Strategic review (busted biopharma) – 80% Upside
HilleVax is yet another busted biopharma currently conducting a strategic review. While it’s somewhat riskier than previous biopharma opportunities covered on SSI, HLVX trades at a wide 46% discount to net cash, offering substantial upside if the setup pans out.
The company has been working on a vaccine for gastroenteritis, an illness caused by norovirus, which leads to symptoms like diarrhea, vomiting, and fever. Norovirus is similar to rotavirus, which has had vaccines available since 2008. Rotovirus vaccines generate billions in annual revenue. However, a vaccine for norovirus hasn’t been found yet.
HLVX was running multiple phase 2 trials for its main candidate, HIL-214, aimed at preventing gastroenteritis in different age groups – infants (the key one), children, and adults. In July, the infant trial was discontinued after it showed only 5% efficacy rate for HIL-214, with no clinical benefit across secondary endpoints. Such poor results impacted the outlook for the remaining trials, and HLVX’s stock plummeted from $14 to under $2/share. Shortly after this, biopharma investor / activist Kevin Tang disclosed a 9.5% stake in the company through a 13G filing. Management announced a 55% workforce reduction (largely completed and set to finalize this quarter) and is currently conducting a strategic review.
Here are my calculations of HLVX’s current net cash:
At current prices, any positive announcements on the ongoing review (e.g. halt of all remaining pipeline development or other signs of management leaning towards a liquidation / reverse merger / company sale) would likely drive the stock price upwards.
HLVX is backed by two highly reputable biopharma players: Frazier Life Sciences (19.7% stake) and Takeda Pharmaceutical’s vaccine development arm (13.5% stake). Frazier controls four out of nine board seats, while Takeda has one. HilleVax was originally established through collaboration of these investors in 2021, when Takeda spun off the HIL-214 vaccine to several Frazier-affiliated entities, which were merged to form HLVX. The company was created solely for developing the new potential norovirus drug. Given the lackluster results from the infant trial and high operating costs ($30m/quarter burn when the infant trial was active, so currently probably closer to $15m-$20m per quarter), Frazier/Takeda might be willing to move on and utilize the $200m+ of HLVX’s cash in some other way.
The company has already executed two rounds of workforce reductions – 40% in July (41 employees) and another 25% in October (15 employees). The incremental October lay-off is especially curious and increases the likelihood that the company won’t continue developing the assets. The lay-off announcement had a new language saying management will also consider “other strategic alternatives”. Maybe I’m reading too much into it, but the fact that they added this line after four months of the review does seem like a positive sign.
Kevin Tang’s involvement is also somewhat reassuring, even if he’s taken a passive stance so far (given the 13G filing). That’s probably expected, considering HLVX is under the control of two much bigger players. Tang has built up his stake close to the current price levels, and while it’s hard to pinpoint his exact angle, it’s unlikely to be tied to the value of the remaining pipeline. More likely, he’s betting on the sizable discount to net cash and the potential optionality this provides. While Tang’s record with busted-biopharma bets has been mixed, one of his successful acquisitions – THRX – also counted Frazier as a major shareholder (5% stake).
The deep discount reflects concerns that management might instead opt to keep burning cash on what’s left of the pipeline. This includes the same HIL-214 candidate but targeting adult use, along with another norovirus drug HIL-216, which is very early stage (was about to only start Phase 1).
Given management’s sparse and vague communication since the infant trial setback, these concerns aren’t entirely misplaced. When the trial was halted on July 8, the only forward-looking statement was that management would “explore the potential for continued development of HIL-214 and HIL-216, HilleVax’s Phase 1-ready vaccine candidate, in adults.” This statement was reiterated in the Q2 results in August. The above mentioned line regarding exploration of “other strategic alternatives” appeared only in the latest press release in mid-October. That’s a positive, however, a “formal” strategic review hasn’t been announced yet. Management is surely taking their time with this and hasn’t provided much reassurance that shareholder interests are being prioritized.
Some other details
- HLVX’s management and controlling shareholders have previously made some interesting moves. For context, the infant trial began in 2022, with 200 patients enrolled by May’22. More than a year into the trial, in September 2023, HilleVax conducted a sizable secondary offering, raising $108m at $12.50/share. Even more curious, Frazier was buying HLVX at over $14/share in May of this year, just a month before the infant trial results were released, which then sent the stock plunging by 90%. Given how bad the efficacy was, it’s hard to grasp how, in both instances, Frazier (4/9 board seats) or HLVX’s management could have been in the dark about the trial’s direction. I may be missing something, but I’ve seen numerous examples (e.g., EPIX) where management teams halted trials early once they realized the drug wouldn’t meet efficacy goals. Here, however, things seem to have taken a different turn.
- HLVX’s first move after suspending the trial was a full debt repayment. This seemed intriguing at first, however, it turns out that the debt facility was structured in tranches, each contingent on reaching specific trial milestones. With the trial’s failure, access to further financing from this facility disappeared, leaving little reason to keep this legacy debt on the books, especially when HLVX is flush with cash.
The 10Q for 30-Sep-24 is out and they mention “We plan to discontinue further development of HIL-214 and are exploring the potential for continued development of our other norovirus vaccine candidates, as well as business development-related activities for these vaccine candidates and other strategic alternatives” (p21).
So they are still exploring the “potential for continued development, still no decision has been made. And they still have 45% of their workforce in place (“On July 31, 2024 and October 15, 2024, we announced workforce reductions of approximately 41 and 15 employees, respectively, constituting approximately 55% of our workforce”).
Oddly in the 10Q 30-Jun-24 it said “We may determine to evaluate other strategic alternatives, such as a business combination, merger or reverse merger, in order to maximize shareholder value” (p22). I.e., they have become less specific with regard to what they may do.
Given this stock appears to have been trading at a large premium to cash prior to the failure announced in July, and because the largest shareholders have incurred a significant paper loss, I wonder if that makes them more inclined to be ‘risk seeking’ in an attempt to recoup their losses, as opposed considering what went before as a sunk cost and being prudent with the cash that remains.
Great update from HLVX. The company just announced another major round of layoffs – 70% of its current workforce (28 employees) will be let go by January 2025. This includes key executives like the COO, Chief Medical Officer, and Chief Business Officer. Two executives will remain as consultants, and Kohli will stay on the Board of Directors. The company estimates $6.1m in charges related to the layoffs, with majority to be recognized in the current quarter.
In the press release, management again mentioned other strategic alternatives:
“The remaining management and employees will continue to explore and evaluate the development of its norovirus vaccine candidates, as well as business development-related activities for these vaccine candidates and other strategic alternatives.”
The combination of significant layoffs, executive departures, and a small remaining team (12 employees left) suggests the strategic review is progressing toward a positive outcome. Ongoing cash burn should also decrease substantially. Any further workforce reduction costs should also be small.
My updated net cash calculation for year-end puts the NAV at $2.91/share, a 40% premium to current prices. The stock is up 12% today.
I more or less agree with your update but I would recommend using the Q3 financials instead!
thanks. copied in wrong table. now corrected.
So, with NAV reduced from $3.6 to $2.91, the discount is getting closer to that of EPIX.
However, there is a larger chance of a reverse merger than in the case of EPIX.
If it takes another two quarters for a transition to be consummated assuming 3m cash burn per month plus some change in control costs, transactions costs etc the forecasted price/net cash might be around $2.45 (just guessing 23m in further cash burn).
Anyone got a more informed or refined projection? My concern is a negatively perceived reverse merger assuming a entry price of 2.00 is still exposed to a material downside.
HLVX released its Q4 results:
– Net cash after non-lease liabilities was in line with my December estimates and stood at $158m (or $3.16/share).
– Even if we deduct a full lease payable of $25m (lease expires in 2032), the stock would still be trading at a very large discount to NAV – $70m market cap vs $123m NAV.
– Ongoing cash burn is likely to be minimal as the company has only 14 employees remaining.
A couple of other points indicating that the strategic review might be wrapping up:
– The company reclassified its lab equipment as ‘available for sale’, and expects it to get sold till Q3. That would be an additional $1m cash inflow, but more importantly, this suggests that the company is no longer proceeding with any R&D activities. I would expect the remaining two R&D employees still on payroll to be made redundant shortly.
– New retention bonuses for CEO ($0.5m) and CFO ($0.35m) if change of control occurs before Mar’26. While the long timeline is not inspiring, this is still a positive hint.
The largest negative is that the strategic review has already been dragging on for 6 months and the company has been rather slow in cancelling drug development activities and letting the employees go. Even today, the company is still supposedly exploring “the potential for continued development of its norovirus vaccine candidates”.
The stock has sold off meaningfully over the past month and now trades at $1.39/share. Even if we deduct two more quarters of cash burn (let’s say $6m), full lease liability ($25m), and further lay-off/severance costs ($5m), the company would still be left with $112m in cash or $2.25/share. So this should be a rather juicy target for a reverse merger or liquidation.
In light of recent developments in other busted biotech situations, does it make sense to apply a “Tang” discount to the base case to better handicap the downside risk? Stock has had a decent run in the last several weeks and is approaching the handful of analyst targets, albeit old, showing on ibkr.
We now have a basket of busted biopharma situations, and with sector exposures getting larger and the recent XBI volatility I am trying to think more about whether we should and how we can hedge.
For busted biopharm situations, can we assume that:
(1) a reverse merger is a better/higher value outcome than liquidation?
(2) the reverse merger value and potential is highly sensitive to XBI (i.e., sentiment/fundamental of the sector in general)?
(3) the liquidation value is less sensitive, except in relation to resale value of lab equipment and sublease vale of lab/office spaces?
(4) we should hedge X% of our position value with XBI shorts (assuming X% chance of reverse merger and 1-X% chance of liquidation)?
Interesting idea. I’m not sure reverse mergers tend to create more value than a straight liquidation, at least on average. Would love to see some stats, but I remember quite a few have flopped over the years. And in this market, pulling off a successful RM is probably even harder.
Also, not sure about using XBI as a hedge. It’s pretty heavily weighted toward very big, commercial stage pharmas. Something like BBC, which focuses on clinical-stage biotechs, would be a better fit. Borrow is more expensive there, but it only started running recently.
HLVX has rebounded nicely over the last few weeks and is now up 40% since post ‘Liberty Day’ lows. Over the weekend, Tang (10% stake) has changed his 13G into 13D, but did not share any additional commentary.
There is only 15% remaining to my conservative estimate of mid-year net cash of $2.25/share (see April 2 comment above). Given how Tang’s involvement turned out for KRON, I am not as optimistic in him extracting value for the minority shareholders. The strategic review might also get pro-longed beyond Q2, resulting in further cash-burn.
So it feels like a good time to take chips off the table.
HLVX tender offer will expire on 15 Sep 2025. Any view about the value of the CVR? The market is currently valuing the CVR at $0.15/share.
Aug. 04, 2025 (GLOBE NEWSWIRE) — HilleVax, Inc. (“HilleVax” or “the Company”) (NASDAQ: HLVX) and XOMA Royalty Corporation (“XOMA Royalty”) (NASDAQ: XOMA) announced today they have entered into a definitive merger agreement (the “Merger Agreement”), whereby XOMA Royalty will acquire all of the issued and outstanding common shares of HilleVax.
Under the terms of the Merger Agreement, HilleVax stockholders will receive $1.95 in cash per share of HilleVax common stock at the closing of the merger, plus one non-transferable contingent value right (“CVR”), which represents the right to receive potential payments following the closing of a pro rata portion of: (i) any remaining HilleVax cash in excess of $102.95 million; (ii) between 90 and 100% of certain savings realized by XOMA Royalty following closing on the Company’s Boston office lease obligations, including the net proceeds received from the sublease of the premises, and (iii) 90% of any net proceeds received by XOMA Royalty within five years following regulatory approval from any sale, transfer, license or other disposition of any and all remaining norovirus vaccine programs of HilleVax if such disposition or a financing of such program occurs within two years following closing, each pursuant to a contingent value rights agreement (the “CVR Agreement”).
Following a strategic review process conducted with the assistance of its management and legal and financial advisors, HilleVax’s Board of Directors has unanimously determined that the acquisition by XOMA Royalty is in the best interests of all HilleVax stockholders and has unanimously approved the Merger Agreement and related transactions.
I looked into it recently as well. The CVR value seems to hinge almost entirely on the Boston office lease. Breaking it down, there are 3 potential sources of payment:
1) The right to receive a pro-rata portion of cash exceeding $102.95m at closing. This is unlikely to yield a significant payout, if any. The threshold was likely set by XOMA to be at or slightly above their estimate of HLVX’s closing cash balance after accounting for remaining operational burn and transaction expenses.
2) The right to 90% of net proceeds from monetizing the remaining vaccine assets (HIL-216, specifically) if a deal is struck within two years of closing. This is deep optionality and a low probability event. The primary asset HIL-214 has failed spectacularly. HIL-216 is Phase 1-ready, meaning it’s extremely early-stage and high-risk.
3) The right to 90-100% of income/savings from the Boston office lease, which runs until 2032. Part of the space is already subleased, generating ~$0.08/share annually. If renewed after its 3-year expiry and extended to 2032, the present value is about $0.40/share. Leasing the remaining vacant space could add another ~$0.06/share per year. The overall upside remains modest given the assumptions required and the long timeline.
I guess the most likely path is for XOMA to terminate/extinguish the lease obligation by paying 3-4 years worth of rents to the landlord, as XOMA is not in the business of running a real estate operation.
However, the incentive for XOMA is not there, unless HLVX manages to secure a deal before closing as happened in the case of KRON.