Quick Pitch: Aclaris Therapeutics (ACRS)

Strategic review & potential activism – 42% Upside

I was planning to highlight this situation to SSI subs in mid-January, but then Clark Street Value beat me to the punch. Still, it’s a pretty interesting situation and I want to track it here on SSI. I’m providing a brief case summary with several additional thoughts below.

Aclaris Therapeutics is a busted biopharma trading at a 50% discount to net cash. In November 2023, the company failed a phase 2 trial of its lead drug candidate, prompting a 46% workforce reduction a month later. Then two weeks ago, the CEO stepped down, and a strategic review was initiated. Several aspects, including CEO’s retirement, large cash balance, wide discount and presence of multiple activist investors (Kevin Tang, BML Investment Partners, Foresite Capital) increase the chance of a favorable outcome for shareholders.

The key risk here is that management will simply continue the development of their remaining programs. The press release has even noted the company “seeking a development and commercialization partner” for one of their drug candidates. Recently, good trial results were reported for this exact treatment. 

Kevin Tang and BML Investment Partners have recently taken positions in ACRS, 6%+ stake each. Foresite Capital also owns 6%. Combined, that’s already a pretty meaningful c. 20% ownership. It’s entirely possible that the activists will push management to reroute the direction towards wrapping up/selling the remaining development programs and start reviewing other strategic alternatives instead. I would expect the stock to react positively to such news. It’s worth noting, however, that Tang and BML Investment Partners have seemingly acquired their shares at substantially lower levels than the current market price – BML at around $1/share (versus $1.2/share now) and Tang at around $0.6-$0.7/share.

It’s actually not uncommon for busted biopharma companies to change their course after failing with the leading drug. Over the past few years, there have been multiple similar examples where a biopharma intended to continue with drug development, only to pivot towards monetizing the company in a short order. I’ve provided 10 examples below, 5 of which received takeover bids along the way.

There is a chance that ARCS might become an acquisition target as well. Both Tang and Foresite have a track record of bidding for similar busted biopharmas. Although more than half of those offers have failed so far, the share price of the target companies had always jumped up upon the offer announcement. I expect the same would happen for ACRS. Tang’s previous offers ranged from 9% to 28% discount to net cash. At a 15% discount to NAV (after deducting $32m of further cash burn over the coming quarters), the offer could land at $1.70/share, implying a 42% upside from the current levels.

 

Examples of similar busted biopharma’s changing direction to asset monetization

Here are 5 cases where management shifted from the initial aim to continue with the development of other programs after the failure of lead drug candidates. Although BML/Tang had positions in most of these biopharmas, none of the companies were publicly pressured to change course by the activists.

  • TALS failed a lead trial, laid off 1/3 of employees and announced a strategic review in Feb’23. TALS continued enrolling patients in the remaining trial only to suspend it shortly after and announce further 95% workforce reduction in Apr’23. The company eventually ended up in a reverse merger.
  • GRPH voluntarily suspended development of the leading program, laid off 50% of workforce and announced a strategic review in Feb’23. Initially, GRPH intended to continue the research activities and exploration of developing their core technology externally. However, in Aug’23, incremental 70% workforce reduction was announced and the final result of the strategic review was a reverse merger.
  • FIXX stopped the development of its programs due to financing environment and timeline, laid off 86% of employees and announced a strategic review in July’23. Management strongly emphasized a search for commercialization partners but then in Nov’23 did a reverse merger instead.
  • ELYM announced pipeline reprioritization and 55% employee reduction in Feb’23. Then, in October, all further R&D was halted and the company announced a strategic review alongside another 70% workforce cut. No outcome of the review has been reached yet.
  • NLTX discontinued their key asset for strategic reasons and announced 40% reduction in force in Nov’22. The company reprioritized focus on other technology developments. Then, in March’23, NLTX laid off another 30% and launched a full strategic review. The review resulted in a reverse merger.

5 more cases that were targeted by Kevin Tang or Foresite Capital:

  • JNCE discontinued its key development programs, announced a restructuring (57% workforce reduction) and then eventually entered into a reverse merger with another biopharma. Tang disrupted the reverse merger and proposed to buy the company in Mar’23 at a 28% discount implied by the minimum cash condition. The activist held a 10% stake. BML also owned 2%. JNCE eventually terminated the revere merger and agreed to the takeover offer.
  • THRX suspended its lead phase 1/2 drug candidate, laid off 72% of employees, and launched a strategic review. R&D of two pre-clinical stage development programs continued. Tang (held 7% stake at the time) made a buyout offer for THRX in late November 2023 at a 9% discount to net cash. While management did not respond to Tang’s bid initially, both sides entered into a definitive merger agreement a few weeks later. During the bidding process, Foresite Capital (owned 14%) also made a proposal for THRX although the offer details were undisclosed.
  • RPHM discontinued the development of its key/only drug and cut 70% of the workforce. However, a strategic review was not announced. Tang held a 10% stake and offered to buy the company at around 19% discount to net cash. Management hasn’t responded yet, despite Tang’s set acceptance date passing on January 5. BML disclosed a 5% stake mid-January.
  • RAIN discontinued its key development program and announced significant layoffs (65%). However, strategic review was not launched and the company simply continued to evaluate the failed phase 3 trial results as well as a potential pipeline expansion. Tang, who had previously accumulated 14% stake, proposed to buy the company in Oct’23 at a 17% discount to net cash. BML reported 7% stake several weeks after that. While management did not respond to Tang’s offer, the company eventually agreed to be bought by another party Pathos AI in Nov’23 (although at a slightly lower cash consideration compared to Tang’s offer). The transaction is still pending.
  • KNTE discontinued several of its most advanced development programs and laid off 70% of its employees. KNTE did not launch a strategic review and instead continued to pursue earlier-stage development programs. Foresite owned 29% stake and made a buyout offer at undisclosed terms. Shortly after the receipt of the offer, KNTE changed bonus structure adding lucrative payouts to key executives in a company sale scenario and then announced another 56% workforce reduction. However, nothing more has transpired so far. Tang has built a 6% position as well.

Tang has also made bids for AVIR (16% discount) and LIAN (10% discount), but those were not as comparable to ARCS and both bids failed eventually.

45 Comments

45 thoughts on “Quick Pitch: Aclaris Therapeutics (ACRS)”

    • Could you please clarify your question? In reverse mergers, shares of the public company are issued to the private company. Not sure how would you calculate a takeover premium in this situation.

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      • What would be the implied upside, if there was to be a reverse merger in this case?

      • It’s impossible to know as that would depend on what kind of company they would choose to merge with, i.e. the quality of its pipeline, prospects, deal terms, etc. However, ACRS is already trading at a very wide discount to its net cash, so the margin of safety in a reverse merger/liquidation scenario would be wide. The real question is whether ACRS will really go for it, and if so, what kind of timeline can we expect.

  1. I wouldn’t say LIAN has failed yet. The date for Tangs offer has passed, but the controlling shareholder appears to be following a similar path to liquidation, without the Tang discount. Or they will be reverse mergering all that cash into another one of their biotech investments.

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  2. Any thoughts on the recent SEC ruling regarding shell companies? Many of the busted biotechs may be classified as shell companies, which will make reverse merger with a private company more difficult. This might be a good ruling for Net net investors, as a reverse merger can sometimes destroy the market cap.

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    • Do you want to perhaps elaborate on this? The rule number, a link etc. ?

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    • Thank you, I hope this will increase the chance of a liquidation scenario for the current busted biopharmas, including ACRS. Although judging from the price action, the market doesn’t think so. Quoting your second link:

      “Fiduciary obligations must also be taken into account, and some public companies facing a failed drug development program may want to give greater consideration to a liquidation of assets and distribution to stockholders, instead of a reverse merger, particularly in situations where keeping programs and employees may lead to a depleted cash position that would reduce stockholder returns and make the company a less attractive target for private companies in a reverse merger.”

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  3. Regarding RPHM
    “However, a strategic review was not announced.”
    Is this your only concern about this situation?

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    • Here’s a few more:
      – The spread to $1.8/share cash consideration is tiny. I might be wrong, but the CVR is probably worthless/not worth much.
      – Tang’s condition of RPHM having $75m minimum net cash upon closing. RPHM had $100m in gross cash as of mid-December. Deducting $14m in total liabilities (as of Sep’23, excluding leases) and $2.5m in severance expenses would leave only $7.5m remaining for cash burn since mid-December and potential transaction-related costs.
      – RPHM’s discount to net cash is not that big overall. This significantly reduces the odds of a higher bid or the margin of safety in a reverse merger/liquidation scenario. Deducting lease termination costs and another quarter of cashburn, I get around $71m in net cash as of Q2 vs $59m mcap (17% discount).
      – And yes, management communication so far doesn’t inspire any confidence.

      Interestingly, Octagon Capital Advisors has recently reported a new 6.75% position in RPHM. Not really sure what are they seeing here, although its an absolutely minimal position for the fund. Octagon is a biopharma focused hedge fund (non-activist) with $1.1bn AUM.

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      • RPHM had OVER $100M in cash in Mid-December, and we don’t know their total liabilities at that point but they are presumably a lot less and there is $3M in other current assets to offset them by. Even with severance it’s unlikely they finished the quarter with less than $100M and their burn rate is going to be a lot less going forward.

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      • Here are the counterarguments:
        – The $75m cash condition comes out to ~$2.25/sh vs Tang’s $1.80/sh offer.
        – Tang’s min cash to consideration spread (as a %) is reasonably higher than some of the other situations where he has lobbed in offers. That’s worth the board considering if that’s best value for SHs (see LIAN announcement today).
        – Ed Mathers at NEA, the largest shareholder, is driving this bus. Your outcome is aligned w/NEA
        – Also, Octagon is not a new holder. They were a 13-F holder as of 9/30

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      • To clarify, these are counterarguments to IIja’s post

  4. There is many busted biotech stocks trading sub-net cash. Is there any indicators or a blueprint which ones turn out to be good investments?

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    • A few good signs are:
      – the announcement of a strategic review (meaning the company is actively looking for ways to maximize shareholder value(hopefully))
      – a major workforce reduction (they’re stopping/slowing the operating business and lower cash-burn to increase the companies value in case of a liquidation or sell)
      – changes in management
      – a major participation of activist shareholders with good track-records regarding busted biotechs. In Aclaris case you have Tang Capital (6,12%), Foresite Capital (5,74%) and BML Capital Management (13,26%).

      Basically one would be looking for a good indication of the company actually liquidating/selling in the next few quarters.

      Imo the language being used in the announcement of a strategic review is also pretty important. In Aclaris announcement it sounds like management wants to keep their business running, which makes it a bit risky imo. Still the big participation of activists makes it somewhat likely that they will put out an offer at a good premium to current prices.

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  5. Do you have more info on Tang and BML? They have a number of holdings in listed companies. What does their track record look like?

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    • Some of the more notable cases involving Tang and BML are listed in the write-up above. You could also run a search on SSI to see a few more that were covered).

      BML is generally quite diversified with over 30 holdings as of the latest 13F. And Tang has a portfolio with 100+ positions. For only a few of those positions they have a larger % stake in a particular company or press management with takeover offers / activism. I do not know what their overall track record is and I do not think it would carry any meaning with regard to likely outcomes for ACRS or RPHM. Every setup has specific peculiarities and the only important takeaway is that the involvement of Tang and BML increases the chances the board will make value accretive decisions. Whether these ‘increased chances’ will be sufficient or not, remains to be seen.

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    • My take on Tang’s activism. He usually initiates campaigns right after a recession hits, targeting high-risk biotech/pharma companies that are left stranded. He typically swoops in either by pushing for liquidation, sale, or buying those companies out himself. Some recent successful cases you can check out include MTCR, JNCE, and TCRR. Of course, there are cases where his presence was not enough, like MEIP or QNCX, for instance (I think all five of these were posted on SSI at some point).

      From older cases, here is some information that I got:
      – Ardea Biosciences. The company was founded by Tang Capital in 2006 and subsequently reverse merged with Intrabiotics Pharmaceuticals to become a publicly-listed entity. In 2012, Ardea was acquired by AstraZeneca for $32/share or >2x above levels where Tang increased its stake with open market share purchases in 2006-2008.
      – Northstar Neuroscience. Tang accumulated an 18% stake in 2008 before launching a takeover bid at $2.25/share in mid-2008. Northstar’s management rejected Tang’s bid before eventually subduing to activist pressure and initiating a liquidation in 2009. The liquidating distributions stood at $2.06/share while the activist acquired its stake at $1.77-$1.87/share.
      – Penwest Pharmaceuticals. After acquiring an ownership stake in 2009 (40% combined stake together with another activist), Tang started pushing for a wind-down. The management eventually agreed to be acquired by another biopharma at $5/share in cash – a material premium to $1.3-$1.99 where the activist acquired its shares.
      – Vanda Pharmaceuticals. In 2008-09, Tang accumulated a stake of 15% in Vanda, pushing the company to cease operations and liquidate itself. In mid-2009, Vanda’s share price jumped 8-fold on the unexpected news that the company’s schizophrenia drug was approved by the FDA. Driven largely by luck, Tang exited its position at $10-$11/share in 2010 vs ~$1/share where the initial stake was acquired.

      There are a lot more cases involving him if you decide to check out his 13D filings starting from 2002.

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    • what’s your view on that? it’s not the same people, is it (bml and tang)?

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      • Tang could have been taking profits for another use, his basis was something like 80 cents. Foresite was a long time holder since 2020, probably at much higher prices. Its possible their sales were tax loss harvesting in December, but my knowledge of SC13 filing rules is limited at best. BML has come in like gangbusters since the layoffs/test failure, and all combined with Millennium and Tang still own 21%.

        Overall a bunch of passives and biotechs have rotated out of ACRS since then (Wellington, Vanguard, Biotech Value Fund, Rock Springs, Venrock, RA Capital) which I think is good news since they were likely to support management if they attempted a reverse merger. Total sales by this group since the failure is roughly 22% of shares by my math.

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  6. Summary from the 4Q23 10-K (released 27/02/2024):

    – Seems okayish – all drugs are on standstill, the contingent liability has unwound, BUT saying “we’ll continue the Discovery platform”.
    – Re-iteration too is that Neal is a “interim CEO” with no timeline on a permanent replacement
    – Neal has the option to buy 497k shares at $1.20 – big incentive to get the SP up (also has 142k RSU’s). Both vest equally over the N15M with a CoC and BoD award discretionary clause

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    • I read the 10K with a diff against previous 10K to highlight changes, and they emphasize finding partners for remaining drugs, and play up the value of the KINect platform and their patent IP. For example they removed the following from their forward looking risk statements on 2nd page:
      ● the timing of our planned clinical trials of our drug candidates and the reporting of the results from these trials;
      ● the timing of our regulatory filings and approvals for our drug candidates;

      These changes to me read that they are focused on selling KINect and IP as a prelude to liquidation, or selling the company as a whole. I also wonder about the possibility that they stop developing new drugs to instead focusing on selling KINect as a service to other drug developers. But I don’t understand it’s value well enough to know if that’s even possible.

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  7. Yesterday it was announced that William Powell (a non-executive director) just bought 14.5k shares at $1.23-$1.25, increasing his stake in the business by 100% to 29k shares.

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    • Any other news I’ve missed, or is this the likely reason for todays movement?

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  8. Any update here? How long did the strategic reviews of the precedents take?

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      • Why not? Director resignations are common with liquidations and reverse mergers so it could be a sign they are close to one of those outcomes.

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      • Usually they remain until whatever deal done. And the statement would read differently.

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      • How would it read differently?

        My experience is they leave all the time when the company is making a large strategic change. If they were there because Aclaris was going to be developing new drugs, they might not want to sit around twiddling thumbs. Especially if it looks like a liquidation.

      • I’d say it is a (small) positive. We don’t know why they are leaving but there could be good reasons (cost savings due to a liquidation, shareholders applying some pressure to get board representation) neutral reasons (they are going to be replaced anyway by others in a reverse merger deal) or bad reasons (maybe they don’t want to be part of an egregious course of action).

        But at the very least it signals CHANGE. Last thing I want is that the strategic review concludes with “nothing changes, we continue burning cash like last year, thank you very much”. I like to see directors resigning, people getting fired, compensation packages being adjusted, investment banks being hired, IP written off, in short, everything that is apart from the ordinary. I just want to see something happen and I’m fine with the risk of getting screwed over. What I don’t want to see is business as usual.

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    • Certainly interesting. Powell doubled his stake on the 6th of March – and then announces he is resigning from the board two weeks later. IMO it reads as if he is expecting a liquidation, or a value-accretive deal, where in both cases he is likely to be replaced.

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      • Aren’t insiders prohibited from transacting if a deal is about to be announced?

      • It’s true. But if the strategic review is indeed expected to complete by the end of April, then Powell’s buying was with a nearly 2 months gap. At the time, the exact outcome of the review might not have been evident yet (which allowed him to buy), although, as a director he definitely knew towards what the board was leaning to. As I understand the timeline for blackout periods can vary depending on the circumstances and may offer some degree of flexibility. Although, I would appreciate if someone had more insights into this.

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      • I personally wouldn’t read too much into it. It’s chump change and the guy seems to have a history of randomly buying a handful of stock of companies he is involved with every now and then.

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  9. Saw this from the Toff Cap weekly blog – Nuvation (net cash broken biotech) was up +70% on announcing a merger with Anheart. Suggests “risk on” appetite perhaps, esp. when it comes to Late-stage Oncology assets.

    Nuvation (NUVB US). Busted biotech SPAC with >$600m net cash on balance sheet, trading at negative EV. Currently pursuing last trials. If success, stock is cheap; if failure, NUVB becomes a cash-distribution play. To play out over next ~12 months. UPDATE. Big insider buying recently, while share price under pressure.

    UPDATE (April 8, 2024) To acquire AnHeart Therapeutics. Massive stock price reaction. No clue on the impact, but sell side strongly increased TPs.

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    • The sentiment on the busted biotech acquisitions has changed recently. NUVB, ABIO, and CHEK all popped on deal announcement.

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