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Bargain shares: A Ben Graham value play

A cash rich venture capital company that invests in early stage biotechnology and life sciences offers a hefty ‘margin of safety’ and multiple catalysts for portfolio gains later this year
  • Net asset value per share declines 11 per cent to 214p due to weakness in listed investment portfolio.
  • Post period end follow-on investments in both Artios and Imara.
  • Cash pile and listed portfolio back up 92 per cent of market capitalisation.
  • Unlisted portfolio in the price at just 25 per cent of its carrying value despite multiple catalysts for valuation upside.

Arix Bioscience (ARIX:165p) is the laggard in my 2021 Bargain Shares Portfolio after the share price pulled back below my 168p advised buy in price following interim results from the venture capital company. Arix holds a diversified portfolio of unlisted and listed investments in early stage biotechnology businesses targeting cutting edge advances in life sciences.

Share price weakness in four of its Nasdaq quoted investee companies, the decision to close-down another company after reviewing initial pre-clinical work, and adverse foreign currency movements accounted for £28m, £7.5m and £2.5m valuation reversals, respectively, in the first half of 2021. The negative impact was partly offset by £5.5m net gains on other investee companies, but closing net asset value (NAV) of £281m (214p a share) was still well shy of Peel Hunt’s forecast range (£300m to £310m).

Post the half year-end, Arix’s listed portfolio has suffered further paper losses of £12.7m and currently has a value of £47.3m (36p a share) after factoring in the follow-on US$8m (£5.8m) investment in Nasdaq-quoted drug development company Imara (NSQ: IMRA). Later this year, Imara is expected to announce interim results from its ongoing Phase 2b clinical studies for IMR-687 in sickle cell disease and beta-thalassemia.

2021 Bargain Shares Portfolio Performance
Company nameTIDMOpening offer price 05.02.21Bid price 12.08.21 DividendsPercentage change (%)
Duke RoyaltyDUKE29p44p1.1p55.5%
San Leon EnergySLE27.5p40.75p0.0p48.2%
Vietnam HoldingVNH201.4p296p0.0p47.0%
Wynnstay GroupWYN424p570p10.0p36.8%
Ramsdens HoldingsRFX142.8p180p0.0p26.1%
Springfield PropertiesSPR135.6p150p1.3p11.6%
Canadian General InvestmentsCGI3,611c3,900c44c9.2%
AnexoANX136.9p140p0.0p2.3%
Downing Strategic Micro-Cap Investment TrustDSM69p67.5p0.8p-1.0%
Arix BioscienceARIX177p164p0.0p-7.3%
Average     22.8%
FTSE All-Share Total Return index7,1358,088 13.5%
FTSE AIM All-Share Total Return index1,3841,466 5.9%
Source: London Stock Exchange.

Arix has also spent a further £1m on share buy-backs in the second half, and invested £6.3m in portfolio company Artios Pharma’s recent oversubscribed US$153m (£110m) Series C financing round. Artios is a leading DNA Damage Response (DDR) company that is developing a pipeline of precision medicines for the treatment of cancer. In April, Artios entered a research collaboration with drug giant Novartis to discover and validate next-generation DDR targets to enhance Novartis' Radioligand Therapies. I have great hopes for Artios (‘Five investment company bargains’ 8 April 2021) and note some smart investors are backing the company’s management who previously played key roles in AstraZeneca’s discovery of Lynparza, a treatment for advanced ovarian cancer.

Factoring in investments made in the second half, Arix’s proforma net cash of £150.7m (115p a share) and its £47.3m (36p a share) listed portfolio back up 92 per cent of the company’s market capitalisation of £215m. This means that Arix’s unlisted portfolio is in the price for £17m, or 75 per cent below its carrying value of £67.5m (51.6p a share), even though the Artios stake is in Arix's books at £25.3m (19.4p a share) and analysts at Jefferies value it at more than double that sum.

Importantly, Arix’s new management team has been boosted by the return of Mark Chin as managing director following a shareholder led boardroom clear out. Chin was Arix’s investment director from 2016 to 2020 during which time he sourced and led deals in key portfolio companies, including: VelosBio (acquired by Merck for $2.75bn), and Amplyx Pharmaceuticals (acquired by Pfizer). The team highlights no fewer than eight anticipated milestones across Arix’s portfolio in the second half of this year including:

  • Harpoon Therapeutics (NSQ: HARP) is expected to report interim data from ongoing Phase 1/2 clinical trials in ovarian and pancreatic cancer, multiple myeloma and small cell lung cancer.
  • Artios is set to initiate a Phase 1 clinical study for its Pol-theta inhibitor for the treatment of PARP resistant cancers.
  • LogicBio (NMQ: LOGC) expects to report interim data from its Phase 1/2 clinical study for the treatment of methylmalonic acidemia in paediatric patients.

Potential for further valuation upside from unlisted holdings and likely positive newsflow from well-funded listed holdings is not only being materially under-rated, but expect Chin to recycle the cash pile wisely while Arix’s ongoing £25m NAV accretive share buy-back programme – £8m shares were repurchased in the first half – is also supportive. Buy.

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