I recently published a report on Adverum (ADVM), which can be found here. Many investors have asked me if I think the company is an acquisition target for RegenXBio (RGNX) or Ultragenyx (RARE). the simple answer is that yes, I do believe there may be M&A interest from RegenXBio so I figured I would write about it.
My constructive stance on Adverum is not based on a takeout scenario, however this scenario cannot be ruled out, given the consolidation in the biotech space. Adverum is an under-appreciated stock within the gene therapy space that was created via a pseudo-reverse merger in 2016. The company benefits from optionality on three early stage pipeline assets for the treatment of rare disease: Alpha -1 antitrypsin deficiency, Hereditary Angioedema (C-1 Esterase deficiency) and Wet Age-related Macular Degeneration. This provides investors with multiple shots on goal. If successfully commercialized, these pipeline candidates have an NPV of US$ 15bn or > US$ 300/ share. With a negative $30m EV, and the company burning $50m/ year there is perhaps c. 30% downside in a worst case outcome. This is perhaps the greatest risk/reward skew I have seen in my 20 year career which is why it is my top pick for 2018.
Might RegenXBio try to acquire Adverum?
Recently there was a bidding war for Dimension Therapeutics, another negative EV gene therapy company. As reported in the Schedule 14D-9 there were eight companies interested in acquiring Dimension Therapeutics. Three companies battled it out and on Aug 28 RegenxBio agreed to acquire Dimension in a 100% stock transaction. Subsequent to that agreement, Ultragenx then offered to buy Dimension Therapeutics for US$6/ share in cash. This is equivalent to a market cap of US$151m and an enterprise value of US$122.4m. The final price of US$6/ share is five times the initial price of $1.20/ share. Dimension Therapeutics had three mid stage pipeline assets for ultra rare diseases: OTC and GSD1a. Arguably, the commercial opportunity for Adverum's pipeline assets is significantly greater than that of Dimension's. Also, the company has ADVM-022 for wet AMD which may compete with RGNX's own product, if successful. ADVM-022 has many convenience advantages over the RGNX product which means if successfully commercialized, it would likely become the standard of care.
Adverum - How we got to where we are today...
On June 15, 2015 Avalanche Biotechnologies announced disappointing results for its lead drug candidate but spun the results as positive to the street. The stock dropped from $38.88 to $17.05. Then on July 23, 2015 the CEO resigned, likely due to a loss of credibility. On August 13, 2015 the company reported earnings and announced it would not initiate additional trials of its lead drug. The stock dropped from $13.83 to $10.01. Finally, on November 20, 2015 the board named Paul Cleveland as CEO and on February 1, 2016 management announced a stock for stock merger with Annapurna Therapeutics, a private company with some interesting gene therapy assets. The existing shareholders owned 62.5% of newco so this was essentially a merger as opposed to a reverse merger. On October 14, 2016 Amber Salzman (originally from Annapurna) was promoted from President to CEO and Paul Cleveland moved from CEO to Executive Chairman of the board.
So the conclusion is that their first drug failed to perform as expected and the CEO attempted to mislead investors. He was fired shortly thereafter and the company abandoned trying to advance it. The triple blow of a failed drug, an attempt to mislead investors by the old CEO, and their pipeline being so far from being approved is what has led to the stock trading at a substantial discount to its net cash.
Negative EV Companies - Usually have attractive risk reward profiles.
Historically I've found that investing in a basket of biotech companies that are trading with substantial negative enterprise values relative to their market capitalizations and have drugs in development where the jury is still out has been an attractive strategy. The list of opportunities has dwindled as several have seen the market become more optimistic on their prospects so far this year including TTPH, LIFE, VSTM, and ZFGN.
Although I will at times invest across a wide basket of biotechs trading with negative enterprise values, I prefer to invest when there is:
- At least three years of cash left on the balance sheet at their current burn rate
- At least one year of cash burn built into their current valuation before they would be at a positive enterprise value
- The drugs at the forefront of their pipeline have never missed their primary endpoint in any study and they have the potential to generate substantial revenues if they are approved.
Frequently the reason that these opportunities exist is that a prior drug didn't demonstrate statistical significance / missed its primary endpoint and the existing shareholder base sold to move on to the next interesting story. These stocks are usually orphaned until they are able to advance another drug into their pipeline far enough to allow a new story to be told. The key in my view is avoiding companies that lack the capital to advance the next drug in their pipeline or where the management team continues to try to advance the same drug that has already missed its primary endpoint in a way that seems unlikely to lead to different results in the next trial.
To Conclude... I think M&A my be likely at the current valuation
In my opinion, if the enterprise value of ADVM doesn't increase significantly in the near term, it is likely that it will attract attention from potential acquirers. In addition to RGNX and RARE, who have already shown their hand, it makes sense for Shire (SHPG) to make an advance as Adverum's products will compete with products that currently represent 14% of Shires current revenues.
Readers should feel free to refer to my original article published on Adverum here for further information.
Disclosure: I am/we are long RGNX.