Bargain Shares: A Ben Graham contrarian value play

Arix Bioscience (ARIX:116p), a global venture capital biotechnology focused investment company, remains the laggard in my market-beating 2021 Bargain Shares Portfolio. This reflects the bloodbath on Nasdaq that has impacted listed portfolio valuations.

At the end of 2021, Arix held seven listed stakes worth £63.3mn, an unlisted portfolio of seven holdings worth £54.6mn and £134mn (104p a share) of net cash. Since the financial year-end, three of the listed holdings have been fully exited and a fourth, LogicBio (US:LOGC), partially exited. The £8mn cash proceeds from those sales has been recycled into 12 new listed US investments worth £12.8mn.

However, this year’s decline in biotech and life science valuations means that I estimate the current listed portfolio of 16 investments is now worth £41.4mn (32p a share), of which the stake in Aura Bioscience (US:AURA) has a value of £21.8mn. Having presented final Phase II data of its lead asset, AU-011, in choroidal melanoma, demonstrating good safety and significant clinical benefit in patients, Aura subsequently raised $75.6mn in a successful Nasdaq IPO last October. Investors have warmed to the company, hence why its share price is 25 per cent above the $14 a share listing price.

The de-rating of sterling will have benefited the unlisted portfolio which I estimate has a pro-forma value of £59.5mn (46p a share), or £5mn more than at the end of 2021. The gains will offset some of this year’s losses on Arix’s listed holdings. Also, Arix’s pro-forma cash pile of £129m (100p a share) should have benefited from the slide in sterling on the value of US money market deposits.

By my reckoning, Arix’s NAV per share has dropped from 198p to 178p since the end of 2021 with cash backing up 100p of the current 115p share price. This means that at the current bombed out market valuations, Arix’s listed and unlisted portfolios are in the price for 80 per cent less than their carrying values after adjusting for cash. This explains why Arix’s share price has not followed the XBI biotechnology market index down since I reviewed the portfolio in mid-February 2022.

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 tendered shares at the lower market price (284p offer price on 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 188.3p a share.

Source: London Stock Exchange. 

Moreover, it’s not as if the unlisted holdings are worthless. Half that portfolio is invested in Artios, a leading DNA damage response (DDR) company that is developing a pipeline of precision medicines for the treatment of cancer. Artios has 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). Large pharmaceutical companies have historically outsourced much of the research and development of new drugs to smaller companies, often start-ups, which are faster and more agile in making cutting-edge medical breakthroughs.

Bearing this in mind, analysts forecast that big US and European pharma groups could have $500bn to deploy on acquisitions in the coming years, providing a clear path to exit for biotech companies that do succeed. Arix’s diversified portfolio offers such exposure. Also, the group has made bumper gains from some holdings in the past including VelosBio (acquired by Merck for $2.75bn in 2020), and Amplyx Pharmaceuticals (acquired by Pfizer). The receipts from these sales explains why Arix is in a strong position to selectively cherry pick mispriced investments among the market carnage.

I also note that US hedge fund Acacia Research Corporation (US:ACTG) raised its stake from 21.5 to 22 per cent last week. Bottom fishers should do the same. Buy.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £4.50 [UK].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 plus £4.75 [UK] postage and packaging.

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.