Quick Pitch: Pardes Biosciences (PRDS)

Strategic Review – Upside TBD

Yet another biopharma strategic review and potential liquidation on our screeners. Pardes Biosciences is a failed biopharma/previous SPAC, which trades at an almost 45% discount to net cash. This week, PRDS suspended the development of its only clinical program, laid-off 85% of the workforce, and announced a strategic review. There are no debt or lease obligations, which makes the modeling a bit easier. It’s not clear if liquidation is really in the cards but the discount to net cash is very wide and even with conservative assumptions the margin of safety seems sufficient to wait for the conclusion of the strategic review.

Here’s how the potential liquidation math could work out:

• $172.4m ($2.8/share) cash as of March 31. Q1 results are not out yet, but the cash balance was reported in the latest press release.
• Less $5.7m – restructuring costs (severance, personnel expenses, etc.) as guided by management.
• Less $1m – PRDS also noted it will incur certain expenses related to the wind-down of certain CMC (chemical, manufacturing, control) operations and contractual costs, however, management was unable to assess the potential amount. PRDS doesn’t own or operate any manufacturing facilities and relies on third-party CMOs in China, so I think these costs will be minor.
• Less $20m for accrued expenses and payables as of Dec’22. There might be some double counting here, as some of the liabilities might have already been paid-off during Q1’23 (this will be visible only with the release of Q1’23 results).
• Less $10m – cash burn in Q2 and Q3, assuming the strategic review will take 6 months. Estimating cash burn is a bit tricky here. Before the restructuring total expenses used to be very high and management hasn’t explicitly stated that R&D costs will fully stop. Aside from the main suspended drug, the company still has a small development project in the discovery stage with almost no available info. I do not think that during the strategic review management will spend a substantial amount of cash on this discovery-stage drug. Excluding stock-comp, R&D and G&A expenses in 2022 stood at $65m and $24m respectively. The cash burn during Q1’23 was $25m. Given the suspension of the main development program and 85% workforce reduction, I think it is conservative enough to mark the forward cash burn at $5m/quarter (or $20m/year).
• Less $10m for any final wind-down costs.
• Summing this up, results in the expected cash balance of $126m or $2.04/share in Sep’23 vs $1.58/share current price.

I think the above assumptions are conservative enough and the margin of safety is sufficiently high at current levels to wait for the outcome of the strategic review.

The main risk here is that management opts for a reverse merger or acquisition of other drug development programs. The wording of a strategic review press release did not separately mention the liquidation option but instead spelled out “acquisition, merger, business combination, or other transaction”. The company’s largest shareholder Foresite Capital Management (24% stake) is the sponsor of a SPAC through which PRDS was listed back in 2021. Aside from PRDS, Foresite Capital sponsored one more failed biopharma SPAC called Gemini Therapeutics (GMTX). This one eventually ended up as a reverse merger. GMTX launched a strategic review in Feb’22. At the time the company traded at a very wide discount to net cash ($136m vs $50m market cap). The merger with Disc Medicine (focuses on hematology) was announced in Aug’22 and closed in Dec’22. The combined company now trades under a ticker IRON. Although liquidation would have probably resulted in higher value, the setup still worked out pretty well for the legacy GMTX shareholders – at the time of the strategic review announcement share price was c. $1.4 vs $1.8 post merger and $2.2 currently (adjusted for 10:1 reverse-split). However, what really helped here is that concurrent with Disc Medicine also managed to attract $54m PIPE funding from a number of biotech investors/VCs at $2.3/share – a significant premium to prices at the time of transaction closing.

While clearly, not all reverse mergers are inherently value-destroying, there’s substantial uncertainty whether PRDS would be able to find a good reverse merger target or not. What gives some confidence in this setup, is that special situation fund/activist BML Investment Partners holds a 7.8% stake. Recently, BML successfully derailed the sale of another biotech MTCR by acquiring 22% stake, and was able to turn it into a profitable liquidation instead. The fund was also involved in lucrative Imara’s case, which was covered multiple times on SSI (here, here, and here).

Other major PRDS shareholders include Khosla Ventures with 10% (pre-SPAC investor), GMF Pardes (pre-SPAC investor) with 6%, Lynx1 Capital Management with 5% (biotech-focused hedge fund), and PRDS founder/ex-CEO Uri Lopatin with 9%.

PRDS’ current Chairman/CEO seems quite reputable. He previously founded Demira, which was sold to Eli Lilly in 2020 for $1.1bn. Before that, he was CEO/Chairman of Peplin, which was sold for $290m to LEO Pharma in 2009. Insiders have acquired about $0.6m stock in December last year.