 2m shares

    Baker Bros Advisors, Ben. Owner,Buys 2,285,342 from 8/15/23-8/17/
    The following transactions were reported by Baker Bros Advisors LP of Neoleukin Therapeutics Inc on a Form 4 filed with the S.E.C. on August 17, 2023:

    Date(s) Trans Type Shares Price(s)
    ——————- ————– ————— ———————–
    8/15/23 – 8/17/23 Purchase 2,285,342 $0.63-$0.69

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  16. Up to $0.815 in AH.
    Neoleukin Therapeutics (NASDAQ:NLTX) shares rose 13.25% to $0.82. This security traded at a volume of 174.4K shares come close, making up 67.1% of its average volume over the last 100 days. The company’s market cap stands at $36.0 million.

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    • some insider buying from Baker Bros probably sparked it. They bought 2.3M shares.

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  17. Reading about this today has made me ask myself ” Self, do the Billionaire Baker Brothers want to help unfortunate people to get effective medical treatments, or do they want to make even more money.” Of course they would say both. At some point some rich people give away money to accomplish such things.

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  18. Any estimate of when the merger would close? There was a draft merger prospectus on 8/21/23.

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  19. Neoleukin Therapeutics Announces 1-for-5 Reverse Stock Split
    SEATTLE, Sept. 22, 2023 (GLOBE NEWSWIRE) — Neoleukin Therapeutics, Inc., “Neoleukin” or the “Company” (NASDAQ:NLTX), a biopharmaceutical company that has designed de novo protein therapeutics utilizing sophisticated computational methods, today announced that its Board of Directors (“Board”) has approved a reverse stock split of the Company’s outstanding shares of common stock at a ratio of 1-for-5. The reverse stock split will become effective at 12:01 a.m. Eastern time on September 25, 2023. Neoleukin’s common stock will begin trading on a post-reverse stock split basis on September 25, 2023

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  20. Reverse splits tend to get whacky but this float isn’t going to be that low. This has pulled back “nicely” since the recent rally – it doesn’t seem like the story has changed so is this potentially a good opp to get in the trade?

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  21. Here’s what I summarize from AI:
    The merger agreement provides that each outstanding share of Neurogene common stock will be converted into the right to receive approximately 0.0981 shares of Neoleukin common stock.
    The exchange ratio was determined through arms-length negotiations between Neoleukin and Neurogene. It represents an implied value of $9.03 per share of Neurogene common stock, based on the closing price of Neoleukin common stock on September 23, 2022.
    After the merger closes, former Neurogene stockholders will own approximately 18.9% of the outstanding shares of the combined company, while current Neoleukin stockholders will own approximately 81.1% of the outstanding shares.
    The number of Neoleukin shares that will be issued to Neurogene stockholders is fixed based on the exchange ratio. It will not fluctuate based on the market price of Neoleukin stock between now and closing.
    However, the implied value of the merger consideration to be received by Neurogene stockholders will fluctuate based on the market price of Neoleukin stock. The implied value to Neurogene stockholders will decrease if the price of Neoleukin stock declines prior to closing.

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    • Regarding cash, WITHOUT factoring in extra cash burn it looks like there would be less than $4.6/share? This would make sense if they factored in a reverse split.

      Neoleukin had approximately $210 million in cash as of June 30, 2022
      Neurogene had approximately $85 million in cash as of June 30, 2022
      The combined pro forma cash balance would be $210 million + $85 million = $295 million
      Neoleukin expects to issue approximately 10.7 million shares of common stock to Neurogene shareholders based on the exchange ratio
      Neoleukin had approximately 53.3 million shares outstanding as of June 30, 2022
      So the combined company would have approximately 53.3 million + 10.7 million = 64 million shares outstanding
      Dividing the pro forma cash balance of $295 million by the approximately 64 million pro forma shares outstanding results in:
      $295 million / 64 million shares = ~$4.60 in cash per share

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      • Thanks for your work on this. Throughout the doc there’s mention of the assumption that the NLTX will have Parent Net Cash more than the Target Parent Net Cash ($66MM) (page A-5) – otherwise it appears to trigger a ratio change.
        Are you sure shares from Neurogene’s pre-closing financing are taken into consideration? It appears so, but I dug less into that than the cash.
        Also, I’m sure you noticed after you posted: I believe you mean 2023 as the years you reference, not 2022.

      • I think you are mixing some things up.

        Let’s start with the cash of the combined company. This should be about $200m post-merger as per merger announcement press releases. Looking at pro-forma financial statements in S4 filing, the combined company had c. $230m of cash/investments as of June 30 (including the $95m private placement). Thus the previously communicated $200m cash figure post-closing looks kind of correct.

        Share count figures can be taken from the latest S4 filling. NLTX’s fully diluted share count was 55.5m. Total shares to be issued to Neurogen shareholders and private placement investors is 289.8m. This adds up to total of 345m of shares. The figure is pre reverse split, which took place last week. Adjusting for the split, the combined company will have 69m of shares outstanding.

        In turn, the combined company will have $2.9 in cash per current NLTX share.

        Private placement investors are putting down $95m for 27% of the combined company, including the to-be-issued common stock and pre-funded warrants. So these warrants will not come on top (which I was worried about previously), but are already included in the 27% ownership figure. The private placement owners will receive 18.6m shares in the combined company and in turn are paying an equivalent of $5.11 per NLTX share, which is materially above the current trading prices.

        Hope this clarifies the figures for this setup post the split. Although the opportunity to buy NLTX below the private placement levels is one of the core aspects of the thesis, it does not necessarily mean NLTX will trade up to these levels – there are plenty of precedents that showed the exact opposite.

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      • Gotcha and agree, I used too much AI there (maybe everything)

  22. NLTX really gotten smacked down the last several days. Certainly there will be vol with an illiquid micro-cap, but 3.30 ask at the moment. No news I’ve seen. Anyone hear anything?

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    • There were also a couple of days where there were some big intraday swings as well. But since 10/11 volume has been extremely light – 1,300 – 13,000 shares per day as opposed to 50-200,000 in the past. unfortunatley seems it’s all sell and no buy which would drop the price.

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  23. Minor update for those who are following Neurogene’s trials.

    Neurogene, the company with which NLTX has engaged in a reverse merger, dosed first patients in the Phase 1/2 Trial of NGN-401 for the Treatment of Female Pediatric Patients with Rett Syndrome. NGN-401 has been well-tolerated to date. The third patient is expected to receive dosing in the first quarter of 2024, and interim efficacy data from multiple patients in the initial cohort is still on schedule for the fourth quarter of 2024.

    https://www.bamsec.com/filing/119312523286269?cik=1404644

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    • Yesterday I received CUSIP 640CVR031 which appears to be the CVR. On Fidelity it has the name “Neoleukin Thera Contra”.

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  24. I am closing out NLTX idea at breakeven relative to the opening prices + CVR which may pay out in the future. The upside part of my initial thesis rested on two points:

    1) 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.
    2) There is also a small chance shareholders will reject the merger and the company will opt for liquidation instead.

    The reverse merger with Neurogene closed yesterday and both of my thesis points have failed to materialize. And as I have no intentions of keeping an investment in post-merger Neurogene, it’s time to move on.

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    • My timing on exiting this one has been unfortunate as the stock started moving straight upwards after the merger closed and I posted my comment above.

      I was not able to find any significant developments to explain the move, except for:
      – A business update released on Friday, January 5, after the stock had already risen by nearly 50%.
      https://www.bamsec.com/filing/119312524002861?cik=1404644
      – Analyst coverage initiation, though it appears that the majority of the coverage also occurred around January 5.
      https://www.marketwatch.com/tools/upgrades-downgrades?mod=mw_quote_upgrades

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      • Sometimes unlucky. Still think it was a good call to exit based on thesis

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      • yes, good news on trials, Stifel set price target at $31. Some of the movement before could be explained by a) some people always get word of good news before the public and start buying b) fund managers like the new company, same as the old talaris now Tourmaline, up almost 300% in 3 months. a merger of a company with an asset and no cash with a company with cash and no asset, maybe the potential is seen. Two more biotech mergers announced today, belief is that after a lean year or 18 months biotech is now undervalued.

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