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Arix Bioscience (ARIX.L) – Potential Liquidation – 37% Upside

Current Price: £1.15

Expected Price: £1.58

Upside: 37%

Expected Timeline: TDB

 

This security is listed in London and has limited liquidity (ADV around $50k-$110k), so the opportunity is not for everyone.

Arix Bioscience, a biopharma-focused venture capital firm, is currently trading at a notable 38% discount to its £241m NAV (£1.86/share). The NAV is comprised of cash (42%) as well as listed (30%) and unlisted (27%) investments.

Arix has recently initiated a strategic review in response to “volatile market conditions” and “depressed biotech valuations,” which have resulted in limited new investments in the biopharma sector. The company is actively considering the liquidation scenario. In the press release, Arix highlighted the substantial discount to the NAV and mentioned the possibility of a “tax efficient wind-down of the company.” My conservative liquidation value is at £1.58/share or 37% upside from current prices.

The key factor that adds confidence to this setup is that Acacia Research has a 26% stake in Arix and has nominated three out of six board members (including the chairman). Acacia Research is likely to play a crucial role in Arix’s capital allocation strategy, which in turn should have a significant impact on the outcome of this strategic review.

Acacia is a publicly-listed $420m market cap company primarily focused on patent enforcement and manufacturing of industrial printers. It had never been involved in the biopharma sector before. But then in April 2020, Acacia opportunistically acquired a biotech portfolio in a fire sale of the befallen fund manager Neil Woodford. The stake in Arix came as part of this purchase. Since then, Acacia has been methodically monetizing the acquired Wodford’s biopharma assets, aiming to shift its focus back to the core businesses. Of the initial 19 holdings in the biotech portfolio, only 4 remain. Arix is the largest one and the sole public biopharma investment, comprising 62% of the remaining portfolio acquired from Woodford. Most other public biotech investments were small stakes in large companies (ONT, IMCR, INHC.L), which, as I understand, Acacia was able to simply liquidate in the open market. However, Acacia’s ownership in Arix is significantly larger and liquidity is much lower, which puts open market share disposals out of the equation.

Acacia’s primary goal should be a swift monetization of ARIX assets and liquidation of the company afterward. However, ARIX could also be a potentially attractive target for a reverse merger due to a substantial amount of liquid assets (cash + public investments) and its public listing on the London Stock Exchange. So that’s a bit of a risk till we wait for the outcome of the strategic review.

Arix’s chairman Peregrine Moncreiffe, nominated by Acacia, has recently spent a total of £560k acquiring Arix’s shares at prices of c. £1.05/share.

The rest of the shareholder base includes Chinese conglomerate Fosun International (owns 9%), French drugmaker Ipsen (5%), and investment manager Ruffer (5%).

Arix went public in Feb’17 at £2.07/share and was initially trading at around 1.4x NAV. Since then, NAV has increased from £140m to the current £240m (partially driven by a 30% increase in the share count), however, the NAV trading multiple has shifted from the premium to a substantial discount.

 

Composition of Arix’s NAV

A quick breakdown of Arix’s NAV as of the end of June:

  • £101m (£0.78/share) in cash.
  • £71.2m (£0.55/share) in listed investments.
  • £65.8m (£0.51/share) in 7 unlisted investments in early-stage clinical/pre-clinical stage biopharmas.
  • £2.8m (£0.02/share) in other interests – details are not provided.

Let’s start with the listed portfolio which is valued at £71.2m. This portfolio is split into two parts. The first one comprises disclosed investments either in the annual report or in subsequent 13D fillings. This includes ownership stakes in AURA (4.1%), IRON (2.7%), HARP (8.4%) and ELVN (c. 1%). These holdings sum up to £45m at today’s market prices (not much change from the end of June figures). The remaining £26m is likely allocated to Arix’s ‘Public Opportunities Portfolio’ of smaller bets. This portfolio of undisclosed public investments was valued at £13.5m at the end of 2022. In the subsequent 6 months, Arix has either invested additional funds into this portfolio or the existing holdings have grown in value. This is how the company describes it:

Each of the companies selected for the Public Opportunities Portfolio (POP) is a clinical stage drug development company with near-term clinical trial readouts and the potential for acquisition by big pharma. Whilst this is consistent with our investment philosophy for private companies, the liquid nature of public market investments allows for dynamic trading of these positions which are deliberately kept at a size which allows for rapid liquidation.

In terms of the easiness of the exit for the public portfolio:

  • AURA, IRON, and ELVN are all $400m+ market cap companies with ADVs of >$1m. Arix would likely be able to gradually dispose of these stakes in the open market without significant issues.
  • HARP is a smaller and less liquid entity with a $32m market cap and ADV of only $180k (vs around $2m value of Arix’s stake).
  • The ‘Public Opportunities Portfolio’ per management’s explanation allows for rapid liquidation.

Turning to unlisted investments, a breakdown is provided below. Unlisted investments are revalued each year based on IPEV guidelines, using “the most recent funding round, milestones, and comparable valuations”. The book value of most of ARIX’s unlisted investment portfolio positions has remained quite stable during 2022 (see page 28). Most of these investments appear to be valued quite conservatively – in line with cost basis or recent funding rounds, while the drugs of the investee companies continue to progress through clinical trial stages. I think Arix would have a decent chance of disposing of these assets at the indicated £66m NAV in an orderly (and potentially lengthy) liquidation scenario.

  • Artios – book value of £24.9m or £0.19/share. Arix owns a 9.9% stake in the company. Develops cancer treatments that target DNA Damage Response pathways. The trials seem to be advancing well and both of its leading candidates have recently entered into phase 2 study – one in Aug’22, another in Feb’23. Phase 2 data is expected in 2024-2025. Arix seems to have invested in Artios at a very early. Artios was established in 2016 and at the time of Arix’s IPO in 2017 was already in the portfolio. On the books, Artio’s stake is valued at only a 25% premium vs the £20.2m cost basis. Given the drug development programs proceeded to Phase 2 studies, it seems Artio’s NAV should be conservative enough.
  • Ensoma – £15.9m or £0.12/share. Ensoma is engaged in genomic medicines and cell engineering. Arix acquired the stake when Ensoma purchased Twelve Bio, a company in which Arix already held an investment. The stake’s original holding value was £3.8m, but after Ensoma’s acquisition, it was uplifted by £1.2m to £5m. On top of that, Arix has recently participated in Ensoma’s series B financing round with an incremental investment of US$9m. Interestingly, Ensoma’s financing round was initially planned for $85m but was expanded to a total of $135m with participation from reputable heavyweights such as Gilead Sciences ($95bn market cap), Bill & Melinda Gates Foundation, Takeda Ventures, and more.
  • Depixus – £8.2m or £0.06/share. Arix owns a 21.4% stake. Depixus is developing technology for the extraction of genetic and epigenetic information from single molecules of DNA and RNA. The company is currently working on proof of concept and functional prototype – updates are expected this year. The company raised £26.1m series A financing in Dec’21. Arix’s cost basis is £4.6m. Arix’s participation in the series A financing has been minimal (£0.1m) and most of the cost basis comes from prior earlier investments (£2.4m in early 2021 and the remaining part prior to 2017).
  • Sorriso Pharmaceuticals – £6.6m or £0.05/share. Arix owns a 26% stake. Sorriso is focused on the treatment of inflammatory diseases. Expects to start phase 1 in 2023. Raised US$31m in Series A financing in Dec’21. The financing was led by Arix, which committed £9.8m. This investment is also mentioned in Arix’s annual reports, however, these same reports (2021 and 2022) note that the cost basis is only £6m (it’s not clear where the difference comes from).
  • Evommune – £6.6m or £0.05/share. The cost basis is £6.6m. Develops treatments for chronic inflammatory diseases. Currently in Phase 2a with data expected this year. This is the most recent investment of Arix, which co-led Evommune’s US$50m series B financing in April 2023.
  • STipe Therapeutics – £1.3m or £0.01/share. Arix owns a 19.8% stake. Develops treatments to help patients overcome immune system suppression observed within solid tumors. The lead program is still in pre-clinical stage. Due to a challenging funding environment, Arix has recently written off £3.7m from STipe’s book value. The previous holding value and the cost basis was £5m.
  • Amplyx – £1.3m or £0.01/share. The company was acquired by Pfizer in 2021 leaving Arix entitled to milestones that are worth around £1.3m (discounted for time and probability of success). The lead candidate of Amplyx is the treatment of invasive fungal infections. At the time of the sale, the drug was in phase 2 trial. The exit resulted in 1.1x return on the upfront payment.

Tax leakage from the disposals should be minimal, as in aggregate the book value of Arix’s investment portfolio appears to be below the cost basis. Only a couple of individual assets are valued or are trading above the cost basis.

 

Liquidation scenario

Arix’s cash and listed investments alone sum up to £172m or £1.33/share. Deducting £2m trade payables (as of Dec’22), £4m of expected cash burn over the next 4 quarters (in line with 2022), and £10m of additional liquidation expenses, leaves £156m or £1.21/share (vs £1.15/share trading price). That should be an overly conservative estimate and the downside in a winddown scenario appears to be very well protected at current prices. Investors are pretty much getting the private investment portfolio for free.

The book value of private investments would yield an incremental 40%+ gain on top of the above liquidation estimate. Given the nature of these assets (private, early-stage biopharma stakes), arguing against or in favor of management’s valuation estimates is pretty hard. As I have shown above, these private investments on Arix’s books are valued in line with the cost basis or the recent funding rounds. Artio’s stake alone is worth an incremental £0.19/share, which is only just 25% above the cost basis although its development programs have successfully progressed to Phase 2 studies. Given the fresh and successful financing rounds, Ensoma and Evommune could probably be liquidated close to their book values. That’s another £22.5m or £0.17 per Arix share.

But to stay on the conservative side, I will simply take a 30% discount on the whole private investment portfolio, valuing it at £46m or £0.36/share. I assign zero value to the £2.8m of ‘other interests’.

So the liquidation scenario would look something like this

  • £101m in cash at 100% of BV.
  • £71m in listed investments at 100% of BV.
  • £46m in unlisted investments at 70% of BV.
  • £0 in other interests, vs £2.8m in BV.
  • less £4 in the next 4 quarters of cash burn.
  • less £10 in any further wind-down expenses.

In total, this results in a liquidation value of £204m or £1.58/share vs the current price of £1.15/share. That’s a 37% upside and there is also a chance that liquidation could deliver a better result. But first, we need to wait for the outcome of the strategic review.

52 comments

  1. Interesting idea,

    Have they got any outstanding commitments for further funding rounds for the private stuff?

    Reply

      1. There are, however, these seem to be tiny. From the annual report:

        “The Group has amounts committed to portfolio companies but not yet invested; at 31 December 2022 these totaled £4.1m (2021: £5.6m).”

        Reply

  2. Thanks for the write up. I note your final comment says “first we need to wait for the outcome of the strategic review” – wouldn’t it make sense to pre-empt that outcome to (hopefully) capture the re-rate? To me the insider buying by Moncreiffe and the Acacia dynamic seems very encouraging..

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      1. I meant to say that the outcome of the strategic review will determine which way the company will be moving and whether my liquidation calculations are even relevant.

        I have a position currently and did not intend to imply that it makes sense to open the position only after the strategic review.

        Reply

          1. Was it difficult for you to buy shares?

            No matter how much volume trades below my limit order I can’t seem to get a fill, it’s very frustrating and makes me wonder how I’d get out of didn’t work out as expected….

            Reply

          2. I had no issues of getting the order filled (aside from the specific trading times when the orders are matched).

            However, as you suggest this stock is illiquid – if the strategic review does not pan out as expected, exiting the position will be pretty difficult.

            Reply

  3. Nice find. I think you address the biggest typical risk well, which is why would any manager willingly give up a 2%+ annual income stream on a client portfolio. Clearly the board, shareholder base and recent portfolio changes point to some type of return of capital.

    This would be my first UK based investment, I use Interactive Brokers and the quotes I’m getting are that it’s trading at 113/116, I’m assuming that’s pence and actually £1.13/ £1.16 share? This might be worth getting up early for (or staying up late).

    Reply

      1. yes it’s in pence. This stock does not trade continuously, there are like 4 intraday auctions (I think 8/9/11am, 2pm and 4:35 pm.)

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          1. How did you find out it doesn’t trade continuously?

            I guess that means only limit orders can be used as any other order types, such a trailing stop limit order etc. would not get activated via an auction system.

            I really don’t understand the reason for the auction system and it strikes me as archaic.

            Reply

          2. ARIX is listed on London Stock Exchange under SETSqx trading service.

            This is how this service is explained on LSE website:

            “Stock Exchange Electronic Trading Service: Quotes and Crosses (SETSqx) is a trading service for securities less liquid than those traded on SETS. The auction uncrossings are scheduled to take place at 8am, 9am, 11am, 2pm and 4:35pm. There are 2 types of order book model for SETSqx depending on whether the security has registered market makers providing non-electronic quotes. ”

            https://www.londonstockexchange.com/equities-trading/asset-classes/shares-trading/setsqx-and-seaq

            Reply

  4. Thanks for this great piece of research and analysis!

    Could you please clarify the number of shares outstanding? It is bit confusing due to the comments they made about the ~5m restricted shares in the annual report.

    How did you determine the value for Ensoma – £15.9m or £0.12/share?

    Did you use the information of ARIX’s site to update the values of their unlisted holdings starting with the values per the annual report?

    Thanks

    Reply

      1. Regarding the shares outstanding, there are 129m shares and 5m restricted units. Since these restricted units will only come into effect if the share price reaches £1.8/share (which seems unlikely, as discussed in the write-up above), I have excluded them from the total share count.

        It seems I have made a typo with Ensoma’s holding value calculations (not sure how I arrived at £15.9m figure). Thanks for spotting this. The company previously had a £5m investment in Twelve Bio, and invested an additional $9m in Ensoma after the year-end. In total, this sums up to £12.5m and results in a minor £0.026/share cut in my previous liquidation estimate.

        Reply

          1. Thanks DT.

            Could you double check your implied share count please? I think you have it as 129m.

            Reply

          2. Not sure I understand the question – are you implying that the 129m figure is incorrect?

            This is the figure that management is using for the latest calculations of NAV/share, so I have just used the same. The annual report indicates 135.6m shares at the end of Dec out of which 6.4m were held in treasury, so net figure of 129m. There are also options and conditional share awards for another 3.2m shares – the terms of the vesting are not entirely clear, but seem to be conditioned on continued NAV growth. I have excluded these for simplicity as these will not have a material impact even if all of them are added to the share count.

            Reply

  5. I thought the 129m included 5m of restricted shares and therefore 124m might have been the most appropriate figure; that was my implication.

    Agree that management used 129m.

    Reply

  8. A lot of the valuations of the individual positions (esp private) cited in the pitch look different from the FY 22 valuations in the annual report. Are you getting updated valuations from some other source? For example, Ensoma is valued at 8m GBP and not 15m as per the pitch above.

    Reply

      1. He rectified the mistake in the comments
        “It seems I have made a typo with Ensoma’s holding value calculations (not sure how I arrived at £15.9m figure). Thanks for spotting this. The company previously had a £5m investment in Twelve Bio, and invested an additional $9m in Ensoma after the year-end. In total, this sums up to £12.5m and results in a minor £0.026/share cut in my previous liquidation estimate.”

        Reply

      2. Hi, when you say “[a] lot”, are there any other material discrepancies that you found? If so could you please specify what they are? I ask because I thought I checked everything across all docs carefully and I am now wondering if I may have made a material error.

        Thank you

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          1. I think it was actually just this one, upon further review. Sorry for the alarm

            Reply

  9. Any thoughts on the insider sales by the CEO, a day after the chairman bought?

    Reply

  10. “Insiders might sell their shares for any number of reasons, but they buy them for only one: they think the price will rise”. Hard to say anything more than that in this particular instance.

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      1. I think that is what people say when they want to convince themselves to buy the stock… that said I believe in this case he sold part of a share award.

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      1. They own 1.5m shares of AURA that are down $1.52 / share in August, 590k shares of IRON up $3.35 and 590k shares ELVN down $3.32.

        That explains most of the losses in the public portfolio. And they have some smaller (undisclosed) bets that are probably down too on average.

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  12. It will be interesting to see what they say post today’s results. NB a few of their listed stocks are well down in September (and XBI too) so expect a fall in NAV for September. One of the tiny listeds, Harpoon, is -50% ish which doesn’t make much $ difference but I wonder whether the £2.8m prefs they own in Harpoon are safe.

    Reply

      1. Thanks, well spotted. EVO101 has been discontinued – this was listed as the key Evommune’s in the latest ARIX presentation. I assume this press release from Evommune came out after ARIX investor call.

        Reply

  14. Yesterday ARIX released H1 results and had an investor call.

    It seems that some kind of announcement on strategic review is imminent. During the investor call, the CEO stated that ‘they wanted to make an announcement today’ but active discussions, including with external parties, are still ongoing. The presentation even had a line saying:

    “A conclusion to the process will be announced soon”.

    However, management was reluctant to specify which way the strategic review might be leaning and reiterated that all options (including capital allocation and shareholder returns) are still open.

    Also, on the same day, it was announced that the CEO was resigning. Any replacement is pending the outcome of the strategic review. I am a bit puzzled by this – why announce this now when the outcome of the strategic review is supposedly imminent and the CEO is anyways going to stay for another 3 months to run the company? Why couldn’t this wait a few weeks? But let’s be optimistic and hope that CEO’s resignation is a sign that the board is leaning towards the sale of the company or liquidation and there will simply be no need for the CEO going forward.

    On the portfolio and NAV side there is not much to update, aside from the Ex-Locust comment above. The fresh £6.4m investment in Evommune should now probably be heavily discounted, potentially down to zero. This would bring Aug NAV down to £236m or £1.82/share.

    Investor presentation and webcast: https://arixbioscience.com/investor-relations/events-presentations

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  16. Trading was halted but I didn’t see any regulatory announcement on their website – does anyone know what’s going on ?

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      1. It was not an ARIX-specific incident. There was an issue at the London Stock Exchange that halted trading in a number of stocks there.

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  17. One of pharmas in the ARIX portfolio, Harpoon Therapeutics, has seen pretty high stock volatility during Sep-Oct. After the share price slump from $8 to $4, this week Harpoon announced fresh $100m from PIPE financing from new and existing investors at $5.83/share (slightly above current prices). This gives some confidence that ARIX should be able to exit its 6.7% stake in Harpoon at current prices. Harpoon accounts for c. 5% of ARIX’s NAV.

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      1. Also interesting is that Arix was the co-lead investor in Harpoon in 2017 and they even invested in Harpoon warrants and prefs earlier this year. However, in this PIPE round Arix isn’t mentioned at all as an investor. Seems a bit incongruent with their past behavior, might be a tell that the strategic review is leaning towards a liquidation.

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  18. Arix will be purchased in an all equity transaction currently worth 143p. Ratio to RTW shares is 1.4663

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      1. Correction the new issuance ratio of RTW shares shares is 1.4663 for each Arix share (not the exchange ratio)

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      1. Yeah, that sucks. I don’t understand how shares can receive completely different treatment from a legal standpoint.

        Let’s see what DT’s take on this is.

        Reply

  20. It seems we got screwed by ARIX management and by Acacia (25.5% owner of ARIX).

    Acacia is selling its stake at £1.43/share in cash whereas the rest of the shareholders theoretically get the same amount but just in RTW stock. At current RTW prices, the stock consideration is only worth £1.33/share, and might be worth even less after the merger closes.

    What I find extremely surprising is that despite receiving a far superior merger consideration, Acacia is still able to vote its stake in approving merger consideration for the minority holders. Legal loophole exploited well.

    Both ARIX and RTW trade at similar discounts to NAV (30-35%) and the merger of the two will not help close this gap. Shareholders will still need to approve this transaction, but given 26% ownership by Acacia, this should pass easily.

    There is an 11% spread to the stock merger consideration but with no possibilities to hedge, I am closing this idea at £1.2/share. Clearly not the outcome I expected, but at least exiting a small gain.

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      1. They need less than 2% of shareholders to exercise dissenter rights as a condition to scheme completion.

        I think going for dissenter rights isn’t that difficult in the UK, based on this piece of the law.

        https://www.legislation.gov.uk/ukpga/1986/45/section/111

        Quote: (2)If a member of the transferor company who did not vote in favour of the special resolution expresses his dissent from it in writing, addressed to the liquidator and left at the company’s registered office within 7 days after the passing of the resolution, he may require the liquidator either to abstain from carrying the resolution into effect or to purchase his interest at a price to be determined by agreement or by arbitration under this section.

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          1. That might be a way for shareholders to reject the merger, however, from the language in the press release it seems that Acacia is selling its stake regardless if shareholders approve the merger or not.

            If this merger was the best outcome from the strategic review when we had Acacia on board, I do not think anything better should be expected after Acacia gets replaced by RTW.

            Reply

  21. It would have been difficult to close your position at 120GBX given the volume that passed at this price…

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      1. The liquidity on this stock has always been low, but yesterday 400k shares traded at or above 120p.

        Reply

          1. Almost all of that was off-book. If you held your shares at IB there was only one tradable opportunity trading over 120p which was 100k shares trading at the auction uncrossing at 09:00:18 in the morning UK time.

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  22. The Chairman: The Hon. Peregrine David Euan Malcolm Hay, later Moncreiffe of that Ilk, Baron of Easter Moncreiffe and Chief of Clan Moncreiffe…..

    Probably lucky he only jacked the trade and didn’t recolonize the world at the same time with a title like that!

    I’ve had very few trades or investments work out in the UK. The regulations (and taxes) seem endless yet it keeps given me EM vibes.

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  23. Maybe im missing something here. But it seems that the rtw share equivalent is worth 1.476 atm? (Rtw share × share exchange rate/gbpusd= 1.29*1.46/1.28

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      1. Indeed, RTW shares has spiked upwards (on low liquidity) during the last couple of weeks resulting in increased merger spread. However, there is no RTW borrow to hedge this spread.

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  24. Has anyone a live NAV for RTW?
    At the moment, Arix shareholders would receive about £1.57 in RTW shares, an upside of 16%.
    Events continue to happen… Harpoon taken over at a +100% premium. Weiss has just taken a 5% stake in Arix and I wonder what they can do.

    Reply

  25. Live NAV means that you make adjustments based on the market value of public holdings… In this moment NAV should be more than 1.65, but I have not done the work myself because I have no time

    Reply

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