Cadus is a tiny company with a market cap of only $19.7 million at Thursday’s close of $1.50, yet it has cash and equivalents of over $24 million. In addition, the company owns several hundred thousand dollars of marketable securities, mostly in Sequenom (SQNM). While unusual, Cadus is certainly not the only company with cash exceeding market value. What is unusual is that the company has no debt or other liabilities and is cash flow positive. The company has no employees (even the CEO is a consultant), leases nothing more than a storage space, and the interest on the cash hoard plus its one small revenue stream more than covers expenses, leaving a small profit.
Cadus was formerly a biotech company engaged in research and development until it sold all research assets to OSI Pharmaceuticals (OSIP) in July 1999. OSI continues to pay $100,000 per year in a contract that continues until 2010 to license Cadus’s patent portfolio. The portfolio is also licensed to another, undisclosed company that may extend the agreement for $250,000 per year once the current term expires this year. There are also potential milestones if drugs based on Cadus patents move towards approval. The company has done nothing substantial to monetize these assets, and it is probably reasonable to assign them a value of zero and allow any upside to be a pleasant surprise.
One potential area of concern is ownership. Carl Icahn controls the company by virtue of a 38% stake. Icahn originally invested in Cadus in a private financing in 1993. He later purchased ImClone's (IMCL) stake in 1995, which helped fund ImClone’s development of Erbitux. Icahn continues to be involved in ImClone, having just become a director and called on the Chairman to resign as a result of poor performance.
Oddly, though Icahn is well-known for taking stakes in companies and forcing changes to unlock value, nothing has been done to unlock value at Cadus despite years of Icahn control. Cadus claims in its 10-K that:
The Company is presently seeking to use a portion of its available cash to acquire or invest in companies or income-producing assets. To date, the Company has not been able to identify an appropriate acquisition or investment and there can be no assurance that it will do so. There also can be no assurance that acquisitions or investments by the company will be profitable.
Cadus has a large loss carryforward and could prove an attractive merger partner for a small, profitable company.
Cadus faces limited downside given its large cash position. Value could quickly be unlocked if the company decided to liquidate, found an appropriate merger or acquisition target, or unexpectedly monetized its dormant intellectual property. That is, if Carl Icahn finally decides to pay attention to the stock he already owns.
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Neal Shanske may own securities mentioned in this article.