Quick Pitches For OABI, ALBO, AMYT, CF.TO

OABI – Forced Selling After Spin-Off – 140% Upside

ALBO – CVR – 5x Upside

AMYT – CVR – Multibagger Upside

CF.TO – Expected Buyout Price Increase – 8% Upside

A NEW MEMBER POST

A long-term SSI member JESQ shared an interesting binary play on bankruptcy emergence that is likely to playout over the next several months and could either result in a multi-bagger or a 100% loss. The stock is very illiquid and the trading has just been moved to the Expert Market, so this idea won’t be included in SSI Tracking Portfolio. Still, I think some members will find the case intriguing and might be interested and able to accumulate small positions. TLDR summary is presented below and a full thesis is published on SSI here.

PhaseBio Pharmaceuticals (PHASQ) – Emergence From Bankruptcy – Mutibagger Upside
PhaseBio Pharmaceuticals has been left for dead by the market after declaring bankruptcy in October and dwindling to a market cap of $1m. The company filed for chapter 11 after getting sued by the development partner of its Bentracimab drug. Recently, a settlement has been reached and the company is expected to exit bankruptcy over the coming months. PHASQ is set to receive 2.5% royalties of worldwide Bentracimab sales over $300 million. The drug is on the verge of BLA submission with the FDA and had previously been expected to receive a smooth approval. In court, the company estimated the royalty pot could be worth at least $80m (vs $1m current market cap). The main issue is that PHASQ bankruptcy is still ongoing and a bunch of trade debt hasn’t been worked out yet. There is a sizeable risk that the royalty asset could never reach equity holders. However, the recent settlement foresees that part of the trade debt will be covered/renegotiated by the development partner, which might lay a reasonable path to paying off unsecured creditors in full, while still leaving the whole of the royalty pot to PHASQ shareholders.

NEW QUICK PITCHES

OmniAb (OABI) – Spin-Off – 140% Upside
This is a rather intriguing setup where the spin-off driven forced selling was supercharged by the merger into a failed-SPAC. OABI stock has been hit by a double whammy of 1) indiscriminate share selling by the legacy LGND shareholders many of whom were unable to hold spinco shares (30%+ are index funds) and 2) an icky sticker of merging into SPAC at the time when all SPACs got thrown away without much of consideration. A really good write-up on the situation can be found on VIC (free guest account access required).

A few months ago, Ligand Pharmaceuticals spun off its antibody platform business OmniAb by merging it with SPAC. Legacy LGND shareholders received an 84% stake in the newco through the distribution of new OABI shares. Just as the carve-out and distribution was completed (Nov 1), OABI share price crashed, going from $10 to $2 per share in a matter of a few weeks. The price has since recovered to $3.8/share. A significant upside remains to VIC author’s expected fair value of $9/share.
OmniAb’s owns an already validated antibody discovery technology, which produces a growing revenue stream. OABI is a serious candidate to grow into a large royalty business over the next several years. The company receives service fees and milestone payments whenever its antibodies are used for new drug development by OABI’s pharma partners. And then later OABI gets royalties on any commercialized drugs that were developed using its technologies. The NPV of the license agreements is structured heavily towards the royalty part (60%-80%). OABI’s technology/platform has been validated with 3 treatments already approved. A further 282 candidates remain in the company’s fast-expanding pipeline. The average antibody treatment in the US did $1.7bn sales in 2021, while OABI’s management expects sales per product to range from $250m to $1bn. This would lead towards a very substantial royalty revenue stream once more treatments get approved. More information can be found in the company’s presentations (here and here). The bottom line is that OABI is definitely not the usual shady SPAC. This is also illustrated by:

• Vote of confidence from management. After the share price crash, OABI’s management immediately started buying large amounts of stock in the open market. So far, over the last 2.5 months they have collectively purchased nearly $2.3m worth of shares. The latest buy from the CEO last month was for $0.6m at $3.77/share (current price levels).
• Vote of confidence from the SPAC sponsor. SPAC sponsor PE firm Avista Capital ($5bn AUM) put $100m of its own capital (vs OABI’s $850m pre-money valuation) into OmniAb at $10/share, mostly through backstopping the redemptions. Avista Capital is deeply focused on the middle market biopharma sector and has significant experience/knowledge there. I doubt it would’ve agreed to put such an amount of capital into this deal only to see 60-80% of it evaporate in a few weeks.

Despite the fairly attractive setup of the double whammy-driven technical sell-off, there are a number of uncertainties (mostly with regard to the valuation of the business) and I am unable to clearly tell if OmniAb is undervalued at current levels. That might be due to my lack of knowledge of the industry rather than anything else.

• The visibility of future revenue growth is limited and there is significant uncertainty around the timeline of new royalties coming online. OABI’s current pipeline (i.e. pipeline of the drug development programs where OABI’s technologies are used) is very heavily skewed towards the early-stage development projects and includes only two Phase 3 drugs with approvals expected 2024/2025 and two Phase 2 treatments. While given a high percentage of antibody treatment approvals so far, statistically, OABI’s royalty business should work pretty well over the next 5-10 years, there is a risk that in the short-term royalties could get materially delayed if the current Phase 2/3 drugs don’t get approved and commercialized. The existing royalty, service fees/milestone payments are not sufficient to cover the operating expenses, which also creates a risk of upcoming equity dilution if the near-time development programs by OABI’s partners fail.
• Following the spin-off, LGND shares quickly bounced back up to pre-split levels, even though OABI was supposed to account for almost half of the legacy LGND. Seems like investors were happy the parent got rid of its cash-burning OmniAb business. OABI was clearly seen as carrying limited value within the legacy LGND.
• The SPAC merger was a failure as pretty much all SPAC shareholders chose to redeem their shares – a third of those had to be backstopped by Avista Capital to get the transaction over the finish line. Not clear if that really says much about investor sentiment towards OABI as nowadays all SPACs simply get thrown away without paying much attention to the underlying business.
• Avista’s track record is not exactly clean. Avista sponsored another SPAC (ticker: ORGO) back in 2018 – it has been a failure and currently trades at $2.66/share.

Canaccord Genuity (CF.TO) – Expected Higher Bid – 8% Upside
This setup was highlighted to me by SSI member Mike. Thank you. Management consortium with a combined stake of 21.3% has offered to buy out other Canaccord Genuity shareholders at C$11.25/share. CF is Canada’s largest independent full-service financial services firm (investment banking and wealth management). The shares are currently trading at the offer price, however, it seems that the the bid might soon get a slight bump to appease the Special Committee.

The Special Committee is apparently fighting for an improved bid and has said clearly it won’t recommend the current proposal at C$11.25/share. Negotiations between the management consortium and Special Committee have been ongoing for half a year now, but the discussions so far have been fruitless. Therefore, the management consortium is now going straight to shareholders with the offer. Hard to see the buyers receiving the minority shareholder support without the blessing from the Special Committee. Such support would also go a long way in protecting against potential legal consequences later on.

The buyers have secured a financing commitment that appears to be higher than required at the current offer price – C$825m or C$12.16/share to be precise. This might be another indication that the consortium is fully prepared to increase the bid. A similar dynamic has recently been observed in ATCO’s privatization (covered here and here).

Having said that, there are a couple of risks worth noting. Management already has support from 10.7% of shareholders, including the largest owner with an 8.8% stake. The largest shareholder has apparently approached management and more or less demanded an exit noting that the currently low public market valuation of the cyclical investment banking business. This shareholder has agreed to stick with management’s offer even if an improved bid from a third party appeared.

I find investment banking businesses hard to value – these are black-box to me, with volatile levels of revenues and staff bonuses. CF’s investment banking business got hit pretty hard recently, but on pre-COVID earnings, the company is trading at 14x PE vs 9.5x PE for its peer JEF. So at least the undervaluation that the Special Committee is claiming is not plainly obvious.

More details on how management’s consortium as well as the Special Committee view CF’s valuation is expected to be released shortly with the take-over bid circular as well as Special Committee’s response to it.

Two Interesting CVR Situations
Below I’m sharing two fresh setups of biopharma acquisitions with CVRs. Both mergers are likely to close without major hurdles, and both cases appear to have a number of interesting arguments in favor of the eventual CVR payout. But please read these with the grain of salt as my medical knowledge and understanding of the drug approval processes is very limited.

Albireo Pharma (ALBO) – CVR – 5x Upside On The CVR Price
Rare liver disease treatment developer Albireo Pharma is getting acquired by Ipsen for $42/share in cash + $10/share in non-tradeable CVR. ALBO shares currently sit just under $44. If CVR pays out, it will be a 5-bagger on the CVR cost. The merger is expected to close at the end of Q1’23. Shareholder approval is likely given the massive premium to pre-announcement levels. There seems to be no overlap in Albireo Pharma/Ipsen drug portfolios, so the antitrust approval should also be just a formality.

The CVR will pay out if ALBO’s Bilvay drug gets FDA approval for the treatment of Biliary Atresia (rare and potentially lethal liver disease) by the end of 2027. Phase 3 study is already underway and the topline data report is expected by the end of 2024. Given Bilvay’s recent success in approval for the treatment of a somewhat similar rare liver disease, there seems to be a decent chance the CVR pays out.

A little bit of biology background first. Bile acids are produced in the liver and are then transported to the small intestine where it helps to break down fats and fat-soluble vitamins. After that, most bile acids (95% in a healthy person) return to the liver. This way liver needs to generate only a small incremental amount of these acids to make up for the loss. Cholestasis is a liver disease whereby the fluids can’t properly flow out of the liver and therefore the flow cycle of bile acids gets disrupted. This causes toxic accumulation of bile acids and damage to the liver. The disease might potentially progress into Cirrhosis – the end-stage disease that can cause liver failure. ALBO’s Bilvay is a bile acid transport inhibitor that prevents bile acids from returning to the liver and in this way reduces the build-up.

ALBO has been testing Bilvay for three somewhat similar rare liver diseases in infants/children that all result in Cholestasis and potentially Cirrhosis. FDA approval was received for one of them. Approval of the second is expected in late 2023. And the approval of the third will cause CVR to pay out.

• Progressive Familial Intrahepatic Cholestasis (PFIC) is a genetic disorder that disrupts bile acid secretion and causes the buildup of bile in liver cells. Causes severe itching and cholestasis. Bilvay has already received FDA approval for PFIC treatment last year.
• Alagille Syndrome – a genetic disorder that can affect multiple organ systems, including the liver. The liver damage comes from having less than normal bile ducts which constrict normal bile outflow. Only rarely Alagille Syndrome develops into Cirrhosis. Bilvay’s phase 3 trial for Alagille Syndrome has been very successful (here and here) and has proven to significantly reduce both pruritus (itching) and bile acid levels in the liver. FDA approval is expected in late 2023.
• Biliary Atresia is the most common and the most fatal out of these 3 rare liver diseases. The sales for the treatment of Biliary Artresia (if approved) are expected to account for 50% Bilvay’s total. This disease is a condition when bile ducts don’t develop normally and results in scarred, damaged, or full/partial absence of the bile duct system. The effect here is similar to above mentioned Alagille Syndrome but only much stronger and often quickly leads to Cirrhosis. This disease develops during the first few months after birth. Biliary Atresia doesn’t have any pharmaceutical treatment at the moment while the common procedure is Kasai surgery. However, 50% of patients after the surgery still need a liver transplantation before reaching 2 years and 80% need the transplantation before reaching the age of 20. ALBO’s management expects that Bilvay can significantly improve the native liver survival rate following the surgery, which could materially delay or even prevent the need for transplantation. Bilvay’s phase 3 study is currently expected to reach a minimum 15% survival improvement in two years following the surgery. I understand this threahold would be sufficient to claim significant improvement. Study results are expected next year.

Given that Bilvay has already been proven to decrease the accumulation of bile acids (reduce damage to the liver) and was effective in treating somewhat similar Alagille Syndrome, it seems that there the chances are high Bilvay will also work sufficiently well for the Biliary Atresia. The current CVR price already incorporates approval likelihood of c. 30% (also taking into account the time value of money). I think this should be higher. But just to repeat again, this assessment on my side was done with very limited medical/pharmacological knowledge.

Amryt Pharma (AMYT) – CVR – Multibagger Upside
Amryt Pharma is getting acquired by a privately held global pharma conglomerate Chiesi Farmaceutici. Consideration stands at $14.50/share + non-transferable CVR with a potential payout of $1/share + 1.50/share. AMYT shares currently sit at $14.67. The first part of the CVR payout will be driven by FDA’s approval of AMYT’s drug Filsuvez. The company had successfully completed the Phase 3 trials and submitted NDA, but then in Feb’22 received a CRL from FDA saying the drug can’t be approved in the current form and needs additional evidence of efficacy. However, subsequently, Filsuvez got approved in the EU and UK. AMYT had a meeting with the FDA in Jun’22 and immediately decided to go for a formal dispute, which was filed in Nov’22. The expected timeline of the dispute resolution has not been disclosed, but it needs to be settled in AMYT’s favor before Dec’24 for the CVR to pay out.

The second part of the CVR will pay out if following FDA’s approval of Filsuvez, the company is granted a priority review voucher. The voucher allows its owner to expedite FDA’s review process for a future drug. Priority review vouchers are awarded as an incentive to companies that successfully pursue treatments for rare or neglected diseases. Filsuvez is a treatment for wounds associated with a rare skin disease Epidermolysis Bullosa. Aside from the recent Filsuvez approval in EU and UK, Epidermolysis Bullosa currently does not have any other available/approved treatments. Therefore, Filsuvez had been previously granted Rare Pediatric Disease Designation by FDA, which makes it eligible for the priority review voucher once/if the approval is granted.

As for the merger closing risks, I think these are minimal/zero. The merger is expected to close by the end of Q2’23. Shareholder approval is pretty much guaranteed by 100%+ offer price premium and support from management and two major shareholders (combined ownership 34%+). Antitrust issues are unlikely given the small deal size and limited overlap of companies’ drug portfolios.