Strategic Review and Potential Liquidation
Clarke Street Value has recently shared his thoughts on the ongoing strategic review at Graphite Bio. GRPH is yet another busted biopharma that has suspended the development of its key asset, cut the majority of its workforce, initiated a strategic review. GRPH is currently trading at a substantial discount to its net cash value. Company sale or liquidation seem to be among the likely near-term outcomes. The recently appointed CEO will receive substantial bonuses in the event of a strategic transaction or liquidation, along with an additional incentive award if a transaction is completed by mid November. The incentives are somewhat skewed towards reverse merger rather than liquidation. Interestingly, the new CEO was previously in charge of another failed biotech firm, JNCE, which was eventually acquired by Tang Capital (who also happens to own 3.6% of GRPH). One concerning aspect is that GRPH has recently commenced an expensive 10-year lease for office/laboratory space (agreement signed at the peak in 2021) with aggregate minimum payments of $88m. The company has indicated that it does not intend to use this space and plans to sublease it to recoup some of the costs. It might also be possible to terminate this lease with a substantial pre-payment. With conservative estimates (deducting $50m for the lease liability), GRPH might be worth $2.95/share in a potential transaction, implying a 23% upside from current trading levels. Given GRPH’s large cash pile and CEO’s incentives, a reverse merger is quite likely, which is a risk for this setup. However, GRPH’s shareholder base includes several reputable biopharma investors, including Versant Ventures, Samsara Biocapital, and Ecor1 Capital, who might oppose any value-destructive merger.
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Seems likely we get a sale here. Based on fact pattern i.e. mid-course mgmt change w/a new board member, chunky top of the mkt lease you ain’t getting out of, incentives more aligned to do a deal than max px – is it possible to handicap price?
I agree. Reverse merger looks more likely at this point and you’re betting on management’s ability to find a good deal. The positives are the somewhat decent margin of safety to net cash (especially if you think the lease liability should be lower than what’s indicated in the write-up) and several reputable biopharma investors with >50% combined stake sitting on GRPH register.
Seems market doesn’t like the deal with stock trading lower pre market
https://www.biopharmcatalyst.com/company/GRPH/news/170240
Its a typical first day reaction. Arbs betting on sale/liquidation all head for the hills as soon as a reverse merger is announced. Over the next few weeks as everyone digests and analyses the deal it will probably find a new level. I am holding thinking that with that $1 dividend that holding is a relatively cheap call on the upside of the deal.
Yeah, that would be my guess as well. Though it is impossible to value LENZ itself for most of the readers here (including myself) it looks like it could be worse. At least a smallish return of capital and 50%+ of the large holders like the deal enough to enter a voting agreement and to join the PIPE as well.
Also, I’m getting tired of these ‘trendy’ corporate names. We do something with eye drops, so lets call our company LenZ with a Z because that’s how we name startup nowadays. I’m hoping this trend reverts and people will just name their company “Del Mar Ophthalmic inc.” like they did a century ago.
Do you have any guess on the potential upside for the reverse merger play? I’m not sure at what prices PIPE investors are buying shares and what stake they will get. However, GRPH is already trading at around net cash value attributable to its stake (35%) in the combined company before dilution from PIPE. After accounting for the dilution from PIPE, GRPH is obviously trading at a premium to net cash.
I’m not sure if that’s even directionally correct, but if you calculate PIPE stake ($53m) based on the $231.6m combined company valuation mentioned in the merger agreement, the diluted GRPH stake drops is 27% and the premium to net cash becomes 28%. Meanwhile, NLTX is trading at 7% discount to net cash, whereas TALS traded at 20% premium before merger closing.
So it seems a bit of a difficult gamble without having any confidence in LENZ’s eye drops. These drops do sound interesting, but some people are saying there are substantial concerns on competition. Would be interested in hearing more thoughts, thanks.
I have the same questions. I do the math a little differently, but I think we’re saying the same thing:
Right now, GRPH is at a roughly $130M market cap. Paying out the $60M in the special dividend leaves a $70M shell that will have a 35% stake in the merged pre-PIPE entity, valuing that pre-PIPE entity at $200M. That’s against $172M in pre-PIPE cash.
A lot would seem to turn on the PIPE details.
At the same time, $225M in cash with multiple P3 shots on goal underway, and P3 toplines by the spring, seems pretty nice. I would think that’s a cushion that can get them all the way to market. But as with TALS, this is turning into a biotech play rather than a special situations play.
After having time to read everything and do some basic internet research, I’ve greatly warmed up to this deal. LENZ looks to have a significantly better product that the market “leader” Vuity, its almost certain to be approved within a year and our price is pretty good. The biggest risk is the market simply not caring, Vuity looks like it’s struggled to get significant sales so far (though I think LENZ addresses Vuity’s biggest flaws). LENZ doesn’t have to be a home run to be worth more than the stub cost of $1.25, and if it is a home run, well well.
I wrote up my thoughts in more detail, feel free to rip them apart if you find mistakes or disagree.
https://nvariant.substack.com/p/grph-pulls-off-a-miracle
Great write-up, thanks for sharing.
Any thinking behind the “swag” 1-5% penetration estimate?
Putting the potential market size at >100M patients in the US alone seem aggressive, I assume its just everyone that is even mildly near-sighted as that ~33% of the total US and 80% of the population 40 year+ (to match the trial).
Though 1-5% is small, I have worked in pharma on other eye drops products and everyone HATES eye drops. There are countless startups that seem to put glaucoma meds in various other forms (contact lenses, rings, etc) to replace drops.
For a rough estimate, we need the % of patients each year:
* Are 40+ / near-sighted (let’s assume that 130M is accurate; swag % =100%)
* Go to an ophthalmologist (swag % =25%)
* Go to an ophthalmologist that prescribers these drops (what is the incentive vs. making money via selling glasses / contacts? It doesn’t appear to be buy & bill as through retail/specialty pharma) (swag % = ???? 10% of ophthalmologist)
* Near-sighted enough patient wants to treat (swag % = 33%)
* Patient willing to pay out of pocket for product (75$ / month > glasses / contacts) (swag % = 20%)
* Patient willing to do drops (swag % = 10%)
Let me know if I’m missing other obvious haircuts. Every one of my numbers could be challenged, but just as a strawman that gets me to 0.017% or 2M US (off the optimistic 130M market). Assuming 2.5 bottles on average per patient annually (compliance/persistency will be much lower than typical orals) you are at ~$400M revenue peak if everything goes well and I didnt miss any leakage points.
Also seems like will require a big sales force to broadly reach ophthalmologists, so will require another Big Pharma partner to buy in and launch this. This could be tough following the Vuity failure with Abbvie.
It’s the biggest uncertainty. I quit my Vuity test after three days because it didn’t work well enough, effective period too short, seemed less effective each day and finally always had a slight tension in my eyes telling me it was working. It shows me if LENZ can’t address each of these problems and not introduce other side effects its probably going to fail.
And I agree it likely needs a marketing partner. I have mused about the likelyhood that a large pharma company might buy it after approval. After all Vuity was valued at least $1B by Abbvie based on it’s potential market. So if LENZ shows it addresses all the shortcomings that held Vuity back it might be a hot property. But the counter argument is that LENZ probably could have been bought for $400M or even less before the merger, so why wait? You wait if you think the market isn’t there and wait for LENZ to show enough traction to change your mind.
Also worth mentioning that Aceclidine has been approved in Europe for the treatment of glaucoma since the 1970’s. Seems unlikely to me that this is a revolutionary treatment that has the potential to change billions of lives. It’s a very old compound, nobody bothered / managed to introduce it in the US for half a century but now a company is trying to do so for a slightly different indication. Consider me a bit skeptical a priori.
On the other hand the worst scenarios for the stock also seem off the table. It’s a drug that has been used for decades in ophthalmology, already in a stage 3 trial, large holders invest more money, deal risk seems minimal and you get a juicy dividend.
I’m not super excited here but I’m fine with holding a bit longer at current prices to see the transaction pan out.
There are better glaucoma treatments is the reason why it was never introduced in the US. As for its new application in treating near sightedness, that required a big investment by someone to test it for that application. For example pilocarpine has been approved by the FDA since 1994 for treatment of dry mouth, but it wasn’t until 2021 that Abbvie got it approved for treating near sightedness to create Vuity.
I don’t want to oversell its potential here, obviously I’m biased because I’m irritated that I have to wear computer glasses to write this. Odds are probably against success, but average payoff if it succeeds should be well over 100%, so even if it’s a good gamble odds are still that we are not rewarded.