Quick Pitch: Altreca (BCEL)

Contingent value rights – Multi-bagger Upside

Altreca (BCEL) is a tiny failed biopharma, which is selling substantially all of its assets and plans to promptly return cash/liquidate after that. BCEL is already almost a cash shell with only 5 employees and clean balance sheet. Management expects the liquidation distributions to range between $0.05-$0.06/share. On top of that, shareholders will receive a contingent value right that could pay up to $0.17/share. The CVR is contingent on the first patient dosing of the sold antibody development programs, rather than some distant FDA approval or sales related goals that are typical in most of pharma CVRs. The market is currently pricing the CVR at $0.02-$0.03/share, which offers substantial upside potential. However, keep in mind that liquidity is limited ($50k per day on average).

BCEL is disposing nearly 30 development programs of antibodies for cancer treatment. All of these programs are now in pre-clinical stage. Pre-clinical trials are focused on developing an antibody, based on which a clinical product candidate is then derived and a clinical trial begins.

The CVR milestones are:

• Milestone 1 ($4m or $0.10/share) – first dosing of the first patient in the first clinical trial for a pharmaceutical product derived from one of the acquired programs.
• Milestone 2 ($3m or $0.07/share) – first dosing of the first patient in the first clinical trial for a pharmaceutical product derived from any second acquired program.

Most of BCEL’s programs are still far away from entering clinical trials. However, two programs (APN-346958 and APN-497444) are much more advanced and already close to filing INDs – the authorization to start clinical trials. Even before the asset sale, BCEL had already planned to file INDs for these two programs in late 2024 and early 2025. If approved, the clinical trials could begin by early-mid 2025 – i.e. the CVR could get paid in full already next year (see August 2023 presentation).

BCEL is selling these assets to Immunome (IMNM), a cancer treatment focused biopharma. IMNM is definitely a credible buyer with $900m+ market cap and a track record of much larger acquisitions (e.g. here). In pharma deals with CVRs the buyer is often motivated to artificially delay trials in order to game the payout to CVR holders – this is not the case here:

• The total CVR liability would amount to only $7m, which is an immaterial figure to IMNM.
• Two of BCEL’s clinical trials are set to start (if approved) early to mid-next year – so even if there is a slight delay, it shouldn’t be a dealbreaker for the CVR.
• Immunome has a relatively thin pipeline (one phase 3 trial and three pre-clinical programs) and should be incentivized to advance programs to clinical stage as fast as possible.
• It’s also unlikely that IMNM has any ulterior motive behind this acquisition rather than just advancing the programs to trials. BCEL’s proxy states that IMNM did not want buy the technology behind the discovery platform and was solely focused on the programs only: “following the Asset Sale, our non-cash assets are expected to consist only of our platform technology and ATRC-501“.

As for the liquidation distributions ($0.05-$0.06/share), BCEL does not provide detailed calculations. The company held $3.5m of cash as of March 31 and will receive $5.5m upfront payment from the sale. Total expenses are expected to land in the range of $6.6m – $6.9m, which includes all non-contingent liabilities, severance and even $1m set aside for contingency reserve. This leaves $2.1m-$2.4m ($0.05-$0.06/share) for the shareholder distributions. The latest available financials are only as of Q3’23, when the balance sheet looked very different, so it is difficult to have an opinion whether management’s estimates make sense. However, usually, if management gives liquidating distribution range for shareholders to vote on, the final figure falls within the indicated range.

The sale will need to be confirmed by BCEL’s shareholders on May 13. I expect the vote to pass easily and the transaction should close shortly after that. The CVR will expire in 5 years.

 

Some thoughts on other risks

The margin of safety for liquidation proceeds is very narrow. $0.5m negative swing in costs could wipe out 20% of the distribution (I’m not including the CVR, to be clear). Nonetheless, the company is almost a cash shell already and management should have pretty good visibility into the remaining expenses. The sale was announced at the end of December and at the time, when both cash and liabilities were much larger, the expected distribution range was set to $0.05-$0.07/share. This month, the upper end was tweaked lower to $0.06/share. The fact that the update estimate stayed within the initial range is positive and I expect management now has an even better visibility into the remaining expenses. Another positive is that BCEL has a couple of prominent shareholders. 20% of the company is owned by Baker Brothers (one of the most successful biotech investors with $23bn AUM). A further 5.7% stake is held by biotech fund Boxer Capital. Although, given how tiny BCEL is ($3m mcap), it’s possible that these investors are not deeply concerned with the minutiae of the liquidation returns.

The only other questionable nuance I’ve found in this regard, is this line in the CVR terms:

“a pharmaceutical product containing an antibody that is not a Specified Program Antibody but that targets the same antigen as a Specified Program Antibody shall not be considered to be derived from a Specified Program Antibody”.

It seems a bit strange why this seemingly obvious point had to be explicitly stated in the agreement multiple times. Maybe IMNM could somehow use this angle and copy/create very similar antibodies based on BCEL’s assets and then derive clinical products/proceed to trials without of triggering the CVR milestones. But that’s already deep into the realm of conspiracy theories and is probably unlikely considering the time/costs inefficiency the whole thing would create.

The last thing I wanted to highlight is that according to the background section of the proxy, there was only one other potential bidder besides IMNM. This other company offered $3m for only certain pre-clinical programs – not clear how many, but it included the two most advanced ones. However, after due diligence, the bidder walked away. Meanwhile, IMNM initially offered $3m upfront payment + $3m CVR, but after a couple of negotiation iterations raised the offer to the current $5.5m + $7m in CVR.