Markets have seen quite the rally in the past two months, my portfolio followed along, pulling my returns for 2023 up to 38.54% for 2023 versus 26.29% for the S&P 500. My lifetime-to-date IRR is currently 22.47%, which continues to be above my 20.00% goal. Â
Despite the good year, I’m still below my high water mark due to a disappointing 2022. I admire anyone that invests professionally through volatile markets, my returns wouldn’t be as good if I was managing outside capital.
Updated Thoughts on Current Positions
As usual, these brief updates were written over the past two weeks, share prices might have moved around a little, but hopefully still directionally relevant. Excuse the inevitable typos.
Broken Biotech Basket:
- Homology Medicines (FIXX) has been the laggard in the broken biotech basket, in November the company announced a reverse merger with Q32 Bio, a private biotech focused on the treatment of severe alopecia areata and atopic dermatitis, hair loss and a skin condition respectively. The transaction assigned an $80MM ($60MM of cash, $20MM public listing) to FIXX exclusive of their legacy assets, which equates to roughly $1.38/share compared to the current share price of $0.55/share. The cash at closing is expected to be $115MM, pre-merger FIXX shareholders will own 25% of the post-merger company, or roughly $0.50/share in cash. It is not unusual in the current market for the enterprise value of a pre-revenue biotech to be near zero, but in addition to the NewCo, FIXX shareholders will get a CVR for the monetization of any legacy assets. There’s reason to believe that the CVR will have some value, FIXX’s IP had initial positive Phase 1 results, but the data is still “immature and inconclusive”. Plus there’s the JV, OXB Solutions, that will be put to Oxford Biomedia Solutions for 5.5x TTM revenue by March 2025. My current plan is to hold through the reverse merger, maybe the name change, upcoming Phase 2 study data readouts (second half of 2024), conferences/investor reach out, etc., will encourage traditional biotech investors to rotate into the stock providing a slightly better exit. And I’m bullish on the CVR, it’ll act as a liquidating trust, Q32 Bio needs to use “commercial reasonable efforts” to dispose of the legacy assets.
- Graphite Bio (GRPH) is a similar situation, they also announced a reverse merger in November, this one with LENZ Therapeutics, LENZ has a late stage product candidate for treating near sightedness that is expecting a Phase 3 read out in the second quarter of 2024. GRPH shareholders will receive approximately a $1/share special dividend at close (targeted for Q1) plus will own 30.7% of the post-merger LENZ. Post-merger LENZ is expected to have $225MM in cash after close (there’s a $53.5MM PIPE), equating to another ~$1.20/share of cash per GRPH share. GRPH currently trades at $2.33/share, giving it only a slightly positive enterprise value, seems cheapish for a biotech with a near term catalyst in a big addressable market. I’ll likely hold onto the stub and see what happens.
- AVROBIO (AVRO) announced strategic alternatives in July and is still determining its next steps. As of 9/30, the company has ~$100MM of NCAV, assuming another $10MM of cash burn (they further reduced their workforce in October) before a deal can be commenced would equate to $2/share of value without any value attributed to their IP. AVRO sold one of their programs to Novartis for $80+MM, the other, HSC gene therapy for Gaucher, might have some value as a kicker. Shares currently trade for $1.32/share, making it an attractive risk/reward.
- Pieris Pharmaceuticals (PIRS) ran up quickly after my initial write-up, I took profits, but then it fell and I re-entered, a little too early in hindsight as shares have dropped roughly in half since. As of 9/30, PIRS had $30.5MM in net current asset value, or $0.31/shares versus a current share price around $0.15/share. That number doesn’t include a number of IP assets and possibly valuable partnerships, but with limited cash on an absolute basis, they’ll need to move fairly quickly. Pieris did just terminate their operating lease, often a precursor to a deal announcement. This one is on the riskier side, but could be interesting if you see any value in their hodgepodge of IP.
- Sio Gene Therapies (SIOX) is a liquidation that’s now a dark stock. One reader has been keeping better tabs on the liquidation than me (see the comments), apparently they have two of their three subsidiaries liquidated and should have the third done soon. The expected initial distribution in the proxy statement was $0.38-$0.42/share versus a current price of $0.37/share. It’s been an annoying wait with limited-to-no public disclosure, which is one of the downsides of investing in liquidations, you need to have a certain personality quirk to set it aside in the meantime. Hope this liquidation is put to bed soon.
- Cyteir Therapeutics (CYT) is in the final stages (as we’ve seen with SIOX, could last a while) of its corporate life, shareholders approved the liquidation plan on 11/16/23 and now we await timing of the liquidation distribution which is estimated at $2.92 to $3.31/share in the company’s proxy. Liquidation estimates tend to be conservative and this appears to be a cleaner situation than most as CYT is only holding back $500k for a reserve account. Shares trade at $3.09/share, I likely wouldn’t buy it today, but content to hold awaiting the liquidation distribution.
- Kinnate Biopharma (KNTE) and Theseus Pharmaceuticals (THRX) are in similar situations to each other where Foresite and OrbiMed, as a group, have indicated plans to make an offer for each company. Presumably the structure would result in a cash buyout for a discount to net cash plus a CVR for any IP value, similar to Pardes Biosciences (PRDS) which Foresite took private earlier in the year. Both stocks trade for only a slight discount to my best guess of a take private offer (5-15% upside on each), but it’s worth keeping an eye out for other biotechs where these two are involved as they pop up. Late breaking news, on the Friday before the Christmas holiday weekend, Theseus announced they reached an agreement with Kevin Tang’s Concentra Biosciences for $3.90-$4.05/share in cash, plus a CVR for 80% of legacy asset sales proceeds and 50% of synergies. I’m a bit surprised that it was Tang versus Foresite/OrbiMed but hopefully that means well for Kinnate.
- Eliem Therapeutics (ELYM) is a new addition to the basket, nothing too much has changed since that write-up.
- Reneo Pharmaceuticals (RPHM) received an offer from Kevin Tang’s Concentra Biosciences for $1.80 per share plus a CVR for 80% of any legacy asset sales. Considering the company has not yet declared strategic alternatives formally, I think it might be some time before we here an official yes/no response to the offer or an alternative deal. But with Tang tossing in a cash offer early, maybe it is less likely Reneo chooses the reverse merger path.
Esperion Therapeutics (ESPR) is a broken biotech adjacent idea, unlike the others, this is a revenue generating company that has a non-satin commercial product (Nexletol) for cholesterol. Esperion is locked in a lawsuit with their primary commercialization partner, Daiichi Sankyo, over a disputed milestone payment tied to the amount of “relative risk reduction” for heart attacks and other cardiovascular diseases/events that was reported in the company’s CLEAR Outcomes Study. Esperion has a PDUFA date set for 3/31/24 that would expand the label of their primary asset to include cardiovascular risk reduction and a trial start date of 4/15/24 with Daiichi Sankyo. This remains a speculative idea, but could be a multi-bagger if both catalysts go their way in the first half of 2024.
Mereo BioPharma (MREO) is more of a regular-way biotech, the original thesis revolved around Rubric Capital taking an activist stance and gaining board seats with a general plan to realize the sum of the parts valuation of MREO’s hodgepodge of programs. No publicly disclosed progress has been made in that regard, but the company did report positive Phase 2 results for Setrusumab in patients with osteogenesis imperfecta with partner Ultragenyx (RARE) that boosted the stock. Following the announcement, Rubric Capital has been a consistent buyer of MREO shares, giving confidence that their plan is working out.
Albertsons (ACI) and previously unmentioned Spirit Airlines (SAVE) are two well covered merger arbitrage situations that don’t necessarily need more inked spilled on them. I’ll use this post as a thank you to Andrew Walker and his wonderful Substack/Podcast, he really ramped up coverage on Spirit as the market became increasingly nervous in early November dropping the shares into the low $10s/share. I picked some up and the market has bid up shares since awaiting a ruling any day now in their anti-trust case with the U.S. government. Albertsons is facing similar push back, regulators are pointing to local market monopolies similar to Spirit, although I still believe the asset divestiture and any further divestitures should be able to create a compromise situation given Albertsons and Krogers general lack of national overlap.
HomeStreet (HMST) is a regional bank based in Seattle that also does a lot of business in southern California, which was caught up in the deposit flight crisis last spring. I bought it after a Bloomberg article suggested the company was exploring a merger or an asset sale, later we found out that several bidders have made offers for the company’s DUS business line (a license that allows them to directly originate Fannie Mae commercial loans), but the company has thus far not been agreeable to a sale. HomeStreet’s deposits costs have risen dramatically, squeezing net interest margin, they’ve cut expenses, and reduced loan originations to the point where they could be classified as a zombie bank. A full out sale is highly unlikely here in the near term, any acquirer would be required to mark-to-market HomeStreet’s balance sheet, which currently would have negative equity value due to the current value of their loan portfolio (rate driven, not credit driven, yet). Without the DUS asset sale as a catalyst, this bank is one big bet on lower interest rates, indeed in the last few weeks, shares have spiked back above $9/share. Tangible book value is $26/share (ex-loan fair market value), if rates decline enough over the next year or two, HomeStreet will limp along until the accounting is satisfactory enough where they become an acquisition target by someone with a stronger deposit franchise. That’s a bit of thesis drift for me and I have plenty of interest rate risk elsewhere in my portfolio, so I might exit this position for future new ideas.
First Horizon (FHN) is a mid-to-large sized regional bank that does most of its business in the southeastern United States. It came on my radar when their sale to TD Bank was terminated after regulators made it clear they were penalizing TD for previous anti-money laundering wrongdoings by not approving the merger. The deal broke towards the tail end of the regional bank panic earlier this year and FHN sold off hard as arbs exited and market participants were unsure if the regional bank model was even sustainable anymore. Six months later, things have calmed down considerably for banks, deposit costs are still rising but with the Fed about to pivot, many bank board rooms are breathing a sigh of relief. First Horizon is a solid franchise, footprint has good demographics (although I’ve seen some stories about multi-family overbuilding in Nashville), minimal mark-to-market losses and strong capital ratios to the point where management has signaled plans to return cash to shareholders next year by repurchasing shares. On the negative side, the bank had a surprise loan go bad for $72MM (Yellow maybe?) and they’ve got some expense ramp happening as FHN modernizes its technology stack. Today it trades at $13.80/share, tangible book value is $11.22/share, a target valuation of 1.5x book still seems reasonable, which would yield a $16.83/share target price. I’m content holding until we get a bit closer to that number, maybe get long-term capital gains tax treatment too.
Banc of California (BANC) is another regional bank that closed on their transformational merger with PacWest (PACW) after the former got caught up in last spring’s banking crisis. Following the merger, Banc of California should have a tangible book value around $14.25/share compared to the current share price of $13.43/share (0.94x book), with earnings guidance of $1.65-$1.80/share (12% ROE, sub-8x earnings). My thesis continues to be that there will be significant realized synergies as the two banks had significant overlap which will become more apparent in 2025 earnings. Until then, the bank is in pretty decent shape after an equity injection, low 80s loan-to-deposit ratio and sub-4% office exposure.
