Negative EV Stocks

How I think about examples that I've seen work, and applying them to the current opportunity set

I thought this would be topical given that, you know, everything sucks! Roughly a third of biotechs are trading under cash, fun! https://x.com/Sanctuary_Bio/status/1889424876559278449

A lot of these are busted microcaps, APLT type of thing with high burn, exec departure, no direction, etc. But not all of them!

I think it’s worth going fishing down here, you can find low-risk opportunities (a rarity in the rest of the sector), and winners can come in all shapes and sizes. What’s interesting to me a lot of the time is that you just have to be able to tell a story, it doesn’t necessarily have to materialize in order to be rewarded. A recent example of this would be THRD:

Stock breaks on initial safety issue down to $4 or so, then runs back up on the story they are telling with the second gen candidate, hitting $15 or so toward the end of last year, and then ultimately that data disappoints, and now looking at a new all time low. The point here is that after the first safety issue, the stock had limited downside, if any, and was slowly able to convince the market of their story. This type of thing happens all the time, and I think “is this a workable narrative” is a much lower and more reasonable bar to set for stocks down here than “do they have a clearly active and commercializable drug profile” or anything like that. Other examples would be like MRSN:

Trade to a buck and change on the PROC safety issue and fail, then run up over 4x on B7H4 ADC, which then flunks POC, and trades 50% lower today than it did after PROC fail. But it was a cheap, novel ADC target with competitor data flowing in, and it was a new, workable story that the market wanted to give some credit for. I think the bar to be interested in some of these well-capitalized bait and switch stories (lead asset fails, tertiary asset has a path) should be pretty low, and even a mild sentiment bump can start to see some of them get attention. FULC is another great example of the same idea:

Trades to negative EV on SCD clinical hold, which actually gets resolved pretty quickly. But at the same time, FSHD pivotal readout story starts to take hold, which becomes a powerful trade as a small-cap rare disease run-up. This ultimately doesn’t work, and the stock breaks again. On a related note, where FSHD became the lead value driver and then broke, FULC is once again negative EV, but the SCD drug is back in play now. They should have something very close to their current market cap in cash after both data cuts next year.

I think this is a really good example of a stock with limited short term downside, and real upside if your bar is “workable narrative” as opposed to “clearly commercializable drug.” We know it’s active, the n is ideally not enough to show malignancy regardless of whether or not you believe that’s a real issue. This of course works against the upside case to some extent, because the data won’t fully derisk malignancy. But again, they’re really getting no credit right now, and efficacy POC should look good. I mean also just if you look at the historical chart, this has generally been the lead value driver, and the stock has generally traded well off its lows. This doesn’t *really* matter, but I sometimes find the pattern worth noting at least. Would it be shocking if the stock, say, doubles on nice efficacy data this year? Giving them some credit for the program, allowing them funding, but expressing big picture issues with not fully derisked safety, and strict enrollment criteria that ideally may soften a bit somewhere along the way?

There are also your more traditional cash-rich shells where you see things like the AVTE merger and liquidation, Tang activist liquidations, the occasional SLRN/ALMS type of deal. You can do the math on those, some of them work well, but reverse mergers are such a mixed bag, usually with opportunities to buy after announcement. And been awhile since there was an activist liquidation, but some of the deltas to cash seem worthwhile for that to start up again. Maybe a basket approach is better, betting on the broader value and range of positive outcomes for these types, rather than isolating one management team and hoping they find a target the market likes.

Other setups like this that I like, NKTR I’ve mentioned before, but I think monetizing their secondary assets can backstop the valuation and get you a look at the AD data with a great skew.

ANNX is trading under their 9/30 balance with high burn, but technically it’s sub cash going off last reported balance. They’re supposed to file for their GBS drug soon. I do think the trial (international, use pbo as control when US has an SOC) and data (high dose missed badly) are a bit of a joke. It won’t carry the same element of surprise as say APLT filing last year for example, but I think they could catch similar lightning in a bottle somewhere along the way, and sure there’s a chance at approval too. They have a stat-sig primary endpoint (but only at the low dose) that was not visibly gamed, so at least there’s that! Again, I think this is a high-upside story that people will take more seriously later in the review process than they will today, but I don’t have a ringing endorsement of the drug for GBS. This one, however, does have meaningful downside. They only have runway into 2H 26, the GA trial is based on heavily spun POC and indicates horrible capital allocation, and the stock is telling you what the market thinks of this oral C1s program data coming this quarter.

VTYX has a potentially workable recurrent pericarditis story, this is another one that works as a good past example as well. Down on TYK2 fail, back up on NLRP3 for obesity with PIPE, but hype fizzles, and then Nodthera data disappoints. But again, really beat up stock with a new story forming, and a low bar to generate investor interest. They’re also still running their own NLRP3 program and should have data on that, as well as some Parkinson’s biomarker data due earlier in the year that I can’t imagine matters much to the market. This is an oral drug (differentiated from KNSA/Arcalyst), with biomarker data that looks similar to Arcalyst. The Arcalyst label MoA description, highlighted biomarkers, and efficacy data with very little/no pbo response would have me think this is a credible approach, with the ability to generate meaningful POC data and a path to commercial differentiation. Given the Nodthera data disappointing, and a chance the obesity catalyst is first (same guidance but just started dosing for RP), not exactly sure what to make of the setup, but this is cheap and, to me, plausible.

I haven’t gone through the entire opportunity set given how many there are, but to me these stand out as having a real shot at getting some credit from the market again later this year. Some of the way that this concentration thins out is delistings/mergers/liquidations, some of it might be IPO’s coming back and those stocks not falling apart immediately (in an ideal world), but some of it is phoenixes rising from the ashes as well. I think the above examples highlight that this does happen. While it requires some luck, it doesn’t always require the most discerning fundamental eye either, it’s more about trying to think ahead with the market than anything else. Just a fun little exercise, definitely interested to see how this crop looks later in the year.