A biotech stock that is realising trapped value for shareholders
'Pursuing strategic alternatives'
This article is about a biotech company aiming to realise trapped value for shareholders.
I can summarise the lifecycle of many small biotech companies like this: they raise funds, pursue one or more drug candidates, and most of these fail during pre-clinical or clinical trials. At this point, they can choose to:
Keep pursuing R&D, burning through their cash until it is all depleted
Choose to liquidate and return cash to shareholders
Do a reverse merger: contributing their net operating loss carryforwards, to offset against the profits of another pharma or other company. They may also issue CVRs: contingent value rights: so that if for example, one of their drug candidates works out, and therefore the company suddenly becomes a lot more valuable, the pre-reverse merger shareholders who receive the CVRs will be able to benefit from this to some extent.
In combination with options 2 and 3, they will usually abandon their R&D efforts, either partially or totally, and lay off staff, exit leases, sell assets, etc. to conserve cash.
It’s in stage 1, the cash burning stage, where you can find biotechs trading below net cash - i.e. trapped value - because investors believe they will keep burning it until it is mostly/all gone. However, sometimes biotechs will announce that they are pursuing ‘strategic alternatives’ where they move from R&D to considering options 2-4 above, which can be a signal that value is about to be realised for shareholders, and that cash burn will be minimised. I will now give a current example of one such company, which has announced that it is considering strategic alternatives, which I think is attractively priced at the moment with downside protection due to net cash being just under 2x the market cap.
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