Pitches for RDUS, MITO, CBIO, NXDT, WOW, RNWK

RDUS – Merger Arbitrage With CVR – 12x Upside

NXDT – REIT Conversion – 40%-50% Upside

CBIO – Expected Liquidation – 16% Upside

MITO – Going Private – 7%+ Upside

QUICK IDEA PITCHES

Radius Health (RDUS) – Merger arbitrage with CVR
Radius Health, a $500m market cap biopharma company with a key osteoporosis treatment product Tymlos, will be taken private by two investment firms. Consideration is $10/share cash + CVR with a likely payout of $1 (subject to TYMLOS net sales in the US and royalties in Japan exceeding $300m during consecutive 12 months before the end of 2025). The deal is expected to close in Q3. Assuming zero closing risk, investors are paying $0.08/share for optionality to receive the $1/share, a potential 12x return. The CVR threshold seems to have a decent chance of being reached.

Tymlos was launched in the US in 2017 for female use only and has since been growing at an average of 25% YoY. Growth slowed down to 5-10% over the last two years. The drug is expected to reach $232m in sales in 2022 and the company projects its client base to increase 10-25% after it begins sales for men in early 2023. Also, RADI expects to start sales in the world’s biggest anabolics market – Japan – where it licenses the product and expects regulatory approval in H2’22.

The acquisition comes as the result of the company’s strategic review. The transaction still needs to be approved by shareholders and regulators – I do not expect any issues with either. Several activists (combined own around 25%) have been involved with the company asking for BOD representation. Post-sale announcement, one of the activists has dropped its slate of nominees. Keeping in mind the absence of any vocal dissatisfaction among shareholders after the announcement, I guess both activists favor the deal. Regulatory hurdles are unlikely either due to the small deal size and quick expected closing. The buyers have experience in acquiring similar companies. For the new RDUS CEO, Kelly Martin (joined in 2020), this will be the second company sale. He sold his biopharma company a couple of years prior to joining RDUS.

​​Some more details on Tymlos. The company’s key Tymlos drug is an anabolic agent that helps grow new bone. The drug treats osteoporosis, which is known to mostly affect post-menopausal women. However, though a smaller market, men are also prone to osteoporosis-related fractures. The drug was approved by the FDA in 2017, generated around $100m in sales during 2018, and is expected to reach $232m in sales this year. However, the growth in sales has slowed down to only a 5% YoY increase in 2021 while 2022 guidance shows a 6% growth YoY – the reason for such a stall is not clear. The growth might reaccelerate as RDUS launches Tymlos for men in the US in early Q1 2023 and adds additional markets. The company expects an increase of 10-25% in patients after its expected male-use launch. Also, the company has recently persuaded the FDA to remove a warning on Tymlos’ label saying it may cause bone cancer. Management expects the updated packaging to have an additional positive impact on sales. The company also licenses its Tymlos drug in Japan. In 2021 Ostabaro abaloparatide acetate was approved in Japan for the treatment of osteoporosis and for the promotion of bone formation in both female and male patients with a high risk of fractures. An additional approval of the 14-day cartridge (to get around Japan’s 14-day prescription laws) is anticipated in 2H 2022 followed by launch. Sales in Japan have not started yet. Assuming the Tymlos drug receives no new use approvals and just continues to grow at the lowest historical 5% growth rate, by the end of 2025, sales for women’s use in the US are expected to reach around $270m. With the additional approval for men (which will increase its patient number by 10-25%) plus the removal of the warning sticker + the start of royalties from Japan, I believe sales are likely to exceed the CVR threshold. Looking at this another way, sales have to grow just 9% YoY (versus an average historical growth rate of 25%) for the $300m target to be reached.

Stealth BioTherapeutics Corp (MITO) – Going private
This is a case of net-net clinical-stage biopharma going private. Chinese PE/VC firm Morningside Venture Investments Limited (MVIL) is acquiring Stealth BioTherapeutics (MITO). MVIL already owns 67% of the company. The offer is at $0.313 per ADS or $0.263 after ADS fees. The current spread is 7%, but it has been volatile and a few days ago stood at 17%. Shareholder and independent committee approvals seem like formalities and regulatory pushback is unlikely as MITO is a zero-revenue nano-cap biopharma. This leaves the only risk – offer cancellation by the buyer. However, MVIL walking away seems unlikely because: (1) MITO is an advanced-stage biopharma with a promising phase 3 drug; (2) the buyer is a credible firm with significant experience in the sector (has a large biopharma portfolio and investments in numerous US-listed companies); (3) there’s some financial reasoning behind the offer as well with MITO trading below the net cash as of Q1’22.

The setup here looks attractive but one important note: I haven’t found any information on annual ADS service fees (up to $0.05/share annually) paid directly to the depository bank. It might well be that both the ADS service and cancellation fees would need to be paid by ADS holders (up to a total of $0.1/share instead of $0.05/share). If that is the case, it would go a long way in explaining the current spread.

MITO focuses on mitochondrial medicine. The stock price has been declining since the IPO in 2019 due to several development drug failures. However, the company was recently granted a pre-NDA meeting for its key phase 3 drug for Barth Syndrome – positive news as the company’s earlier NDA for the treatment was rejected. Not because of the efficacy issues, but because MITO used historical medical records for a control group instead of a real control group (reason for that is that the drug is developed for an extremely rare disease, and it’s difficult to form a control group). The FDA has requested a new clinical trial but apparently, MITO is confident that new clinical data from the same study will suffice. There’s already been a close precedent with BridgeBio Pharma’s first FDA approval in 2021 (also used historical record for control). With this in mind, there is a decent chance that MITO’s drug will also receive FDA approval. The meeting with FDA is scheduled for Q3’22.

Catalyst Biosciences (CBIO) – Expected Liquidation
Catalyst Biosciences, a clinical-stage biopharma company, intends to wind down and distribute $2.06/share (16% upside) if it is able to settle with activist JDS1/Sulian Singer. The activist wants to increase board representation, has filed a court complaint against CBIO and has started a proxy fight. Another activist, JEC 2 (owns 8%), supports management’s liquidation plan and calls for both parties to settle. Shareholder meeting to vote on re-election of 3 directors (out of 8) is set for 15th of August. See how management presents the situation, and here is the take from JDS1.

Assuming management’s nominees win the shareholder vote and management delivers on the promise to initiate return of capital promptly (JDS1 basically claims that management is lying), the main risk is JDS1 continuing with their litigation which will decrease the distributable amount (it is not clear what these potential expenses will amount to). However, there seems to be little financial reason for JDS1 to do so.

Depending on how quickly this litigation is sorted out, management expects to liquidate and distribute up to $2.06/share. This compares to $2.34 of net cash currently on the balance sheet (after deducting all liabilities) and another $0.16/share to be received in a year (relates to the recent asset sale). All together that’s $2.5/share. Management’s distribution estimate seems to have a sufficient buffer ($13m in total) for any additional expenses or for incremental distributions on top of the planned $2.06/share. Going forward expenses should be minimal as all operating assets have been sold and headcount reduced to 6 persons. Most likely only the expenses related to JDS1 litigation and company wind-down remain.

JDS1 (and its BOD nominees) seem to have a self-dealing background and activist’s arguments seem quite strange. While the activist originally called for liquidation, it still has not settled despite the announced plans to do just that. It argues that the recent asset sale was not done properly even when JDS1’s own 2 BOD members (who were elected during the 2020 standstill) supported this sale. The activist has also not provided any capital return alternatives of their own (just saying they will ensure that capital is actually returned). To reach an agreement with JDS1 management has even offered to sign a contract obliging management to distribute capital or otherwise have JDS1 nominees elected to the board. Strangely, the activist declined such a proposal. While I do not have sufficient legal knowledge of what this sort of litigation might entail, management seems quite confident (based on Delaware Chancery Court’s comments) it has the upper hand in this dispute.

NexPoint Diversified REIT (NXDT) – REIT conversion
This is a two-year-old CEF conversion into REIT saga that was first highlighted on Clark Street Value back in Aug’20. A more recent pitch available in this YAVB podcast with Rich Howe. We are highlighting it now as this might be in its final innings with the recently granted SEC approval to convert into REIT.

NXDT is a closed-end real-estate credit-focused fund, which trades at 60% of NAV and is now converting into a REIT. Management expects this conversion will reduce the discount to NAV as REITs usually trade much closer to their net asset value (10%-15% discounts). 50% of the current NAV is comprised of residential rentals and self-storage rentals, while the rest is scattered through various assets including offices, hotels, and timber. Various NXDT investment pitches suggest NAV is not overstated and assets are recorded at fair values on the balance sheet – suggests the 40% discount to NAV is most likely unwarranted and would narrow upon REIT conversion and buying from index funds. The fund’s GP is run by James Dondero, who has a checkered past due to some litigations and owns $100m worth of NXDT’s equity (16% stake). Insiders have been buying shares over the last several months.

There is also a recent similar NXDT pitch on VIC (members only for now) and it has received some pushback, which might explain why the discount has not narrowed yet despite the widely publicized investment thesis. If one looks at NXDT from gross asset value (GAV) perspective (i.e. taking into account not only debt at NXDT level but also at its subsidiaries), then NXDT already appears to be trading at a similar discount to GAV as other REITs. This might limit the potential upside when the eventual REIT conversion happens.

Wide Open West (WOW) – Expected company sale (previously mentioned in the SSI weekly)
There is a recent post from Clark Street Value outlining the situation (while it might seem this is the only blog we follow, that’s definitely not the case). Wide Open West (cable/broadband overbuilder) is rumored to be in a late-stage process of a full company sale. The buyers are said to be PE firms – Morgan Stanley Infrastructure Partners and Global Infrastructure Partners. Just last year the company sold assets to strategic buyers for 10-11x forward EBITDA while it currently trades at 7.5x forward EBITDA (albeit the market has changed and these multiples may not be indicative of expected takeover prices). Clark Street Value argues that even if the company was sold for a 9.5x EBITDA multiple, this would still be a 30% upside to current prices. If the rumors turn out to be false, WOW does not look undervalued vs peers as it trades at only a slight discount to Charter and Altice (although both companies have stronger business models). Commenters suggested that basing WOW valuation on EBITDA multiples might not be the correct approach due to low EBITDA to FCF conversion.

RealNetworks (RNWK) – Privatization by management
2.5 months ago digital streaming/software company RealNetworks was approached by the founder (38% stake) and CEO (Rob Glaser) with a non-binding take-private offer at $0.67/share cash. The spread has been quite volatile for a while ranging from 3% to 13% and over the last couple of weeks widened to the current 12% (trading volume is low with c. $15k-$40k/day). There have been no updates on the process since the May 9th merger announcement. However, since then the second largest shareholder started to build up his position increasing it from 7% to 12.5%. The main issue with this case is that it’s difficult to see the rationale behind the offer. The company has been basically run into the ground with management constantly trying to cover melting revenues with yet another ‘growth story’ that’s always just around the corner. The most recent such venture is in face recognition technology. The company had $22m of net cash as of Q1’22 vs the current market cap of $28m. Cash burn is high at c. $4m-$5m per quarter.