Bargain shares: A heavily oversold biotech value recovery play

Arix Bioscience (ARIX:142p), a company that holds a diversified portfolio of unlisted and listed investments in early-stage biotechnology businesses, is the laggard in my market-beating 2021 Bargain Shares portfolio.

This is mainly due to share price weakness in some of its Nasdaq-listed holdings, which account for 70 per cent of Arix’s listed portfolio valuation of £42.2m (32.5p a share). That valuation is well down from £53.7m at 30 June 2021 even though Arix invested £5.8m after the period end in the $50m IPO of Nasdaq-quoted drug development company Imara (US:IMRA). 

Factoring in the investment in Imara, a £6.3m follow-on funding in portfolio company Artios Pharma’s oversubscribed $153m (£110m) Series C financing round in late July and last month’s £8m investment in new portfolio company Disc Medicine (as part of a $90m Series B financing round), Arix has pro-forma net cash of £139.6m (108p a share). I have taken into account the buyback of 1.73m shares (cost of £2.9m) since the end of June 2021 and third-quarter operating costs of about £1.2m in my calculations.

What this means is that an unlisted portfolio with a book value of £81.5m (63p a share) is effectively in the price for free even though it includes a valuable 8.8 per cent stake in Artios worth £25.3m, and a £16.8m stake in Pyxis Oncology (see below) which will start trading on Nasdaq later today. Artios is developing precision medicines for the treatment of cancer and has attracted the attention of big pharma, having entered a research collaboration with Novartis to discover next-generation DNA damage response targets to enhance its Radioligand Therapies (‘Five investment company bargains’ 8 April 2021). Not only are there some very shrewd investors on Artios’ shareholder register, but its management team have cracking form, having been instrumental in AstraZeneca’s discovery of Lynparza, a treatment for advanced ovarian cancer.  

Arix’s second-largest unlisted investment is new portfolio company Pyxis Oncology. Pyxis is building a differentiated portfolio of biologics, including antibody drug conjugates (ADCs) and immunotherapies, to improve the lives of patients with difficult-to-treat cancers. Arix led Pyxis' $152m Series B funding round in late March and the proceeds raised are being used to advance its differentiated portfolio of ADCs, a growing class of therapies that deliver highly potent targeted treatments directly to cancer cells. Expect clinical trials to start next year. It was a well-timed investment as Pyxis has announced an IPO on Nasdaq to raise $167m, at $16 per share, which increases the book value of Arix's shareholding by 55 per cent from £10.8m to £16.8m (13p a share). Pyxis shares start trading on 8 October 2021.

Note One: Simon recommended tendering 30 per cent of holdings in Vietnam Holdings at US$4.4528 (322.3p) a share, and tendering 3.9 per cent in the excess application ('Exploiting a tender offer', 4 August 2021), with a view to buying back the shares tendered at the lower market price (284p offer price on both 13 and 14 September 2021) when the cash distribution was made during the week of 13 September 2021. Total return reflects these transactions which have reduced the entry point to 188p a share.

Source: London Stock Exchange. Latest prices at 9.05am on Friday, 8 October 2021.

Disc Medicine is a clinical-stage company focused on developing novel therapies to treat serious and debilitating hematologic disorders. Based in Boston, Massachusetts, the company has built a portfolio of first-in-class therapeutic candidates with the potential to address a spectrum of hematologic diseases, ranging from severe orphan conditions to widely prevalent conditions. Of course, there is no guarantee that any of the unlisted companies will be successful investments, but only one needs to be given that they are effectively in the price for free.

I am also reassured that Arix’s managing director Mark Chin rejoined Arix in July, having previously led exits of portfolio companies VelosBio (acquired by Merck for $2.75bn) and Amplyx Pharmaceuticals (acquired by Pfizer) during his previous spell as the company's investment director. In addition, Sir Michael Bunbury has recently been appointed as a non-executive director and former chief operating officer Robert Lyne, who has been interim chief executive since April, has taken on his new role permanently. Lyne joined Arix in 2017 so has a firm understanding of the portfolio, while Bunbury was formerly chairman of HarbourVest Global Private Equity, BH Global and JP Morgan Claverhouse Investment Trust, so brings a wealth of experience to Arix.

So, although Arix’s pro-forma net asset value per share has dropped from 214p to 203.5p since 30 June 2021 and the share price is below my 168p advised buy-in price in this year's portfolio, I feel that the investment case is sound. Furthermore, with the shares massively oversold – the 14-day RSI is 18.07, a level not seen since the March 2020 stock market crash – any upbeat newsflow from investee companies could have an accentuated positive impact on the depressed share price. A successful IPO for Pyxis would be a good start. Buy.

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