Strategic Review and Potential Liquidation
Clarke Street Value has recently 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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