Buy Catalyst Biosciences
October 12, 2022
CBIO: $0.54
Market Cap: $17MM
Enterprise Value: -$9.1MM
Expected Distributions: $0.67
Upside: 24%+
Recommendation: Buy up to $0.58
Summary
This thesis is extremely simple. Catalyst Biosciences is in liquidation. It recently paid out $1.43 per share ($45MM). Its current market cap (post distribution) is $17MM and it has $26MM of cash and no debt. Management previously indicated that it could distribute up to an additional $20MM ($0.64 per share). But wait there’s more. CBIO is in the process of selling its remaining pipeline assets. It already sold one asset for $50MM. If the remaining assets are sold for $50MM, it would result in an additional distribution of $1.59 per share. In short, high probability of small return, low probability of large return. In either case, I think the IRR will be quite high as the bulk of the liquidation is expected to happen before the end of the year.
Background
Catalyst was like any other unprofitable biotech company until November of 2021.
On November 12, 2021, Catalyst published a press release announcing that it would discontinue development of its hemophilia drugs in development and seek to sell them.
It would pivot and try to spend its scarce resources developing its Complement portfolio.
Why the decision?
At the time, Catalyst’s main drug in development was MarzAA, a factor VII hemophilia product.
In 2020, Catalyst was trying to enroll patients in a trial 3 trial but enrollment was very slow due to COVID (Medexus also commented that enrollment in its pediatric study for IXINITY, another hemophilia drug, was also slow during 2021).
Catalyst realized they would have to raise $120MM. At the time, Catalyst had a market cap of $50MM.
Hence the decision to monetize some of its assets and switch development to its Complement portfolio.
On February 17, 2022, Catalyst announced that it had hired Perella Weinberg to explore strategic alternatives.
The idea was to solicit partners for the development of the Complement portfolio, but Vertex just wanted to buy the entire program outright.
On May 23, 2022, Catalyst announced that Vertex would buy Catalyst’s Complement portfolio for $60MM in cash.
Shortly thereafter (June 29, 2022), Catalyst announced that it planned to distribute “as much as $65MM” subject to the resolution of a shareholder lawsuit.
The lawsuit?
JDS1, LLC sued the company arguing that it should have requested a shareholder vote to approve the asset sale to Vertex.
The premise of the lawsuit is/was a little crazy given that the market cap of CBIO was $12MM before the $60MM sale was announced.
Clearly, the Complement sale was in the best interest of shareholders!
Ultimately, the lawsuit was dropped and Catalyst distributed $45MM in cash ($1.43 per share) to shareholders on September 20th.
Where are we today?
As of June 30, 2022, CBIO had $75.4MM in cash and $4.3MM of total liabilities.
So let’s assume $71.1MM in net cash.
$45MM has been paid out.
So that leaves the company with $26.1MM in net cash.
What’s the cash burn?
As of June 29, 2022, the company had reduced headcount to 6 employees and ceased all R&D activities.
I spoke to the CEO and he estimated that the cost to run a public biotech is $6MM per year (public reporting requirements, salaries, D&O insurance, etc.).
As such, I’m assuming an additional cash burn of $6MM this year.
And perhaps an additional $4MM of cash burn next year (my understanding is wind down is going to be almost 100% complete soon).
So let’s assume the company burns $10 million winding down the company (two years to liquidate).
That reduces cash that’s available to distribute to $16.1MM or $0.51 per share.
However, CBIO also has a note receivable for $5MM from Vertex related to the sale of the Complement portfolio.
Basically, it’s a portion of the sale proceeds that Vertex holds back “in case anything goes wrong.”
CBIO fully expects to receive the $5MM but it’s not guaranteed.
If it does receive the $5MM, another $0.16 can be paid out to investors next year.
Add it all up, and I expect $0.67 of additional distributions. This is “in the ballpark” of management’s original guidance of a distribution of “up to $65MM”. $45MM ($1.43 per share) has already been paid out. That leaves $20MM or $0.64 remaining.
What about the upside?
Catalyst is in the process of selling its remaining pipeline assets.
In truth, I have no idea if any additional proceeds will be generated by these efforts.
I’m a little skeptical that we will see any additional proceeds.
Why?
When a company announces that it’s selling assets, the best assets sell the fastest. In this case, Vertex was clearly interested in the Complement portfolio as that transaction came together very quickly.
But there is at least a small probability that someone will want to buy the remaining assets. And if they do, it could result in an asymmetric payout.
For example, let’s assume all remaining pipeline assets are monetized for $50MM net of transaction costs.
In that scenario, investors could expect to receive an additional $1.59 per share.
Base Case:
- $0.67 in distributions (+24% return)
- Assumptions:
- $10MM additional cash burn
- CBIO receives additional $5MM from Vertex in 2023 (final installment of Complement portfolio sale)
- No proceeds from additional asset sales.
Upside Case:
- $2.26 in distributions (+318% return)
- Assumptions:
- $10MM additional cash burn
- CBIO receives additional $5MM from Vertex in 2023 (final installment of Complement portfolio sale)
- Additional assets are sold for $50MM of net proceeds
Downside Case:
- $0.51 in distributions (-5% return)
- Assumptions:
- $10MM additional cash burn
- CBIO doesn’t receive additional $5MM from Vertex in 2023 (final installment of Complement portfolio sale)
- No proceeds from additional asset sales.
Recommendation
I would recommend buying up to $0.58 or lower. If I’m right and investors ultimately receive an additional $0.67 in distributions, buying at $0.58 or lower will generate a 15% return in my base case scenario.
What other assets does that Catalyst own?
The drug that was furthest along in development was called Marzeptacog alfa (MarzAA).
Hemophilia A and Hemophilia B are bleeding disorders caused by a deficiency of Factor VIII (HA) or Factor IX (HB).
Some patients develop immunity to Favor VIII and Factor IX treatment, and thus, have to be treated with other therapies to stop the episodic bleeding.
Treatment options for these patients include IV (requires technical expertise and is painful) and Factor VII therapies (take too long to work which results in longer periods of internal bleeding).
MarzAA is a novel drug Factor VII drug who’s differentiating attributes are:
- Subcutaneous injection (not an IV)
- Faster onset of action (bleeding stops faster)
More details about the phase III study that ultimately was stopped due to difficulty with enrollment.
Drugs that are in phase III trials are generally pretty valuable. However, drugs in development are only worth what someone else will pay for them.
Catalyst also has another hemophilia drug in phase II (DalcA) as well as at least one other drug in development (CB 2679d).
Risks
- Taxes
- I was somewhat surprised to learn that Catalyst will have to pay taxes this year on its Complement portfolio sale proceeds. I figured an unprofitable biotech would have plenty of NOLs that could be utilized. While some NOLs will be used, the company still will have some taxes due. My understanding is management’s initial guidance of $65MM in distributions factored in expected taxes, but there is always a risk that the ultimate tax liability is bigger than originally anticipated.
- Cash burn is higher than $10MM
- Based on guidance from management (“$6MM cash burn per year”), I think my $10MM estimate is reasonable, but I could be off in which case, distributions would be lower than my estimate.
Disclaimer
Rich Howe, owner of Stock Spin-off Investing (“SSOI”), doesn’t own CBIO shares but plans to buy them over time. All expressions of opinion are subject to change without notice. This article is provided for informational purposes. We do not warrant the completeness or accuracy of this content. Please do your own due diligence and consult with an investment adviser before buying or selling any stock mentioned on www.stockspinoffinvesting.com.
Leave A Comment