Description

Inspired by mrsox977’s writeup of the Metacrine liquidation, I’ve been digging through small cap biotechs that are undergoing strategic reviews/liquidations.  The latest one I looked at and just invested in is Magenta Therapeutics (MGTA), a $50m market cap.  They filed an 8-k Thursday evening, announcing they are exploring strategic alternatives.  They also announced they are halting any further development of their programs.  This comes after announcing a death in their main trial, MGTA-117: https://www.biopharmadive.com/news/magenta-pause-clinical-trial-death-mgta-117-biotech/641297/ .  Despite the terrible way of getting to this point, Magenta now joins the list of busted biotechs that are increasingly likely to turn into cash.

What’s it worth?

As of 9/30/22, Magenta had $128.3m of cash and equivalents.  In Q3, they burned $13.8m.  The three main uncertainties between now and liquidation (I hope!) are the quarterly burn, winddown costs and the lease termination expense.

Starting with the burn rate, I assumed Q4 ’22 and two quarters of ’23 burn at the same rate as Q3.  I’d be disappointed if that actually transpires, given the recent announcement but let’s assume it does and that the business goes away as of 6/30/23.

On winddown costs, there were 75 employees as of the last 10-K and there are 79 employees on LinkedIn who list Magenta Therapeutics as their current employer.  Subtracting the board members puts you around the same number of current employees as the 10K.  I’m assuming $10m of costs related to winddown, primarily in severance.   

For the lease, it is on the balance sheet as a $27.2m liability (outside of the current portion).  Magenta is in 69,000 sf at 100 Technology Square in Cambridge, MA and I’m assuming it will be relatively straightforward to either sublease the space or negotiate a termination with the landlord.  I’m plugging in $10m of cost here but this is really a guess.

Plugging all of these in, you get $1.10/share of net proceeds on 6/30/23 vs. a current price of $.82/share. 

Holders

Magenta’s registry is a who’s who of biotech investors, with well-known funds (see below) owning over 1/3 of Magenta.  The risk here is all of them have reputations to maintain with biotech management teams/entrepreneurs.  However, these funds are here to get paid and should be the adults in the room in terms of optimizing cash recovery as part of this process. 

Upside

Given the discount to cash, I didn’t spend much time thinking about the additional upside.  But, the company does have $274.2m in NOLs.  NOLs are tough to put a value on but at least there’s some chance here of these getting monetized.    

Risks

Given the combination of last week’s announcement + the investor base, I think the main risk here is that this becomes dead money.

However, the risk I’m most scared of is a reverse merger where MGTA gives away the cash box at a discount.  As an example, MTCR attempted to do this last fall and was ultimately blocked by activists.  Given who is invested in Magenta, I’m less concerned with it here but it’s clearly a risk and likely the one that would cause the largest loss.

Catalyst

Completion of strategic review and sale/liquidation