ARCA Biopharma: Activist's Pressure Could Make This Into A Liquidation Play
Summary
- Activist is pushing ARCA biopharma to stop new developments and return cash to shareholders.
- Subsequently, management has started a strategic review.
- The company's cash position (minus liabilities) stands at $3.19/share offering a potential 45% upside if things play out according to the activist's demands.
Luis Alvarez/DigitalVision via Getty Images
ARCA biopharma, Inc. (NASDAQ:ABIO) is a clinical-stage biopharma company that has been destroying shareholder value for decades and has recently failed its COVID treatment program. Around that time, an activist Cable Car Capital started aggressively buying shares and has so far amassed 15.2% stake, while calling the board to stop spending cash on the new developments, minimize operating expenses, and explore strategic alternatives. A few days later the board has established a special committee to evaluate strategic options for maximizing stockholder value. ABIO currently trades at $2.35/share vs $3.19/share of net cash (after deducting all liabilities). The biggest risk is that the board might decide to continue with the development of its remaining drug and further erode shareholder value. However, the activist's confidence and aggressive share purchases are a positive signal.
Balance sheet as of latest Q1 results:
Q1'22 financial report
ABIO's background
ARCA biopharma is a textbook example of how to destroy shareholder value by pouring funds into the same drug development program for decades with a slightly updated/changed story each time.
The main/flagship drug in development of the company has been Gencaro - a beta-blocker for heart failure treatment. The early studies (2003) failed to show positive results, so the company has refocused on a smaller subset of treating mild/moderate heart failure instead. The NDA was rejected by FDA in 2009. ABIO then decided to slightly change the targeted treatment to patients with atrial fibrillation and left ventricular ejection fraction. New studies took years when finally in 2018 the company failed its Phase 2b trial. The ABIO did the trick one last time and again refocused on a subset of patients (atrial fibrillation) who have genetically defined heart failure. The new phase 2b study was published in Mar'19 and the company has managed to get a SPA (Special Protocol of Assessment) from the FDA meaning that if certain specific endpoints are met during the Phase 3 trial, the treatment would have a higher chance of getting approved (though not guaranteed).
However, Gencaro the phase 3 trial were not started by 2020, and once the COVID-19 hit, the company decided to jump in on the newly presented opportunity. ABIO announced a new COVID development program in May'20 and the stock skyrocketed from $3.8/share to $20/share, but then quickly fell back again as management started highly dilutive share issuance increasing the share-count 10x within a year. Gencaro atrial fibrillation trial was pushed to the background and the company became very active in printing its COVID treatment-related PRs.
Nearly 2 years later, on the 31st of March 2022, ABIO finally announced that the drug in COVID development program failed the phase 2b trial and showed no significant improvement over the standard of care. No further studies for the COVID treatment will be done. In the announcement, ABIO also noted "Company is now evaluating options for the development of its assets, including partnering and other strategic options".
Needless to say, during all these years, the company had diluted shareholders into oblivion by constantly raising new equity for the trials and doing 4 reverse splits to stay afloat. Adjusting for the splits, the share count has increased over 4100x since 2009.
In 2021 R&D expenses amounted to $15m (most for covid treatment drug development), while G&A stood at $5.5m. Management is quite well paid here with CEO's total compensation in 2020 at $1m and CFO's at $0.6m. Management owns only a negligible amount of shares, so there's a major risk that they will opt to continue the business as usual instead of liquidating the company and returning the cash to shareholders.
The activist
Very little information is available on the activist. The Funicular Fund (the entity that acquired shares) is managed by Cable Car Capital, which is described as "Generalist, global, value-oriented investment research supporting a concentrated, hedged portfolio". Its website is apparently unavailable due to redesign works and will launch later in 2022. Cable Car Capital is run by Jacob Ma-Weaver (LinkedIn). The track record is limited, but the SEC filings show that the activist has been involved in Insignia Systems (in-store advertising solutions to brands/retailers) since 2017 and seems to have exited the position three years later at a loss.
Cable Car Capital reported its first 13D with ABIO (6.49% stake) on the 28th of March, just a few days before ABIO reported the failed COVID treatment results. Apparently, Cabe Car Capital had also been selling $2.5/share Mar'18 put options - 602k from the 22nd of Feb to the 18th of March. The premiums received ranged from $0.19 to $0.57. Some of these got exercised, but the activist has apparently profited here in the end.
On the 4th of April, Cable Car Capital reported a 13.5% stake in ABIO (incremental buys at $1.65-$2.26/share) and said the following:
The Reporting Persons believe that the Issuer should immediately narrow its focus to the preservation of shareholder value. The Issuer should discontinue plans for any additional clinical trials, minimize operating expenses, and refrain from any further investment in its development program. The Reporting Persons believe that the persistent discount between the Issuer's market capitalization and its net cash signals the market's disapproval of management's actions. The Issuer should consider the interests of its stockholders and explore strategic alternatives.
On the 14th of April, the activist reported a 15.06% stake (incremental buys at $2.3/share) and a few days later ABIO's management announced a special committee to review strategic options. The committee is comprised of 3 directors, including the chairman, who has been sitting on the board since 2013 (chair since 2014).
The activist is still buying shares and has recently increased the stake to 15.2%, while also writing 14.5k put options ($2.5 strike).
Conclusion
Recently failed COVID treatment development, activists' involvement, and the recently started strategic review make this into an interesting holding for the next several months to track how are things going to play out.
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Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, but may initiate a beneficial Long position through a purchase of the stock, or the purchase of call options or similar derivatives in ABIO over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.