- The recently announced Amgen/BioVex deal is a positive development for Harris & Harris Group (TINY) as it represents the first exit for the publicly traded nanotech venture capital firm in over five years.
- We expect to see further such exits from the Harris and Harris Group portfolio companies announced over the next 12-18 months.
- We believe renewed exits from the Harris and Harris Group portfolio justify a more traditional 2x to NAV valuation. Our base case Intrinsic Value estimate for TINY continues to be $12.
In our research report on Harris & Harris Group (H&H), published January 10, 2011, we noted that the environment was becoming more favorable for exits and that renewed liquidity would likely drive H&H’s NAV and valuation higher in the months ahead. On Monday (Jan. 24), H&H portfolio company BioVex Group announced it had entered into a definitive acquisition agreement under which pharmaceutical giant Amgen (AMGN) agreed to acquire the privately held Woburn, MA-based company.
BioVex is one of two late-stage investments currently in the H&H portfolio, the other being Metabolon, which we view as another promising healthcare company. They are developing a novel oncolytic vaccine known as OncoVEXGM-CSF, which is currently in Phase 3 clinical development. BioVex’s oncolytic vaccine is viewed as representing a new approach to treating melanoma and head and neck cancer.
A Strong Endorsement
We see Amgen’s acquisition of BioVex as a strong endorsement of BioVex’s nano-enabled drug technology platform. Under terms of the agreement, Amgen will pay up to $1 billion: $425 million in cash at closing and up to $575 million in additional payments upon the achievement of certain regulatory and sales milestones. The transaction has been approved by the boards of directors of each company. It is subject to customary closing conditions, including regulatory approvals, and is expected to close in the first quarter of 2011. Following the completion of the transaction, BioVex Group will become a wholly owned subsidiary of Amgen.
H&H made its initial investment in BioVex in September 2007. As of September 30, 2009, the company owned 2.8 million shares of Series E Convertible Preferred Stock, nearly 7 million shares of Series G Convertible Preferred Stock and 285,427 warrants for the Series G Convertible Preferred. H&H was carrying the total investment in BioVex at $2.8 mm as of September 30, 2009, just over $1 million below the cost basis of just under $4 million.
In accordance with past practices, H&H does not plan to publish how the proceeds will impact NAV and future valuation. The company will likely employ a steep discount rate to value certain milestone payments until such time that it receives the cash. That said, with the upfront payment and some of the early milestones, we see the BioVex investment as providing a high quality return for H&H.
Exits Support Higher Valuation
Importantly, this is the first exit for H&H in more than five years and a welcome sign for the company whose spirit is captured in founder Charlie Harris’ motto, “Survive to thrive.” H&H’s last exit was back in November 2005. During that time, the company sold its shares in NeuroMetrix (NURO) following a successful IPO in July 2005. H&H netted $30.2 million on a total investment of $4.4 million.
The BioVex/Amgen deal is consistent with the outlook for H&H that we published earlier this month. We view the BioVex exit as a positive catalyst for H&H and expect to see further exits from the portfolio in the next 12-18 months. The next likely opportunity for an exit will be with NeoPhotonics, which is currently doing a road show for an IPO that has filing range price of $9-$11. Our Intrinsic Value (IV) of NeoPhotonics is in the $13-$14 range and we would be surprised to see H&H selling shares below this estimate. That said, the outlook for NeoPhotonics is favorable and we believe H&H will be opportunistic in capitalizing on its investment in the company.
In sum, we believe solid operating performance across the H&H portfolio companies, coupled with an environment of heighted M&A and IPO activity, justifies a more traditional 2x multiple to NAV for H&H stock valuation. Our base case IV estimate for TINY continues to be $12.
Disclosures: Harris & Harris is a corporate research client of Research 2.0. We received compensation in exchange for providing ongoing independent research coverage. We maintain our own independent research process, full editorial control of all published content and apply the same standards to Harris & Harris as we do to all companies we follow.