Quick Pitch: Arbutus Biopharma (ABUS)

Odd-lot tender offer: $70 upside (at $5.05)

Arbutus Biopharma is running a $230m tender offer for 20%-23% of its shares, with a price range of $5.00-$5.75/share. Odd-lot holders (fewer than 100 shares) will be accepted on a priority basis. ABUS trades just slightly above the lower limit, which gives arbitrageurs a cheap option on the tender getting priced closer to the upper limit, with downside capped at 1%. The offer expires on September 29.

ABUS is incorporated in British Columbia, but Canadian withholding tax shouldn’t apply. Paid-up capital is estimated at C$8.42/share, or c. $6.09/share, which is above the top of end of the tender range.

The tender will be funded with proceeds from the Moderna lipid nanoparticle patent settlement. Arbutus collected $178m from Moderna on July 8. The company also had $93m in cash and marketable securities at the end of June, so cash on hand seems to cover the whole tender.

As for the factors favoring upper limit pricing, the tender is large, and management considers the shares to be undervalued. Some holders may also prefer to stay in the stock ahead of the Federal Circuit ruling on the $1.3bn contingent Moderna payment.

The largest shareholder, Roivant (19.6%), also employs ABUS’s CEO and two of its directors. It will tender proportionately to keep its stake unchanged. Another major shareholder Two Seas owns 9.4%. Four directors will tender up to 0.68m shares combined (0.34% of total shares outstanding).

The transaction carries the usual conditions. ABUS shares must not fall more than 10% from the August 24 close, and neither the S&P 500, the Dow nor the S&P/TSX may decline more than 10% from that date. Such conditions are very rarely used to cancel a tender offer.

Arbutus is a clinical-stage biotech developing a treatment for chronic hepatitis B, which is moving into a Phase 2b trial. Most of the company’s value, however, lies in its patents on lipid nanoparticles (LNPs), the tiny fat particles that carry mRNA vaccines into cells. In March, Arbutus and its partner Genevant settled their patent case against Moderna for up to $2.25bn. Moderna paid $950m upfront in July, of which Arbutus’s share was $178m. Arbutus also owns c. 16% of Genevant, which kept c. $770m of the upfront payment. ABUS expects a material dividend from Genevant by the end of September.

The other $1.3bn is still up in the air. During the pandemic, Moderna sold part of its COVID vaccine doses to the US government. Moderna argues that for those doses, Arbutus should seek payment from the government rather than from Moderna. The lower court rejected this argument, and Moderna has appealed. A ruling is not expected before next year. Arbutus is entitled to ~20% of what Genevant collects after legal costs, so its share could reach c. $260m, compared with a market cap of $1bn. Arbutus and Genevant are also suing Pfizer/BioNTech, whose Comirnaty vaccine accounts for about two-thirds of global COVID mRNA vaccine sales, which makes it the bigger prize.