Description

Arix is an investment holding company focused on the biotech sector trading at a ~35% discount to NAV, and 10% discount to liquid NAV (i.e. cash + liquid listed equities portfolio), with a near term catalyst in the form of a likely liquidation announcement (note: in this report NAV is already adjusted by me to reflect likely changes driven by security prices in the public holdings since the last reported NAv of 31/August - this assumes the last disclosed Dec 22 portfolio composition so it is only an estimate).

Likely liquidation given main shareholder and ongoing strategic review. Arix is 26% owned by Acacia Research, which purchased the majority of its stake from a liquidating UK equity fund (Woodford) opportunistically in 2021. Acacia is itself 62% owned by Starboard Value which is using Acacia as some kind of listed investment platform (although the Arix deal predates Starboard’s involvement in Acacia).

In its most recent earnings call, Acacia’s CEO stated the company intended on monetizing its remaining life sciences positions soon.

It thus seems that Acacia does not have an interest in being a long term biotech investor and is likely motivated to monetize Arix soon.

Also, Arix announced in July it would conduct a strategic review, contemplating a potential wind down of operations. It is set to announce results from this on 27th September together with H1 results.

Liquid NAV provides margin of safety. 44% of the current NAV is composed of cash and 25% of mark-to-market listed equities that, based on the Dec 2022 portfolio disclosure, should be relatively easy to wind down at current trading volumes. As of Dec 22 the largest position (NASDAQ: AURA) represented around a month of trading at average volumes.

Arix is currently burning ~4m GBP / year as per its latest report and I am assuming a conservative 3 year period for liquidation, leading to ~10-15m GBP in total liquidation expenses + cash burn. I could not find much information on comparable liquidation processes to benchmark timing and cost, but experience from a number of liquidations of listed UK venture capital trusts seems to corroborate a 2-3 year liquidation period and low liquidation expenses.

Thus, without getting into the private biotech portfolio, ARIX currently has a ~150m GBP market cap which compares with liquid NAV net of liquidation expenses of ~140m GBP.

Private biotech portfolio provides upside even after large haircut to NAV. The private portfolio is the key to upside in the Arix liquidation. Currently, it is valued at 66m GBP. 20m GBP is in the largest position, Artios, which is progressing with two Phase 2 trials for cancer treatments targeting DNA Damage Response pathways, with data expected in 2024-25.

Overall, the portfolio marks are not too different from Arix’s cost basis (~26% above cost) and have strong co-investors (e.g. Pfizer, Lansdowne Partners). Arix has a track record of some exits far above NAV (e.g. ~20x on VelosBio, which was sold to Merck) but also total loss in some positions (e.g. Quench) - typical of the biotech space.

Overall early stage biotech equities are currently ~50% down from their peak in 2021. To be conservative, I am thus applying a -50% haircut to the private NAV and we still get 20% upside and a mid teens IRR (assuming early payout of the majority of the cash and liquid assets in the form of a dividend):

There is potential for a higher, ~20%ish IRR if I am too conservative on the private portfolio or liquidation expenses, while it is difficult to lose money given the NAV is mostly covered by cash and listed shares:

Finally, it is comforting to see that Acacia actually increased its position by ~25% during 2022, after the initial Woodford acquisition in 2021, at close to the current share price (purchases were made when the shares were trading at between 100-130 GBX). Acacia-appointed directors at Arix have also been net buyers of shares in recent weeks, including the chairman.

Appendix - biotech valuations

Catalyst

Liquidation announcement