Potential Reverse Merger/Liquidation – 50%+ Upside
This is a quick note on a freshly busted biopharma, which has a very clean balance sheet and trades at 50% discount to net cash.
Aerovate Therapeutics was developing a dry powder inhaled drug for pulmonary arterial hypertension (PAH). This was AVTE’s only project, aimed at directly competing with UTHR’s Tyvaso and LQDA’s Yutrepia (covered on SSI here). Last week, AVTE reported that the first 24 weeks of phase 2b trial were a total bust – none of the studied doses met any of the primary or secondary endpoints. The company halted the development and the stock dropped by 94% upon the news.
The ‘potential liquidation/reverse merger’ setup is still in very early innings. So far, the company did not give any clues about the next steps. That’s quite unusual – normally, busted pharmas in similar position announce restructuring and/or strategic review along with the failed trial results.
But, I think this is just a minor delay. With only $100m in cash left and no other potential candidates in the pipeline, it seems very likely that AVTE will have no choice but to announce a strategic review promptly. These reviews almost always lead to either a reverse merger or liquidation. The margin of safety seems wide enough to wait and see what happens next, especially given a few positive aspects outlined below.
The most interesting twist here is that right after the trial halt and stock sell-off, AVTE’s largest shareholder, Ra Capital Management, acquired nearly 1m shares at an average price of $1.67/share – well above the current price of $1.44/share. This purchase increased the largest shareholder’s ownership from 29% to 32%. Ra Capital is regarded as one of the most prominent investors in the biopharma space. The firm had generated 28% IRR from 2002 to 2015 and currently manages $10bn AUM. This is a tiny position for Ra Capital, but it’s a very sophisticated/smart money investor that’s not throwing money away randomly.
As the largest shareholder with chairman’s position in AVTE, Ra Capital is essentially steering what happens next. The fact Ra Capital has just bought $1.5m of shares at 16% premium to current prices, combined with AVTE’s massive discount to net cash and clean balance sheet, creates a pretty attractive situation.
The remaining shareholder register is also worth noting. AVTE is a tightly held stock, with five major shareholders (all biopharma-focused hedge funds/VC firms) controlling 65% of the outstanding. Among these is Baker Bros (holds 5.8%), also known to be one of most successful biopharma investors. Major shareholders control 4 out of 8 board seats. The CEO owns 2.8% of AVTE and is also a former employee of Ra Capital.
Atlas Venture (owns 6.3%) has David Grayzel as representative of AVTE’s board. David is essentially a serial biopharma dealmaker:
Overall, management appears quite reputable with a decent background in M&A and reverse mergers. The CEO previously led Proteon, another busted biopharma, which executed a reverse merger with ArTara in 2020 (now renamed to Protara).
Here are my quick calculations of AVTE’s current cash position.
- $100m net cash as of June 15 – as reported in the trial halt announcement. The cash is basically unchanged from Q1 (March 30) levels, because the company issued $24m in equity in April through its ATM program. That pretty much fully covered the Q2 cashburn. The ATM program has been almost fully used at this point and only $7.5m are left for further issuances. However, it’s unlikely the company would do it at current levels;
- Less $15m – accounts payable, accrued liabilities as of Q1;
- Less $0.5m – estimated lease termination costs (1 year rent);
- Less $1m – estimated cashburn for the second half of June. AVTE used to burn around $24m per quarter. About $20m of that was to be R&D expenses, which now should be eliminated.
This results in $83.5m of net cash as of June 30, compared to $41.5m current market cap (50% discount).
Assuming the company initiates restructuring and launches a strategic review, I would further deduct $8m of cash burn for 2 more quarters and $6m for severance expenses. This would result in $69.5m net cash by year-end, still implying a 40% discount at current prices.
Another (admittedly almost anecdotal) point is that according to this tweet, some AVTE employees have already started looking for new jobs. After a quick check I found only this one guy, AVTE’s Head Of Clinical Quality, who is apparently seeking new employment. This (sort of) confirms that restructuring and strategic review are about to be announced shortly.
At first glance looks like some of the best conditions for a successful “broken bio” play in a while
Completely agree with all of the above, having tracked the name the last year. Well, almost all. I think you’re giving RA Captial way too much deference. They make most of their money in the cross over. Them buying the entire company at $1.66 is a rounding error (or a tax write off!)
Thank you for the idea.
They reported in 10Q “Research and development expenses for the three months ended March 31, 2024 were $20.1 million compared to $13.5 million for the three months ended March 31, 2023. The increase of $6.6 million was primarily due to our ongoing Phase 2b/Phase 3 trial causing increases of $3.5 million in manufacturing costs, $2.4 million in headcount related costs, and $0.6 million in pre-clinical and regulatory related costs”.
So in Q1 headcounts were 2.4 + 4.5 of admin. Unless they immediately fire their staff, HR costs can be higher that you forecast. Just for thought.
Management already gave cash figure for mid June, so assume most of the Q2 expenses have already been deducted. I have also deducted further a $1m of cash burn estimate for the second half of June and $6m for severance expenses. I assume most of the employees have already been let go or will be let go shortly. But if the process drags on, then you are correct, I might be underestimating cash burn levels.
$5.6M per that Friday night 8-K, solid guesstimate!
https://ir.aerovatetx.com/static-files/3b806cf8-c984-4ffd-af26-2007fb8745f3
Phase 2 and Phase 3 Clinical Trials are expensive to wind-down.
From their most recent 10 Q: “Our global Phase 2b/Phase 3 clinical trial is managed by one CRO and is currently enrolling in over 20 countries and 120 clinical sites.”
How much cash do you think it’ll take for this wind-down?
Good question. I didn’t separate it out in my calculations. I just assumed severance and restructuring expenses to be around $6m, which is in line with previously seen cases. Maybe that’s a bit optimistic since this was kind of a double trial. But even if the restructuring expenses go up to $10m, the year-end discount to net cash would only narrow by 4%.
So what’s a good ballpark in a liquidation ? $2.96 by my calcs… Or should we thinking a buyer pays 85% of cash + cvr ? ~$2.5-ish.
Your guess is as good as mine. Too many unknows at this point (not even the direction the company will take is known at the moment) to pin point the either liquidation or buyout valuations. With my assumptions I have arrived at c. $70m net cash value at the end of the year after severance expenses and 2 more quarters of cashburn (at much lower levels than currently). That works out to around $2.4/share.
thanks – makes sense
The market moved as you sent this one out! Let’s see if there is enough downside volatility to get this with a ‘sufficient’ margin of safety; which brings me to:
“This would result in $71.4m net cash by year-end”
Something is slightly different between the details and the final number:
100 – 15 – 0.5 – 1 = 83.5 (vs 84.5m)
83.5 – 8 – 6 = 69.5m (so ~1.9m lower than the specified 71.4m).
I can get to a similar number playing with assumptions on the percentage of costs re payroll etc, no major differences. However, why haven’t you included some transaction/ /liquidation costs? Usually you include those (maybe 2-5m?).
In addition, the change in control provision would mean a pretty fat pay day for the executive; I calculated that at 2.54m
So even though individually they are ‘small’ differences, the ~2m difference in your calculation, plus, say, 2m for transaction/liquidation costs, plus the payout for the change in control and it is a ~6.5m difference which becomes material, especially given the stock closed at 1.67 vs 1.44 at write up time.
My questions are:
Is your projected net cash 71.4m or 69.5m?
Why no transaction/liquidation related costs?
Do you agree with considering the expense of the change in control salary/bonuses etc. or is that an error on my part?
I end up with net cash of ~64.91m. On a per share basis (after considering the accelerated vesting of RSUs and the relatively small amount of options exercise able in the low $2 range) I get $2.22
Hope to get your feedback prior to market opening :-)
Thank you!
Always had a problem with the 2nd grade math. Thanks for corrections (now updated in the post). This is all based on rough assumptions, so it does not change the thesis anyway.
As for your other questions – I have only estimated net cash at the end of the year rather than cash that equity holders would receive in liquidation or takeout scenarios. But if one of those scenarios materialize, I fully agree that there might be either additional expenses or discount to cash value.
This company came public from the RA Venture program and the company’s chair is part of the RA Venture program. Zero chance this is a liquidation, this will be a new PAH-related company at a fair value for market conditions at the time and they will keep a relative large group of employees on to help coordinate the newco’s clinical programs. They will spend the next 6-months sharing their lessons learned and finding the next PAH-related company to take public, in Q4’2024 or Q1’2025, net cash per share will be $1.57-$2.03. GLTA
Well, this is an interesting and material insight; enough for me to “pause” my order. Thank you for communicating it.
One of the foundational points of this thesis is that R&D costs go to near zero, if that isn’t the case cash could burn quickly and thus erode the MOS/upside.
Look forward to further discussion around this point.
Here is the 8k: https://ir.aerovatetx.com/static-files/3b806cf8-c984-4ffd-af26-2007fb8745f3
“On June 25, 2024, Aerovate Therapeutics, Inc. (the “Company”) determined to implement a reduction of the Company’s workforce (the “Workforce Reduction Plan”) following the Company’s previously announced decision to shut down its Phase 2b/Phase 3 clinical trial of AV-101 as well as the long-term extension study. Under the Workforce Reduction Plan, the Company intends that nearly all of its workforce will be terminated in the coming months. The Company initiated the first wave of its Workforce Reduction Plan by notifying 39 individuals, or 78% of the Company’s workforce, of their termination. The affected individuals will be provided severance benefits, including cash severance payments. Each affected individual’s eligibility for severance benefits is contingent upon entering into a separation agreement, which includes a general release of claims against the Company.
In connection with the Workforce Reduction Plan, the Company estimates that it will be incurring costs (in consideration of releases) of approximately $5.6 million, which are primarily one-time severance benefits. These costs are expected to be incurred in the third and fourth quarter of 2024.”
So based on the above “the Company intends that nearly all of its workforce will be terminated in the coming months”. Obviously, that is in complete contrast to the assertion that “they will keep a relative large group of employees on to help coordinate the newco’s clinical programs”. However, what baffles me is why “costs are expected to be incurred in the third and fourth quarter of 2024”. It implies while they are going to get rid of everyone, it is still months away. It would be good to know if it is just admin staff that will linger or if some research staff will need to be retained which may materially reduce the cash balance. That thought ties in with comment “Phase 2 and Phase 3 Clinical Trials are expensive to wind-down.” I.e. they are expensive to wind down because they can drag out.
My concern is ongoing payroll costs are materially higher than expected even though the eventual severance estimate was spot on. Any thoughts on how others see this would be welcome.
I think DT’s assumption about the ongoing cash burn is more than conservative. R&D will go to zero, and most likely, after the latest announcement, SG&A will also be significantly reduced. Therefore, assuming it stays at current levels until the end of the year should give us enough room for error regarding any cost blowout.
I think easy money on this case have already been made and further upside (despite the remaining large discount to current cash position) is uncertain or might be far away. I have exited my position at around $1.7.
– I think cashburn will be higher during upcoming two quarters than I initially estimated. It also might have been higher than my-estimated $1m during the second half of June.
– 22% of the workforce (11 employees) will remain – these are likely to include executives (i.e. the most expensive ones).
– As G98 spotted, the company expects to incur severance expenses in Q3 and Q4. This might be just a required accounting treatment or might indicate that some of the terminated employees will remain on payroll for a few more months.
– The company has not announced a strategic review yet, which is a bit surprising at this stage.
With more conservative estimates for cashburn I arrive at c. $60m net cash position vs $50m market cap today.
Thanks DT
I keep going back and forth on this one. My SS portfolio has been heavy in cash for a long time, so it is possible (probable) I am straining for ideas suitable for me.
Having read the 8k and gone back to my numbers this is where I’m at, and yes, it can get granular with the assumptions:
They made the announcement of failure on 15-Jun, and implementation announcement on 25-June. So, I assume full costs were incurred for those 10 days. Then, for the 5 remaining days I assumed 25% of R&D costs, let’s call them ‘non-payroll related R&D’. And I assumed G&A continued at full rates for those 15 days. That gives me a cash burn of about 3.54m and a forecast of cash on hand at 30-Jun-24 of 96.46m (starting with 100m on 15-Jun-2024).
Then I have the severance of 5.6m of 78% of the workforce. Grossing it up for the remaining workforce, given they said “nearly all of its workforce will be terminated” that’s another ~ 1.23m which will be incurred eventually.
For Q3 I’m assuming there are lingering R&D costs in winding down the programs of 10% of the unaffected cost (~2.23m) and G&A (being largely payroll presumably) continues at 80% (~3.63m vs ~4.54m full cost).
For Q4 I’m assuming only 25% of the G&A will continue, that’s ~ 1.13m. The executives have a base salary of ~1.5m between them, or 0.4m per Q. I therefore have a residual 0.73m for other employees (and whatever else they need/will waste it on) for Q4. I have then assumed 2m in restructuring/banking fees and 2.54m in Change in Control costs.
Accounting for the lease termination and adding back some interest income I’m currently guessing at 64m or ~ 2.19 per share (taking into account the accelerated vesting) by year end.
I’ve been changing like the wind on this one, but the reality is (as usual) I’m in the weeds and the driver of the returns will be bigger picture management decisions. Nonetheless, insiders (specifically, directors and named officers) own ~20%, and presumably they value a dollar at a dollar, and will therefore ‘do something’ that ensures the dollars are preserved, given it is in their best interests to do so.
So, agree, the easy money has been made, but if there is some downside volatility and it can be bought in the low 1.50s I’m still keen, depending on the answer to the following:
DT is what is the significance of the company not having announced a strategic review as yet? What is their alternative if they fire everyone if not to undertake some type of corporate action?
Thanks
If the directors and officers own ~20% then (ignoring the tax intricacies), it may be significantly less work for them to drag on the process by collecting a salary and allowing the stock value to go to zero. The financial benefit of a proper wind up vs a juicy salary may not be worth it. I’m not sure if the incentives are quite there.
Aerovate Therapeutics to Explore Strategic Alternatives
https://ir.aerovatetx.com/static-files/a0bbece2-fd61-47ef-be6b-e30433da7760
Well this changes things…
G98, thanks for getting granular here. Based on the updated 10q and your assumptions, I’m getting around 72-73m now (main drivers being cash coming in ~8m higher and 2.6/5.6m severance expenses hitting before end of Q2). Curious where you’re seeing things?
Hi kmichell,
My updated numbers get me to $71.89m/$2.45 per share, so in line with yours. The options and RSU numbers I retained what was previously disclosed in the proxy statement.
Initially I think made a mistake with regard to the following:
“Then I have the severance of 5.6m of 78% of the workforce. Grossing it up for the remaining workforce, given they said “nearly all of its workforce will be terminated” that’s another ~ 1.23m which will be incurred eventually.”
I think 5.6m is the total estimate for the “Workforce Reduction Plan” and I didn’t need to ‘gross it up’.
The Total Liabilities nudged up to 17.3m.
Perhaps any other minor variance can be explained by interest/yield assumptions.
Thanks for confirming, guess all there is to do now is wait and see where this strategic review goes. Covered 2.5 strike calls may be worth a look too for some extra premia if you’re interested
For a cash shell like AVTE, should we think of the net cash estimate as a floor for shareholder value, or should we normally expect the company to trade at a discount to net cash (due to various “leakage/frictions” caused by management’s capital allocation actions, as well as time value of money)?
To go along snowball’s comment (not sure if this will show up at the right place), can we restate the risk/reward at current levels?
snowball, I’m curious how you value these things (you seem to be an astute investor) but my approach is basically this. Given the tendency of biotechs to burn enormous amounts of cash as quickly as possible I don’t think there is a floor, or a margin of safety. Size accordingly.
But they announced a strategic review, which basically can have three outcomes:
1. a reverse merger.
2. fire some people and keep burning money, but at a slightly slower rate.
3. a liquidation.
Depending on the shareholder base (and whatever else you think it relevant) you can make some guesstimate of how likely these options are and then calculate the discounted, weighted average of these outcomes.
Now, we always calculate and discuss liquidation value, because, I guess, it is the only thing one can actually calculate. But probably we’re fooling ourselves a bit because as far as I am aware the vast majority of these reviews end with a reverse merger.
However, it has been my experience that these stocks often are so beaten down that any news is good news and, in particular, that on average a reverse merger is well received by the market. Which is I guess the true reason to buy stocks like this. I think that’s also not a total bullshit argument. These reverse mergers often come together with a PIPE deal where some funds buy $100m worth of newco at valuation X. In the merger agreement the old listed biotech is almost always valued at net cash + 5 million for the listing and tax assets, or something like that. So it sort of makes sense that if the deal closes the listed biotech market value gravitates a bit toward to net cash, on average – otherwise it would be a much cheaper way to buy into newco at valuation X.
Long story short, I don’t think there’s any margin of safety in the pro forma cash balance. However, both in the case of a liquidation and a reverse merger (and I only buy them if I think these are by far the most likely outcomes) the market price tends to gravitate to the pro forma cash position. Which is why I think buying these things at a discount to the pro forma cash balance is a decent strategy.
On average this has worked out pretty well over the past few years but it’s certainly not working out well in every single case. There’s also no guarantee it will continue to work in the future, i.e. there’s the new legislation about reverse mergers, sentiment in the market could change, the structure with concurrent PIPE deals could fall apart, etc. etc.
Also note that the easy part is figuring out the pro forma cash balance. The hard part is judging / figuring out what happens in the other scenarios and how likely each scenario is.
Some interesting case studies lately. PIRS announced a deal while almost everybody had written off the possibility of a reverse merger (which of course resulted in the stock skyrocketing post-announcement). ACRS was almost the other way around: lots of people expected a reverse merger or liquidation (extensively discussed on this site) but the outcome so far has been a dud. The strategic review is still ongoing though and if you have reason to believe they will pull off something similar I think it’s a very interesting situation.
However, it’s hard to profit from the ones where you think a reverse merger or liquidation is unlikely because you are stuck with a likely third scenario that is very hard to value unless you have a medical PhD.
Hi writser, with regard to this:
“there’s the new legislation about reverse mergers”
I wasn’t aware of this but just read a little bit. It seems as though, in short, they are harder to execute and have more regulatory oversight and accountability with regard to valuations and projections. Is that about right?
So, my interpretation is that the probability of reverse merger has done down, which means selling assets (if they are worth anything), getting acquired or liquidating has increased (i.e., all good for us). This is based on the assumption that raising capital to ‘go again’ is highly unlikely.
Is that you you see it or have a missed something fundamental here?
Thanks
I have no firm opinion about the impact of the new rules because I’m not a lawyer and I cannot judge the extent to which they make reverse mergers less likely. I guess we’ll see from now on.
If anything, I guess these new rules are a negative. The past few years the results of biotech strategic reviews were something like: 60% reverse merger, 20% liquidation, 20% continue as-is. If you remove reverse mergers from the equation I think a lot more companies will choose to continue as-is, which increases chances they are going to incinerate their cash and makes handicapping the outcome of a strategic review more dificult.
Optimists could argue that all these boards who were going to opt for a reverse merger are now going to opt for a liquidation instead but I’m afraid that is wishful thinking. If I were a paid board member I’d rather go for a moonshot (while getting a fat paycheck) than fire myself. Incentive aren’t always neatly aligned with those of shareholders hoping for a quick gain.
Hi @writser
Thanks for the very valuable inputs!
Maybe @dt has the answer for the following question:
Statistically speaking, in previous busted biopharma deals covered in SSI, during their strategic reviews, what’s average discount of market cap to estimated cash?
I don’t think I have any edge in assessing the odds of the three possible outcomes. However, if the current discount is significantly larger than the historical average, I am willing to place a bet.
Although it’s generally not a good idea to bet without any informational or analytical edge, I think this kind of bets are so uncorrelated that just a statistical edge is good enough to justify a very small position in a diversified portfolio.
“Statistically speaking, in previous busted biopharma deals covered in SSI, during their strategic reviews, what’s average discount of market cap to estimated cash?”
I do not have the compiled data on this, but generally biopharmas during strategic review tend to trade anywhere between 50-70% of cash value. But it depends on how large the cash pile, management, activist presence and etc. So I do not think that the game of statistical averages would work here.
I suspect you mean the price to net cash has been 50% to 70% (which translates to a discount to net cash of 30% to 50%).
My two cents is that a lot have been tending higher, closer to 75% of net cash (i.e., 25% discount).
hi @dt,
Thanks!
Knowing the historical (wide) range (30-50% discount) is already good enough for me.
Based on this range, regardless of whether our cash estimate is $60 or $73 million, AVTE at $52 million market cap ($1.8/share) is not screaming cheap.
When the price drops below $40 million ($1.4/share), maybe we can then consider the positive factors (management, activist presence) if any.
For everyone following the AVTE windup, GRTX has just confirmed its shuttering operations, similar setup. Looks like $10.2m cash and a $4.1m mkt cap.
Thanks for flagging.
Thanks. I was hoping to have a definitive view on this before the market opened but I’m nowhere close.
Do you have any initial thoughts on it?
I noticed that the CEO who had a salary of 600k in 2022 and a total comp of ~1.4m is sticking around. Based on the 2023 proxy he owns 332,044 shares (the rest were options above the current price) worth ~23k…
DT often has guidance around liquidation costs etc., but with these tiny liquidation plays a CEO with such a big salary and meaningless stock ownership could really affect the outcome with a delay of a quarter or two. Anyway, just very preliminary (and potentially outdated) thoughts.
Would very much like to hear from others.
PF for lease, severances, and the settlement, I am at ~$8-8.5m in NAV pre dissolution costs/cash burn. Assuming a $2-3m wind-down, which is quite finger in the air, could still be moderately attractive? Liquidations aren’t my thing (I am sitting on sidelines for now), so I would defer to better versed investors
Galera Therapeutics, Inc. (GRTX)
Apologies for posting about another idea here, but I’m not sure where else to put it to get a discussion (hopefully) going.
Being a tiny liquidation, the result could swing wildly based on a couple of line items, and then the other risk is IB restricting trading as it is a nano cap and they tend to flag clients as affiliates based on nothing, and then force the client to ‘prove’ they are not an affiliate all the while placing their capital at risk by restricting trades.
That aside, I’ve dug in, and it doesn’t appear too appealing at 0.077, but I might be double counting, being too conservative, or being plain wrong so would like some feedback from those who might have also dug in.
The following is my attempt to calculate the potential liquidating distribution(s) based on adjustments to 30 June 2024 figures.
Cash 10,749k less current liabilities 2,126k (possible double counting of current portion of lease based on subsequent items, see below), less deferred tax liability 203k (not sure why without income they have a deferred tax liability but to be conservative/potentially wrong I’ve included it).
So, 10,749k – 2,126k – 203k = 8,420k
Then:
Settlement from litigation 975k
Less:
Lease cost 1-Jul-24 to 8-Aug-24 (termination date) 23k
Lease termination costs 500k (8-Aug-24)
CEO salary – this makes a big difference; if he hangs around to milk this thing, and given he owns virtually no stock he is incentivised to do so, then 1.5 years of his salary is about 925k (is he even allowed to hang around post dissolution announcement/formation of a liquidating trust?)
CEO severance (12 months) 617k (once the milk man is done he’ll get 12 months salary it seems!)
CFO salary from 1-Jul-24 to 31-Aug-24 (termination date) 85k
CFO severance (9 months’ salary, no bonus component) 375k
Compliance Officer (maybe the most overpaid job in the world) 1-Jul-24 to 31-Aug-24 68k
Compliance Officer severance (9 months no bonus component) 300k
Now, they will have three employees kicking about post 31-Aug-24 which, presumably includes the CEO. So, I am assuming the other two will stick around for 1.25 years and earn 150k each resulting in a further burn of 375k (150k *2 * 1.25)
They also plan to provide consulting service agreement to the CFO and Compliance person….. how much will that burn? I’ve assumed they’ll extract half their salary each, so another 450k ((500k+400k) *0.5)
Liquidation costs, I’ve just guessed 1.5m based on SIOX (but maybe I’m double counting with the consulting fees from the CFO/Compliance etc.)
Insurance – Directors’ and Officers’, again something from SIOX but I’ve guessed at 500k vs SIOX that had 1.7/1.8m – input here would be especially valued.
On their cash I’ve assumed 157k of interest income, so that means starting with 8,420k and adjusting for all of the above I get…… 3.835k
Shares outstanding: 54,392k. I don’t think there can be further dilution from the ‘Prior Plan’, Employee Stock Purchase Plan or Inducement Plan (but please correct me if I’m wrong)
The result of the above is per share liquidation value of 0.0705.
Let’s look at ownership and incentives….
The CEO owns virtually nothing, and that holds true for the insiders generally…. But an investor named Schneid owns 20% and doesn’t seem to be a long term insider, but perhaps someone who had higher expectation from their law suit? I haven’t done enough work here. In addition, his wife owns another ~10%, half personally, half though her fund. They seem to have lost heavily, but can they control the votes and the outcome here with a 30% holding? I would think they’d have quite an influence against a CEO who has presumably kept himself around to milk an enormous salary… Their presence should also reduce the risk of not having the dissolution approved in consequence of a fragmented and uninterested shareholder base….
Okay, that’s me done – time to find out all the ways I’m wrong!
(… and apologies for the inevitable typos)
It has taken the company almost a full year and $17m of cash burn to move from strategic review to liquidation. The liquidation process and subsequent cash burn might be equally painful. G98’s calculations land at the current share price – maybe it is overly conservative and some of these expenses will turn out to be smaller, but I my guess a negative surprise is more likely.
Margin of safety in dollar terms is simply too small here with only $10m of cash on the balance sheet.
The CEO is selling down the little stock he has, just filed today. Maybe he also find the CEO comp too high for the stock to do well.
(GRTX) His stock is worth a couple of weeks pay yet he is still selling it…. That’s really concerning…. I think that suggests the current price is increasingly likely to be above the distribution, if any….
AVTE has moved a lot in the last month without specifying their intended ‘strategic direction’.
Given the price was closing in on my estimated liquidation value I started considering selling prior to the completion of the strategic review.
In doing so I revisited my assumptions and I realized that in the 10Q (Q2) they had already accrued 2.6m in relation to their 5.6m Workforce Reduction Plan leaving only another 3m to be incurred. This 2.6m was not ‘expected’ to be incurred in Q2 based on their 8k prior to the release of the 10Q (“In connection with the Workforce Reduction Plan, the Company estimates that it will be incurring costs (in consideration of
releases) of approximately $5.6 million, which are primarily one-time severance benefits. These costs are expected to be incurred in the third and fourth quarter of 2024.) which is probably why I made the mistake. As it turns out Clark Street had made this point clearly in his September write up!
In addition, I had previously disregarded their Prepaid Expenses, however I think it makes sense the the ‘general’ Prepaid Expenses (1.296m) would be utilized and therefore reduce cash burn. In addition, I assumed ~2m of non-payroll R&D in Q3, however, given they have ~4.8m of prepaid research and development, I assumed this ~2m would utilize the prepayment and therefore not further reduce the cash.
Overall, the above adjustments had my estimated liquidation value move from ~$2.45 to ~$2.67 per share.
All said and done, the MOS relative to liquidation has still materially reduced (at a price of 2.36), however, it doesn’t appear to have been fully eliminated.
Aerovate Therapeutics and Jade Biosciences Announce Merger Agreement
https://jadebiosciences.com/press-release/aerovate-therapeutics-and-jade-biosciences-announce-merger-agreement/?utm_campaign=the_readout&utm_medium=email&_hsenc=p2ANqtz-97tPEVpFVc0OmnZrohwgQgJiy8fIeVfFI3SJsj5qHrouqlCGrNompPUrJzOhA3E5r79eUMIA0Ulb_qWoQN8UDqHyHR2Q&_hsmi=331724712&utm_content=331724712&utm_source=hs_email
AVTE shareholders will receive special dividend of ~$2.25/share and 1.6% of the combined company.
So AVTE’s current price ($2.65) is valuing the combined company at $700 million.
Under the terms of the merger agreement, pre-merger Aerovate stockholders are expected to own approximately 1.6% of the combined company, while pre-merger Jade stockholders — including those investors participating in the pre-closing financing — are expected to own approximately 98.4% of the combined entity.
Aerovate is not expected to contribute funds to the new entity and expects to pay a dividend of approximately $65 million to pre-merger Aerovate stockholders immediately prior to the closing of the merger.
A few additional thoughts here:
1) Management teams are conservative when estimating special dividends. For example, Oruka Therapeutics (ORKA), formerly Arca Bio (ABIO), is a recent example of a reverse merger with a similarly large special dividend. ORKA increased the special dividend from $1.378/sh ($20m) to $1.613 / sh ($23.4m). In ORKA, we had a material 17% pick-up in the special dividend.
At AVTE, the current special dividend is estimated at $65m, or ~ $2.25/sh. The language in the Merger Agreement defines the Pre-Closing Cash Dividend as “$70m, subject to certain adjustments.” If the $65m dividend estimate is conservative, an incremental $5m would be an incremental $0.1732/sh, adjusting the special dividend upwards to $2.42/sh.
With interest rates north of 4%, the interest that accrues on cash balances is distributed out. In addition, if a bid comes in for AVTE’s PAH legacy assets – I’m currently ascribing $0 value to this – but that will also adjust the special dividend upwards. Basically, there’s multiple basic levers – lower costs than expected, higher interest rates on cash balances, optionality in asset sales – to adjust the special dividend higher.
2) The PIPE offering at $0.251/sh was oversubscribed by deep-pocketed investment funds. It’s reasonable to assume that anyone who didn’t get an allocation would be a willing buyer in the public market under that subscription price.
I would think that should create a reasonable floor in the $2.70/sh range, with reasonable upside from that level from what looks like a high quality reverse merger.
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At AVTE, the current special dividend is estimated at $65m, or ~ $2.25/sh. The language in the Merger Agreement defines the Pre-Closing Cash Dividend as “$70m, subject to certain adjustments.” If the $65m dividend estimate is conservative, an incremental $5m would be an incremental $0.1732/sh, adjusting the special dividend upwards to $2.42/sh.
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As per the 8k filed today, we’re getting a higher special dividend of $67.6 – $69.6 million, which translates to $2.33/sh to $2.40/sh. The CFO here is conservative. I suspect we’ll come out at the higher end of this range.
Do you think the Jade Biosciences business is worth a lot less now than six months ago?
Assuming the $2.33/sh dividend, the current AVTE price of $2.55 is valuing the combined business at $400 million. Is this a reasonable valuation for Jade? (I have no idea)
The moves in stocks with v.large Special Dividends often disconnect from the value of the asset.
In the case of AVTE, let’s assume the div will be ~ $2.30.
AVTE ex-div opened the day at $0.41/sh ($2.71) and closed the day at $0.33/sh ($2.63)
That’s an ~ 20% move on NewCo even though the stock move was ~ 3%.
Because ~ 85% of $AVTE is a cash dividend, it shouldn’t move as much, but if it trades off of $XBI or general selling, the moves get materially amplified.
Based on a baseline of other large Special Dividend situations, I’d expect this underlying volatility reverses itself as we get closer to the Reverse Merger closing and after the special div is paid out.