Instil Bio (TIL) + Updates on NUVB and TWM.TO
A busted biotech terminating operations and trading at pennies on the dollar to its cash and real estate value
Disclaimer: Nothing on this blog is intended as financial or investing advice. Please do your own due diligence.
Instil Bio
Instil Bio is a clinical stage biotech that went public in March 2021. It was founded by Curative Ventures, a venture capital firm that retains ~30% of shares outstanding, and whose principal, Bronson Crouch (an additional 5%), has at all times been the company’s CEO and Chairman. The company’s stated focus is on developing a pipeline of autologous tumor infiltrating lymphocyte (TIL) therapies for treating cancer. Its lead product was ITIL-168 for the treatment of advanced melanoma. The company also holds a proprietary platform called Co-Stimulatory Antigen Receptor (or CoStar) which it uses to develop genetically engineered TIL therapies, the first of which is ITIL-306.
Though not a SPAC, it debuted with comparable mania, raising $368 million of cash in addition to the ~$380 million it already raised before going public. All in, the company went public with over $600 million of cash despite not having a single candidate beyond Phase 1. And as if that wasn’t enough of a testament to ZIRP mania, by the time of its IPO the company had already acquired 5+ acres of land in Tarzana, California (a suburb of Los Angeles) for ~$35 million, with the aim of developing a brand-new manufacturing facility for ITIL-168 with an all-in cost of well over $100 million. In connection with this ambition, the company received a construction loan from Oxford Properties for ~$85 million secured as mortgage on the property. Again, this was a company with not a single drug beyond Phase 1. The allocation of capital to build out a large-scale manufacturing facility for a drug several preconditions removed from commercialization was…premature to put it gently.
Fast forward to today, and the entire endeavor has been an escapade in destroying shareholder value. In December 2022, the company announced it was discontinuing all ITL-168 programs and reducing its US workforce by approximately 60%. Concurrently, the company announced a shift in its priorities towards the Co-Star platform and ITIL-306. A month-later, the company announced a further reduction in US labor down to a team of 15 employees, shifting the remaining clinical/trial operations to the UK, and that it was “evaluating opportunities for a potential sale/sublease” of the Tarzana property. The company also reduced its UK workforce by 42%.
Then, the nail in the coffin appears to have come last week. The company announced it was outsourcing the development of ITIL-306 to a Chinese company to conduct a feasibility study and, if successful, a clinical trial. The press release provides that Instil may explore transitioning ITIL-306 to a US based CDMO if the clinical trial looks promising (big if). Significantly, the company also announced the closure of its UK manufacturing/clinical operations and a further reduction in force of 61%.
Based on the foregoing, we are left with a company that has effectively terminated its operations: they only have around 15 US employees and 20 UK employees left, both of its manufacturing facilities have been shutdown, and development of its one remaining drug candidate has been outsourced to China. While the company has not formally announced a strategic review, all of the evidence suggests that one is imminent.
With the cessation of operations, the company is (at least for now) little more than its balance sheet. But this balance sheet has a lot of value.
At a share price of ~$11.70, TIL’s market cap is ~$76 million. For that price, you get approximately $195 million of current assets (the majority of which ($185 million) is cash and T-Bills). Total Liabilities, excluding the Tarzana mortgage, are ~$25 million. Therefore, excluding the real estate, TIL’s net current asset value is comes out to around $170 million or $26.2/share! This means that TIL trades at a 55% discount net current asset value (as at Sept. 30 2023).
But here is where it gets even more interesting. In the most recent 10Q, the company noted it incurred an impairment charge against the Tarzana property, which occurs when the book value of an asset (roughly cost basis - depreciation) is found to exceed its fair market value. The impairment charge was $41.5 million, implying a fair market value for the real estate of $132.5 million. This fair value was arrived at through the income-based and market-based approaches.
Here it is altogether:
So at $11.70/share, TIL trades at an enormous 65% discount to Net Asset Value (i.e. you are getting the assets for 35 cents on the dollar). This obviously provides the investment with a huge margin of safety.
I should note that I am extremely skeptical that the Tarzana Property is worth $132.5/mm. The property is 128,000 sqft, implying a price per square foot of $1035, which does not pass the smell test. Another way to look at this is that, assuming a 5% cap rate, which might itself be generous, a NNN lease would need to come in at $6.78/mm/year ($135.5*.05) or $53/sqft. A quick check of Loopnet shows that industrial real estate in the area tends to lease for ~$20/sqft. The Tarzana property might go for a premium given it is brand new, but I highly doubt a lease would go for anywhere near $50/sqft.
That being said, there is still a massive discount here even if Tarzana isn’t worth anywhere near $132.5/mm. For example, if the real estate was only worth the amount of the loan - i.e. if the equity were a zero - at $11.70/share the market cap would still be at a nearly 55% discount to NCAV. To be even more draconian, if the Tarzana property were itself worth nothing (not just the equity, but the entire asset) and the company were saddled with the mortgage liabilities, we would still be buying this for a discount to cash (NCAV excl. mortgage - mortgage (170.46-83) = $87.5 million vs. $76 million market cap. The assumption that the real estate is worth zero is obviously absurd, but this just shows how difficult it is to lose money here.
I should note that the above also gives no value to ITIL-306 (which could still work out depending on the Chinese studies), nor to the CoStar IP.
Okay, so there is an enormous discount to NAV here. But more importantly, all the pieces seem to be in place for this discount to close and the value to be realized. First, as I outlined above, there are no material operations ongoing. Second, the company is currently shopping the Tarzana property (here is the listing). You will notice that the listing is presented principally as a lease, but notes that the property is available for sale as well. Finally, the incentives to realize this very are present, at least in part. As stated above, Crouch, the founder/CEO, holds 35% of the shares outstanding (although, much of this is held through his firm, Curative, and presumably therefore much of the economic interest lies with his LPs). Based on my calculation of NAV above, a 35% interest amounts to $77 million. That is a lot of money to anyone and based on the available information I have been able to find on Crouch, I suspect that figure would be a material portion of his net worth. I very much doubt he has any interest in squandering that. The vast layoffs, outsourcing of operations, and listing of Tarzana, all suggest that he is looking to preserve this value.
Of course, nothing is ever that simple. So here are my concerns and why I think the discount more than compensates of for them:
First, the calculations above ignore cash burn. We know from the Jan. 16 8k that the company will incur around $6.1 million in severance charges, so that needs to be subtracted from NAV. Then we need to consider this quarters cash burn and go forward cash burn. I agree with Clark Street that this quarter’s cash burn will likely come in around $20 million. However, I think he is overstating his pro forma $12.5 million quarterly burn rate. In Q3, total operating expenses were $66.7 million, but $46 of that were restructuring and non-cash impairment charges. The remainder is R&D and G&A (~$20), which I would think should come down enormously given recent developments. Further, interest on the mortgage is entirely offset by interest earned on the T-bills. I think the company should easily be able to burn less than $10 million a quarter, but regardless, the discount here is so big it does not really matter, provided steps are taken to realize shareholder value within the next year.
And that brings me to the next concern - will steps be taken to realize shareholder value? Again, no strategic review has been announced. But let’s invert the question - what would it look like to not announce a strategic review? The company has laid off nearly everyone and has outsourced its remaining drug candidate. Moreover, they are no longer occupying their two facilities - Tarzana and UK. It simply makes no sense to maintain the status quo, so I think a strategic review has to be forthcoming. (That announcement alone should cause the stock to rally).
I think the biggest concern is that Crouch pursues a reverse merger on unfavorable terms to the minority shareholders. Given the huge cash balance, TIL could be an attractive way for a private company to go public. And Crouch could stand to benefit from such an arrangement but retaining control over the merged entity etc. Though Crouch is aligned qua shareholder, I should note he has also taken outrageous amounts of SBC, so I wouldn’t say he has been the most high integrity fiduciary. That said, his large equity interest and the economic interest of his LPs I think mitigates this risk. And we are more than compensated by this risk given the discount.
So that’s the pitch here. We are buying a busted biotech company to acquire its cash and real estate for pennies on the dollar. Management has taken clear steps to preserve cash and shop the real estate. I expect a strategic review is imminent - the announcement of which should itself send the stock higher. Beyond that, if and when the value is realized, is anyone’s guess. But given the margin of safety and pretty clear path for this stock to double, I am willing to grab some shares and see how this plays out.
As I final word on TIL, I would note that stock was been flying recently, seemingly up 10% a day. That is due both to the large move in the XBI index as well as the company’s announcing the further RIF and outsourcing of ITL-306. Obviously, I would have loved to have known about this company when it was trading for $6 last month, which was just flatly absurd. But it is still really cheap at these prices and I will surely look to add significantly if it pulls back into the single digits.
Other Idea Updates
A couple quick updates on two of the ideas I’ve pitched here.
First, a couple weeks ago Nuvation Bio announced that the FDA cleared its IND to evaluate a new candidate, NUV-1511. In the write-up, I noted that Nuvation had two programs: Nuv-868, which is the lead program, and the DDC platform. NUV-1511 is the first candidate from the DDC platform that the FDA has given the go ahead to evaluate. I have mixed feelings about this development. The positive is that it shows there is some value to the DDC platform, which I ascribed no value to in the write-up, and it offers the company another shot on goal. The negative is that my whole thesis was that, with only NUV-868 in trials, the company would be likely to fold on a poor data readout and return the enormous cash balance to shareholders. Obviously, with this new addition to the pipeline, the path to liquidation is murkier. That said, I don’t expect this early stage drug to materially increase cash burn. Given the added value of the drug, I don’t think this impacts the liquidation value at all, though it does perhaps delay that outcome.
The stock is up around 23% since I wrote it up last month. At $1.68/share, the stock still trades at a material discount to liquidation value. That said, given this new drug complicates the story, and I am invested in this business for its balance sheet, not as a speculative bet on its pipeline, I would not personally look to add here, though I am happy continuing to hold.
Next, Tidewater Midstream. I have already provided a couple updates on the pitch (here and here). As I stated in those updates, the story had been unfolding precisely as expected: Pipestone closed, buyback announced, AltaGas shares monetized. However, rarely do investments go exactly as expected (hence the need for a margin of safety) and this is turning out to be no different. On Monday, the company shockingly and abruptly announced the departure of the CEO Robert Colcleugh as well as the CFO and a board member. An unexpected exodus of senior management is never a good sign. However, that is an even more concerning signal when this management team, only recently appointed, had been executing beautifully to create shareholder value. In my opinion, the CEO said and did everything right during his time with the company, from the accretive Pipestone sale to the initiation of a buyback in lieu of the dividend. He was clearly aligned his shareholders. So the decision to replace him with an outsider, Jeremy Baines, who has never run a public company, really irks me. The company has not given any reason for the change of leadership, but given how abrupt it was and the unusual absence of praise for the outgoing team (the press release doesn’t thank CEO and does not even mention the outgoing CFO by name) I suspect there was clearly something acrimonious going on behind the scenes. Perhaps as we learn more it will turn out that the company made this decision for the right reasons, but for now I am skeptical and the market appears to be too, with stock falling from $1.07 back into the mid $0.90s where I first wrote it up. What gives me faith there is nothing nefarious going on here is that Thomas Dea, the Chair of the board and 4% owner through his firm Kicking Horse, was obviously involved in the decision to replace management, and it was pressure from his firm and Birch Hill for the company to unlock shareholder value that led to his hiring in the first place. Given that, it may very well turn out that this decision was made for the benefit of the shareholders.
While this sucks, I am still holding as the leadership change doesn’t impact the fact that the company is still trading at a huge discount to its SOTP and that, with the Pipestone proceeds now fully monetized, it has a net cash position.