Strategic review of a busted biopharma – 30% Upside
Clark Street Value has shared a brief note on Essa Pharma (EPIX), a “busted” biopharma that has just halted its pipeline development and launched a strategic review.
EPIX has a clean balance sheet and low cash burn. The stock currently trades at $1.7/share, whereas Clark Street Value estimates NAV/liquidation value at $2.18/share (27% upside), assuming the review process extends to mid-2025. The calculations are outlined below:
I’ve digged a bit further into this opportunity and I think several factors increase the odds that the strategic review will result in favorable outcome for shareholders:
- Management’s recent actions have been sensible and shareholder friendly, as illustrated by EPIX’s decision to independently halt all clinical trials upon realizing that the primary endpoint of the key trial was unlikely to be met.
- The company is closely held by specialized VC/biopharma investors: BVF Partners (26.4% stake), Bellevue Group (17.9%), Soleus Capital Management (9.7%), and PFM Health Sciences (9.5%). Together, these four holders own 63% of EPIX, though none have board representation.
- Management owns another 14.7%, out of which the CEO personally has 4.8% stake. For him, realizing full NAV or liquidation value would yield 6x-7x times his annual salary. Executive compensation appears reasonable – $600k to $900k/year, far lower than the $2m-$3m/year often seen in other, sometimes smaller, biopharmas.
- The company’s chairman, Richard Glickman, is a prominent figure in Canadian biopharma space. He has previously co-founded and led Aspreva Pharmaceuticals (sold for $915m in 2007). Later he co-founded and led Aurinia Pharmaceuticals (till 2019) – the company currently trades at $1bn market cap. He is also a chairman at ENGN, another biopharma with $400m market cap.
- The CEO and the Chairman are at the age where retirement could be considered as an option – 73 and 65, respectively.
All in all, interests seem to be well aligned and management’s reputation and track record so far decrease the odds of any toxic strategic review outcome (e.g. a value destroying acquisition/reverse merger or a prolonged review with elevated cash burn, etc).
There are a few other concerns which partially explain EPIX’s discount to net cash. The company hasn’t started to lay-off the workforce yet. This is a bit unusual as often reduction in force gets announced alongside trial halt/strategic review in order to conserve cash. However, it might be just a short delay and I would expect to see lay-offs announcement over the coming weeks.
Additionally, EPIX is classified as a Passive Foreign Investment Company (PFIC), which can involve more complex tax and reporting requirements for U.S. investors. I’m not a tax expert and this is not an advice, but, as I understand, this issue may be avoided if the stock is held in an IRA account. For a bit more quick background on PFIC, you can refer to this discussion on SSI.
EPIX used to develop treatments for prostate cancer, focusing on a single candidate being tested in multiple trials. Given that the main phase 2 trial was cancelled due to poor efficacy, realizing any additional value from the company’s IP is probably unlikely.
Positive development – Tang and BML have become major shareholders. Tang reported 13D with 9.7% stake, buying shares up to $1.83/share (above current prices). BML reported 13G with 9.4% stake.
– Tang
https://www.bamsec.com/filing/121465924018630?cik=1633932
– BML
https://www.bamsec.com/filing/137360424000105?cik=1633932
The bulk of Tang’s purchases seemed to be in the $1.50-1.60 range, although some of final brushes went above $1.80.
Do we have BML’s average cost basis info?
Not really, it’s a 13G. However, at least the the incremental part above 5% should be similar to Tang’s, given both were buying at a similar time.
This would seem to be further evidence of the company winding down? They cancelled a licensing agreement with the Univ of BC.
https://archive.fast-edgar.com/20241216/ARZ2K22CZ22BB9Z2222G2ZZZMDB98ZYSE262/
The termination of the license agreement appears to be a formal step that aligns with EPIX’s earlier decision to halt pipeline development following the failure of its key Phase 2 trial. While it reinforces that the company has exited active development, it does not necessarily increase the likelihood of liquidation.
In my view, key indicators of meaningful progress would include a reduction in workforce to conserve cash, announcements regarding change-of-control agreements, or explicit moves or signals toward liquidation.
8K 17-Dec-24
“ESSA has initiated a comprehensive process to explore and review a range of strategic options focused on maximizing shareholder value, which may include, but are not limited to a merger, amalgamation, take-over, business combination, asset sale or acquisition, shareholder distribution, wind-up, liquidation and dissolution, seek new products for development, or other strategic direction. The process is expected to involve headcount and other cost reductions.”
So they’ve named every corporate transaction I could think of (and a few more) and are “expect[ing] head count reduction – they haven’t initiated it yet.
While destroying value seems less likely, “seek new products for development” or a badly received reverse merger are still threats it seems.
So the mostly likely three outcomes are:
(1) reverse merger;
(2) liquidation/distribution;
(3) burning cash on new development;
And we just need to assign a probability to each outcome?
Do I understand correctly that it’s unlikely someone is interested in acquiring EPIX for its IPs or other non-cash assets?
Seems quite unlikely that someone would be optimistic about acquiring the IP after management essentially acknowledged that the primary endpoint of a key trial was unlikely to be met and halted the trials
The stock is now trading 18% above the prices mentioned in the write-up. Has anyone come across any updates or news related to the case?
Essa just filed their paperwork for the annual meeting to be held on March 5. The business items all seem to be mundane issues such as electing directors, approving the auditing firm, etc. I’m not sure what it would be reasonable to expect from this, but there don’t seem to be any hints about closing shop.
https://archive.fast-edgar.com/20250122/A7B2M22C8222U2ZK222L2MZZ93GQR2V2Z272/#tQAA
It’s totally normal for a company to hold its annual meeting. Strategic reviews can drag on for months, but companies still have to the usual routine stuff—AGMs, electing directors, approving auditors. I don’t think it says much about the direction of the review.
EPIX has had a class action filed against it (prnewswire.com/news-releases/shareholder-rights-law-firm-robbins-llp-urges-epix-shareholders-with-large-losses-to-seek-counsel-for-the-essa-pharma-inc-class-action-302368186); is this a nothing burger, or could this 1. result in damages having to be paid by EPIX or 2., EPIX having to spend material amounts defending themselves?
Isn’t this just the usual law firm marketing?
You often see a lot of law firm solicitations surrounding mergers, but EPIX seems to be at another level. It’s a rare day when you don’t see at least seven of them spamming the business wire. Curious situation. I don’t really understand why a busted bio would be a potentially fruitful source of deep pockets.
BHIL (also covered on SSI) is the other extreme: for a stock that has fallen by nearly 90% within a short period time, it is very surprising that not a single law firm has bothered to open a case on it, excluding those about its SPAC combination back in 2021.
I guess the lawyers are certain that they can’t recover a single penny from BHIL.
Q1 update came out. Nothing new – strategic review continues, cashburn in line with expectations. The stock trades at $1.74/share versus $2.18/share estimated NAV as of mid-2025.
Is this situation setup similar to the time of writeup or has risk/reward dynamic changed?
Nothing much has changed. BML and Tang own basically 20% combined. Review results should be out soon. In Q1, management said: “We look forward to providing updates in the near future.”
My hypothetical liquidation scenario is close to Clark’s:
+$121m Cash&equivalents and receivables;
-$3.6m AP;
-$0.3m Lease;
-$8m Q2 and Q3 cash burn;
-$5m Misc. liquidation expenses;
-$5m severance (guesstimate);
= $99m or $2.08/share (37% upside)
Two things to flag:
1) EPIX might be a PFIC. Could matter for some US accounts.
2) There’s a class action lawsuit Filed Jan 24, 2025, alleging overstatements about the masofaniten clinical program. ESSA believes it has valid defenses and has not accrued any liability. The case appears to fall into the standard bucket of biotech lawsuits based on management’s “over-optimism,”. As I understand, these usually go nowhere. Rain Oncology faced a seemingly similar suit but was still acquired. According to Woodruff Sawyer, 80% of pre-approval stage biotech lawsuits were dismissed in 2023:
https://woodruffsawyer.com/insights/securities-class-actions-life-sciences
Anyone been watching EPIX during the day/reading the tape? After hours I see stronger bids in the low $1.40’s and it held that level today so thinking there might be some strong buyers there.
Doesn’t seem like the tariff/economic backdrop should affect this story so r/r appears attractive.
I was buying a lot yesterday 1.4-1.5, though I was solely slapping the ask haha. I agree with your thoughts though, we’re theoretically closer than ever to their review wrapping up yet the discount to cash is near highs. Really like the low burn rate and shareholder base here too as an added margin of safety
A small positive: BVF Partners has switched from passive (13G) to active (13D) filing signaling they may now engage with management or push for changes.
https://www.bamsec.com/filing/119380525000447?cik=1633932
Soleus urging ESSA to liquidate:
https://www.sec.gov/Archives/edgar/data/1633932/000121390025032152/ea023833701ex2_essa.htm
Andrew Walker (I believe he wrote the SAGE pitch) always recommends that shareholders write to boards and management. Maybe we should all undertake to do so in these busted bios. It seems like things are starting to move in the sector with the THRD and KROS announcements the other day.
should post email address and template when you have ideas like that, people are lazy ;)
Dear Board Members,
(Insert Margin Call Gif)
Sell it. Sell it all. Today.
Best regards,
A Shareholder
Dear Board of Directors,
I am an individual shareholder in Essa Pharma. I commend your decision to undertake a strategic review to maximize shareholder value. As you are aware, the current share price is well below Essa Pharma’s net cash per share. I strongly believe shareholder interests are best served by liquidating the company and I urge you to do just that.
Further, I believe that it is not only shareholders that will benefit from this decision. Market participants will scrutinize your actions over the next few months. Failure to do right by shareholders will impact your reputation and career prospects.
Kind regards
BML joined the parade of investors demanding liquidation.
https://archive.fast-edgar.com/20250424/A222E22CZ22C22Z2222822YF3AN3WZ225272/bmlletter.htm
I wrote something similar but decided to leave out “as an owner of approximately 0.0000001% of shares outstanding”…
Looks like BML still sees value above the current market price of $1.80/share. Based on my previous $2.08/share target, there’s still about 15% upside (and 21% based on Clark’s estimates). Personally, I exited my position yesterday since the stock has run up quite a bit from my original cost basis, but I’m still tracking it and may re-enter if the price pulls back.
10Q 31-Mar-25 has been released.
An extract from the press release is below. Personally I didn’t expect R&D cash cost of 3m nor did I forecast G&A to be so high! All said and done my forecast of 2.29 per share is now 2.16 per share; closer to the estimate of Clark Steet ironically enough.
I don’t really understand how so many months in they are incurring such large sums for winding down clinical trails etc., but I might be something to consider for future broken biotech opportunities.
“Research and Development (“R&D”) expenditures. R&D expenditures for the second quarter ended March 31, 2025 were $3.5 million compared to $6.2 million for the second quarter ended March 31, 2024, and include non-cash costs related to share-based payments of $551,433 for the second quarter ended 2025 compared to $455,903 for the second quarter ended 2024. The increase in the second quarter was primarily attributed to the wind-down of clinical trials and cessation of preclinical work.
General and Administration (“G&A”) expenditures. G&A expenditures for the second quarter ended March 31, 2025 were $3.9 million compared to $4.3 million for the second quarter ended March 31, 2024 and include non-cash costs related to share-based payments of $620,676 for the second quarter ended 2025 compared to $671,710 for the second quarter ended 2024.”
As for the cash they said the following:
“As of March 31, 2025, the Company had available cash reserves and short-term investments of $113.9 million and net working capital of $113.5 million. The company has no long-term debt facilities.”
People waste so much money. Clinical trials are expensive. Why is stopping expensive? Just… stop.
Management noted that they “have taken productive steps towards a decision and hope to share an update in the near future”. While still vague, this sounds slightly more reassuring than last quarter’s “We look forward to providing updates in the near future.”
The company continues to say that the review “is expected to involve continuing headcount and other cost reductions,” but that hasn’t materialized so far, and keeps the costs elevated six months into the process.
Assuming cashburn remains elevated in fiscal Q3 and factoring in an additional $5m for severance, I estimate mid-year net cash at $2.17/share. Adding another $5m in wind-down expenses puts the potential liquidation value at around $2.06/share, so only slightly above the current $1.7/share price.
So margin of safety seems to be too small.
Not that my opinion matters, but following on from the KRON outcome, I revisited EPIX I agree that assuming R&D and G&A costs equivalent to those unexpectedly high levels for the Q ended 31-Mar-25 should be assumed to be incurred for the Q ended 30-Jun-25.
As a result I also get to $2.06/share. My $2.06 also includes change in control costs, as well as $1m for litigation defence as a result of that class action that cropped up, and some further severance costs.
The question is, is $2.06 the ‘worst case’ ? Clearly not from what we have seen with broken bio techs (even those with material insider ownership). However, I am assuming the two funds that are pushing for liquidation will be effective (and don’t want bad outcomes elsewhere to cause ‘conservatism bias’ in this holding too).
Given they have basically been told to liquidate, and haven’t, I am guessing/hoping they may be attempting a reverse merger, but with the activists perhaps telling them to dividend out the current cash before completing any such transaction?
If this one doesn’t work out either, it will be quite alarming for investors at large in my opinion, as it signals that ‘fiduciary duty’ exists only on paper.
What do reverse merger targets want from EPIX if most cash is dividend out before merger? Just a stock market listing?
Yes, that’s what I’m hoping/thinking. Unfortunately that path hasn’t been commonly taken.
Yeah easy quick and cheap way to go public
It’s been a while since anyone talked about this. The “near future” is a lot longer than anyone thought. The stock has held in a tight range, but every day management (seemingly) sits on their hands the terminal value gets a bit lower.
Agree. The MOS reduces everyday but surely (hopefully) the probability of loss from here is very low given two activists are pushing for liquidation.
This might have something to do with the litigation that Lukas previously mentioned. But just my guess.
EPIX to be acquired by XOMA at net cash plus CVR. Estimate about $1.91 per share.
https://finance.yahoo.com/news/essa-pharma-inc-announces-definitive-120000000.html
$4mm paid to XOMA to liquidate the company. That’s about $0.09 a share. Personally, I think it is outrageous that management took so long to get to this point and then couldn’t even execute the unwind without losing an additional 5% of the remaining value to pay someone else to clean up their own mess.
Unfortunately, there is no recourse. I would guess that most of us made at least a little bit on this situation, but the gain probably would have been at least double what it turned out to be if there were a proactive mgmt and BOD. #SAD
I agree – that is a pretty underwhelming outcome, and it’s not clear what took them so long to get here. The CVR is obscure and structured in a way that doesn’t seem very transparent or well aligned with shareholders. Wouldn’t be surprised if it ends up paying well below $0.06/share. Most of it depends on further legal expenses. The lawsuit is still ongoing, but there’s barely any detail, so it’s hard to say how much more they’ll end up spending. Either way, the stock is up +26% since mid-April, so it’s been a decent result overall.
More broadly, broken biopharma net-nets under strategic review are disappearing fast. We’ve seen a wave of takeouts lately in a similar format. Tang has picked up CRGX, KRON, IGMS, and ELEV over the last few months. Now EPIX has agreed to a similar kind of cleanup as well.
On top of that, this week we also had the first (I think) broken biopharma pivoting into a crypto treasury play – SONN. It’s planning to hold HYPE tokens and has already gone up 10x. Wouldn’t be surprising if other biopharma shells follow the same playbook. Maybe that’s part of why the remaining names have been drifting higher lately.
However, there aren’t many left. There’s HLVX (covered on SSI) and MURA (flagged on Clark Street Value). HLVX already trades near cash, so unless you’re betting on a crypto pivot, the remaining upside is probably limited. MURA trades at around a 20% discount to Clark’s proforma NAV, but it’s a bit messy due to certain IRS related issues.
VOR was another one, but it had been trading around cash until it spiked 10x on an unexpected licensing deal. RPTX also announced a licensing deal yesterday and was up 26% in after-hours trading.
Let me know if there are any other names on your radar for this theme.
Any insights/opinions on the EPIX price action today?
It had dropped by about the dividend amount of 1.69 from 1.92 to some 20c, but then soared pre-market to 90c and got halted around 80c.
My understanding would be that, due to the size of the distribution, the stock was trading with the dividend Due Bill attached until and including today, August 25th – although the pay date of the dividend was in the past (22nd?).
So the drop to ex-dividend prices should really have happened after tonight’s close. Is that correct?
Any experience with trading stock with Due Bills attached? Does it depend on the broker how that is honored? What’s the experience with IB?
Press release is out, August 25th as end date for the due bill was incorrect and the period ended on August 22nd.
How can they f*** up the info so easily?
Yeah, wondering the same question. This smells like lawsuits as shareholders were clearly misled by this incompetence. I thought that this looks like a good short at $0.78/share but later saw that after hours the price fell to $0.23/share – right in line with the remaining distribution amount (assuming CVR is worth 0).
Matt Levine wrote about this crazy snafu in today’s Money Stuff column.
https://www.bloomberg.com/opinion/newsletters/2025-08-26/biotech-dividend-arrived-early?srnd=undefined
Apparently XOMA is trying to either renegotiate or pull out of the deal entirely. What a gigantic mess.
https://x.com/Lord_of_Biotech/status/1965717646172983435?t=yvwv8eziyiMtkUlSmtZ6bg&s=19
Idea: shorting HVLX to bet on the non-zero prob that XOMA will try to do the same to HLVX, or that the market may believe so.
I assume you mean EPIX? could be done, but borrow rate has been very volatile with 58% at its recent peak. So you’d be down just over 5% each month only on borrow rates.
I mean HLVX. XOMA Royalty is acquiring HLVX as well as EPIX. And the borrow rate is very low for HLVX.
So the main argument is that the issues with the EPIX deal create contagion risk for the HLVX transaction, since they share the same buyer? With EPIX, it seems XOMA is trying to exit because of a potential direct legal and financial liability from the botched distribution. Any indication this might happen with HLVX?
@PharmaNoob I think shorting HLVX is attractive because:
(1) The downside (from rising stock price) is more or less capped.
(2) I don’t need any real possibility that XOMA may walk away from HLVX. I just need some possibility that some arbs may not like the tail risk (however remote) and find it not worthwhile to hold onto HLVX for the last leg of the journey, thus creating temporary downward volatility.
And as you can see from your own experience, not everyone is aware of the fact that XOMA is involved in both EPIX and HLVX. I guess that the knee-jerk reaction of some HLVX holders will be selling out, when they become aware of it.
Snowball, it is too late now. Last trading day is today. You don’t want to be short this after close. You would be on the hook for the entire CVR.
@Thomas Thanks! :-D I’ve closed the short today. Was hoping for some volatility.
This is where all the extra alpha I generate from special situations evaporate :/
Down almost 90%, absolute disaster.
It is reasonably likely that the legal liability from the bungled distribution will eat up any remaining shareholder recovery.
Can you unpack this a bit? I ready it a few times but find it incomprehensible. Was involved in the same stock with a very different outcome. Curious how to reconcile.
I made a stupid error and didn’t see the dividend that came through. I do this as a basket strategy and totally missed that. I could blame my kids and building a house but in the end I just made a stupid error thinking I was getting crushed in this because my brokerage account said I was down tens of thousands.
Patrick, are you taking into account the $1.69/share capital return that was paid out on the 22nd of August? That’s approximately equivalent to where EPIX stock traded at the time of the write-up.
The only part at risk currently is the remaining expected payout of $0.22/share.
My apologies dt, I missed that dividend and only saw the amount it said I was down. I am actually up thousands in this and the only way to sum this up is for me to quote Happy Gilmore
I’m stupid. You’re smart. I was wrong. You were right. You’re the best. I’m the worst. You’re very good-looking. I’m not attractive.
amended terms released on Sep 23 on 8K
it’s 12c cash +14c CVR.
After a quick read, it seems to me they shifted part of the cash consideration to a CVR portion that is supposed to cover legal expenses with respect to the incorrect communication about the due bill period.
Shareholder meeting rescheduled to Oct 3 – court approvals shortly thereafter.
https://app.quotemedia.com/data/downloadFiling?webmasterId=101533&ref=319466763&type=PDF&symbol=EPIX&cdn=d5b60c1c2c7b5751eacd5aafc8b91124&companyName=ESSA+Pharma+Inc.&formType=8-K&dateFiled=2025-09-24
This looks way too expensive at $0.2/share, no?