AKAO - Achaogen

[DocSnowball]

Asking for help from anyone familiar with small biotechs. Achaogen is a niche company developing antibiotics against resistant bacteria. They have one FDA approved antibiotic Plazomicin, but due to FDA limiting indications to UTI (and not additional bloodstream infections which would have meant greater use and total addressable market), the company is running out of capital and has not raised any cash in the last 6 months. It is up for sale and my question is on valuation for the acquirer

 

As of last quarterly filing for Q3 2018 (published Nov 8th 2018):

Current cash and short term investments  58 Million

Total assets                                            98.3 Million (lets just say anything except cash and short term inv are not worth a lot)

Total liabilities                                        62.5 Million

Cash burn per quarter                            30-40 Million (which leaves around 18-28 million of cash/short term investments left)

 

Company has not raised any cash and just paid Gates foundation 5.7 Million to buy back its equity portion of 407,331 shares and remove a liability to do research on antibody development for Acinetobacter neonatal sepsis for developing countries (wonder if an acquirer wanted this off the books before purchase).

 

Other assets that don't show up in the balance sheet:

Plazomicin - NPV debatable but ranging from 50 M to 200 M

C-Scape (antibiotic in phase 1) - NPV negligible at present

Net operating loss - 512 Million as of Q3 2018, and likely to be around 550 million at the end of Q4 2018. At 21% tax rate, worth 115.5 million tax write off to acquirer

 

Current market cap 64 million at share price of 1.39. Question is whether the net operating loss of 550 million on the balance sheet is significant to a larger Pharma company like Pfizer etc acquiring it - at 21% tax rate it would represent 115.5 million worth of tax write off in addition to whatever the NPV of the FDA approved drug will end up being(50 to 200 million) - the market cap is not reflecting these but an acquirer may value them. Downside is it is a fire sale due to running out of capital and a drug unlikely to bring in a lot of revenue in the first 2-3 years unless something changes in the reimbursement structure. If they don't find a buyer either they dilute massively or declare bankruptcy.

 

http://investors.achaogen.com

[patience_and_focus]

I am familiar with this space and the specific company. Valuation of small drug discovery biotech's is very hard based just on their financials. In this case the financials are not that attractive either IMO. Anyways, I look at valuation for a biotech company *acquisition* target in terms of 3 things beyond just financials -

 

1. Does the company have a unique technology (or have mastered one that is used by many) that makes it attractive for pharma acquisition. This is judged by patent portfolio around that technology, past success using that tech, etc. To me the answer is negative for Achaogen.

 

2. Does the company operate in *hot* area of research with promising leads / drugs in the market to make it attractive for acquisition. See for example immuno-oncology space at this moment in time. This is judged by amount of VC investment in this area and M&A by large pharma in the last few years. The opposite is true for Achaogen as it works in antibiotics space which is essentially a step-child for pharma. Returns on investment in antibiotic research are poor on relative basis. Many pharma's have simply given up on this area and laid off all people in those and related departments over the last decade.

 

3. Is the company run by and/or has board members that are leaders in the space. I am talking about Nobel prize winning caliber doctors / scientists in academia (they do not have to have won nobel prize obviously, not everyone brilliant wins that one.  :)). This brings important cachet to the table. Again, the answer seems to be negative to me.

 

Now, the above being said, it may be that a private player such as PE firm might be interested in the assets. I am doubtful because of the space this company and its ROI potential. Also, pharma CEO's have to answer to a board that is mostly filled with people from scientific background. An acquisition has to be first and foremost scientifically attractive for the CEO to not face heat from the board. NOL's and other financial stuff is of secondary importance. My 2 cents.

[mwtorock]

I am familiar with this space and the specific company. Valuation of small drug discovery biotech's is very hard based just on their financials. In this case the financials are not that attractive either IMO. Anyways, I look at valuation for a biotech company *acquisition* target in terms of 3 things beyond just financials -

 

1. Does the company have a unique technology (or have mastered one that is used by many) that makes it attractive for pharma acquisition. This is judged by patent portfolio around that technology, past success using that tech, etc. To me the answer is negative for Achaogen.

 

2. Does the company operate in *hot* area of research with promising leads / drugs in the market to make it attractive for acquisition. See for example immuno-oncology space at this moment in time. This is judged by amount of VC investment in this area and M&A by large pharma in the last few years. The opposite is true for Achaogen as it works in antibiotics space which is essentially a step-child for pharma. Returns on investment in antibiotic research are poor on relative basis. Many pharma's have simply given up on this area and laid off all people in those and related departments over the last decade.

 

3. Is the company run by and/or has board members that are leaders in the space. I am talking about Nodel prize winning caliber doctors / scientists in academia (they do not have to have won novel prize obviously, not everyone brilliant wins that one.  :)). This brings important cache to the table. Again, the answer seems to be negative to me.

 

Now, the above being said, it may be that a private player such as PE firm might be interested in the assets. I am doubtful because of the space this company and its ROE potential. Also, pharma CEO's have to answer to a board that is mostly filled with people from scientific background. An acquisition has to be first and foremost scientifically attractive for the CEO to not face heat from the board. NOL's and other financial stuff is of secondary importance. My 2 cents.

very insightful. thanks

[hillfronter83]

I'm not a tax expert, but in many cases NOL of a company will forfeit when changing ownership. So I doubt a profitable company can just acquire one with huge NOL and avoiding paying tax.

[DocSnowball]

I am familiar with this space and the specific company. Valuation of small drug discovery biotech's is very hard based just on their financials. In this case the financials are not that attractive either IMO. Anyways, I look at valuation for a biotech company *acquisition* target in terms of 3 things beyond just financials -

 

1. Does the company have a unique technology (or have mastered one that is used by many) that makes it attractive for pharma acquisition. This is judged by patent portfolio around that technology, past success using that tech, etc. To me the answer is negative for Achaogen.

 

2. Does the company operate in *hot* area of research with promising leads / drugs in the market to make it attractive for acquisition. See for example immuno-oncology space at this moment in time. This is judged by amount of VC investment in this area and M&A by large pharma in the last few years. The opposite is true for Achaogen as it works in antibiotics space which is essentially a step-child for pharma. Returns on investment in antibiotic research are poor on relative basis. Many pharma's have simply given up on this area and laid off all people in those and related departments over the last decade.

 

3. Is the company run by and/or has board members that are leaders in the space. I am talking about Nobel prize winning caliber doctors / scientists in academia (they do not have to have won nobel prize obviously, not everyone brilliant wins that one.  :)). This brings important cachet to the table. Again, the answer seems to be negative to me.

 

Now, the above being said, it may be that a private player such as PE firm might be interested in the assets. I am doubtful because of the space this company and its ROI potential. Also, pharma CEO's have to answer to a board that is mostly filled with people from scientific background. An acquisition has to be first and foremost scientifically attractive for the CEO to not face heat from the board. NOL's and other financial stuff is of secondary importance. My 2 cents.

 

Thank you - your answer is appreciated. However by those rubrics there is no company in this sector that would meet all of them. Instead what we have happening is consolidation due to the small biotechs running out of capital like this one. NPV is positive but the time to positive cash flows is too long for a small biotech which does not have capital.

 

I agree with you that there would be no takeover premium in regards to the drug, and market cap reflects that. My question is it is a net-net situation where for an acquirer the valuation will be much higher than current market cap (even using a lowball NPV for the drug) because of the net operating loss on the balance sheet. From what I read, as long as the drug is a valid asset (and you are not taking over a company just for NOL), NOL can be used by the acquirer to offset tax. Also if a larger Pharma company does market this drug, it's NPV will be higher because their SG&A costs will be much lower due to having an existing salesforce selling other antibiotics.

[patience_and_focus]

 

Thank you - your answer is appreciated. However by those rubrics there is no company in this sector that would meet all of them. Instead what we have happening is consolidation due to the small biotechs running out of capital like this one. NPV is positive but the time to positive cash flows is too long for a small biotech which does not have capital.

 

I agree with you that there would be no takeover premium in regards to the drug, and market cap reflects that. My question is it is a net-net situation where for an acquirer the valuation will be much higher than current market cap (even using a lowball NPV for the drug) because of the net operating loss on the balance sheet. From what I read, as long as the drug is a valid asset (and you are not taking over a company just for NOL), NOL can be used by the acquirer to offset tax. Also if a larger Pharma company does market this drug, it's NPV will be higher because their SG&A costs will be much lower due to having an existing salesforce selling other antibiotics.

 

Thanks for focusing on the key point, this discussion is very helpful to clarify and expand on how I think about such opportunities. My contention is that the drug plazomicin (not the company itself) in this case has very low NPV (much lower that your figures). The drug comes with a black box warning for complicated UTI infections where other options exist that are equally good or better. The company itself has no other exciting asset. So that just leaves NOLs.

 

I agree with you that there may be value in the NOL's. To me that is the only potential play for this company. I can only take NOLs at face value as I am not qualified to ballpark its true value. Seems like NOL's carryforward in M&A and takeover is complicated and has changed due to new tax law. Now whether this company is a net-net with a good potential reward for an investor depends on (a) the exact value of those NOL's for the acquirer, as you have already pointed out, plus (b) somewhat subjective assessment of probability of a pharma management becoming interested in this one. The second point is also important because attractive scientific asset (drug with growth potential or an exciting technology) is a very important factor when a management evaluates small biotech companies for acquisition IMO.

 

Honestly I have not looked hard enough for past examples but I do not know of any mid-sized or big pharma company has bought another company just for financial reason absent any other asset. Hence I perceive the probability of acquisition to be low.

[patience_and_focus]

Achaogen has filed for bankruptcy

 

https://xconomy.com/san-francisco/2019/04/15/achaogen-eyes-sale-in-bankruptcy-auction-a-year-after-fda-approval/

 

 

[DocSnowball]

Achaogen has filed for bankruptcy

 

https://xconomy.com/san-francisco/2019/04/15/achaogen-eyes-sale-in-bankruptcy-auction-a-year-after-fda-approval/

 

The reverse of the 100 bagger. This has gone from $27 to 14 cents over two years. I gave up when the FDA did not approve bloodstream infection indication because my thesis was disconfirmed at that point. It has been painful to watch, and as a Paratek holder nerve racking. This is a sector that is facing very strong headwinds and desperately needs a new business model.

[DocSnowball]

Achaogen has filed for bankruptcy

 

https://xconomy.com/san-francisco/2019/04/15/achaogen-eyes-sale-in-bankruptcy-auction-a-year-after-fda-approval/

 

FT Opinion Pharmaceuticals sector

"We ignore the disaster in the antibiotics market at our peril

 

There is no viable path for new drugs, however valuable they are to society"

 

https://www.ft.com/content/4da1c6e4-603d-11e9-9300-0becfc937c37

 

[Cigarbutt]

I cannot access the linked article and assume it's about the recent push to deal with growing resistance.

 

I think progress will eventually be made but we may have reached an unusually long plateau.

 

For quite some time, antibiotic resistance has been growing but the new agents are generally some kind of modification of an already existing molecule or class and the new drugs, even if they make it on the formulary, do not automatically make it to the prescription destination as the market is crowded, the antibiotic resistance profile is only marginally improved and further resistance happens quite rapidly once a drug is used on a larger scale.

 

But there is hope:

https://www.pewtrusts.org/en/about/news-room/opinion/2019/04/10/the-antibiotic-market-is-broken-and-wont-fix-itself