Description

NLTX - busted biotech exploring strategic alternatives trading at large discount to cash

NLTX discontinued its lead program NL-201 in November 2022 and reduced its workforce by 40%. The discontinuation of NL-201 left NLTX with a few discovery/pre-clinical stage candidates. 

Then in March, NLTX announced that it had engaged SVB Securities to review strategic alternatives with the goal of maximizing shareholder value. It suspended R&D efforts altogether and announced a reduction in force of 70% of the total number of employees at that time (2022 10K). CEO/CFO Jonathan Drachman and Chief Medical Officer Dr. Patel stepped down.This week, the board appointed the company’s general counsel as interim CEO. 

The company ended the year with $96.4mm of cash and short term investments (mainly US treasuries). Inclusive of pre-funded warrants, the company’s market cap is $40mm. If the company chooses to liquidate, the stock still trades at a significant discount to cash after taking into account cash burn in the interim and liquidation costs. 

The November restructuring would cost $7.2mm cash at high end (Item 5, Q3 2022 10-Q). Only $0.4mm had been incurred by 12/31/2022 (2022 10K). The second March restructuring would cost $2.7mm cash at high end (3/10/2023 8K). The company said both restructurings would complete by the end of Q2 2023. Notably, the company ended 2022 with 56 employees compared to 91 employees a year ago, indicating the first 40% workforce reduction had already been completed in 2022. After the second, further 70% workforce reduction, the company would only have 17 employees. I put final severance at $2mm, or ~$120k per head (vs $70k in the second round). 

The company was burning $12mm per quarter prior to the November restructuring announcement. I estimate Q1 cash burn to be $7mm and subsequent cash burn at $2mm/quarter. I assume by the end of this year we would know the outcome of the strategic review. 

Lease termination - the company is paying $2.9mm per year for its office and lab space in Seattle. I’m assuming early termination costs of $6mm.

Options - 1.15mm options were granted recently enough at ~$1 that they could become dilutive, but the amount is not material to the 55mm shares already outstanding. 

Ownership/Board: ex CEO Jonathan Drachman who just stepped down owns 3.7mm shares so the amount of money involved is likely peanuts to him. Baker Brothers owns 4.2mm shares and has a board seat. The board consists of accomplished biotech executives, including Chairman Todd Simpson who is CFO at Seagen. Maybe the quality of the board would help steer the company to a more shareholder friendly path, but it’s also possible that the company is too small and their personal stake is too tiny to matter to them. The large discount to cash and proactive cost cutting effort provide some comfort. 

If the company goes the liquidation route, I estimate there would be $1/share of proceeds, representing almost 40% upside. 

Catalyst

Liquidation