Cadus Corporation KDUS
December 12, 2003 - 4:55am EST by
2003 2004
Price: 1.45 EPS
Shares Out. (in M): 0 P/E
Market Cap (in $M): 19 P/FCF
Net Debt (in $M): 0 EBIT 0 0

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Cadus Corporation is a cash shell plus the remains of a drug discovery company. It is trading at a discount to cash and net current assets. Market value is 19M which is 73% of Net Current Assets (which include over 24M of cash), which would allow for about 35-40% upside if it were sold for around Net Current Asset value (26M). In addition, the company runs at a small profit and has other assets (licenses and patents) which may be worth something.
Although this is clearly not the world’s most exciting investment there would seem to be little downside.
I see no immediate catalyst, but the company is controlled by Carl Icahn (who owns over 37% of the stock). So I don’t think this is one of those cases where a company will continue to return a low ROE indefinitely because the owner has an emotional attachment to the company. I presume that Mr Icahn will make rational decisions here. As I see it, either the company will be sold, liquidated, or an acquisition will be made, so worst case (for me) would be investing alongside Carl Icahn, but at a useful discount.
About 6 months ago, Cadus announced they were changing their name from Cadus Pharmaceutical Corporation to Cadus Corporation to reflect the fact that they had expanded the scope of their acquisition targets to include companies outside of the pharma industry.

Company History
Cadus was formed in 1992 and engaged in the development of yeast based and other new drugs. In 1999, Cadus sold its drug discovery assets to OSI Pharmaceuticals and ceased its research.
However, Cadus is still entitled to receive royalties (up to $3M) on the first product derived from compounds sold to OSI. Cadus also retains ownership of all its other assets, including its core yeast technology, its collection of over 25,000 proprietary yeast strains, cell lines, genetic engineering tools and its genomics databases.

In February 2000, Cadus licensed to OSI, on a non-exclusive basis, its yeast technologies. OSI paid a license fee of $100,000 and an access fee of $600,000. OSI also pays an annual maintenance fee of $100,000 until the earlier of 2010 or the termination of the license. OSI may terminate the license at any time on 30 days prior written notice.
In December 2001, Cadus subsidiary (to which the licenses have been transferred) licensed to a major pharmaceutical company, on a non- exclusive basis, its yeast technologies, including various reagents and its library of over 25,000 yeast strains. The licensee paid Cadus a fee of $500,000. In October 2002, the licensee paid to the Cadus subsidiary an additional $1,000,000 when the licensee achieved a research milestone. The license terminates end 2006; however the licensee may extend the term for additional one-year periods by paying to the Subsidiary $250,000 for each one-year extension.
Cadus subsidiary is seeking to license its yeast technologies to other third parties on a non-exclusive basis.

Cadus previously had collaborations with other pharmaceutical companies. The Bristol- Myers Squibb Company collaboration expired in July 1999, the Solvay Pharmaceuticals collaboration was assigned to OSI in July 1999 and the Company and SmithKline Beecham agreed to terminate their collaboration in September 1999. Each of Bristol-Myers Squibb Company and SmithKline Beecham is required to make payments to the Company upon the achievement by it of certain pre-clinical and drug development milestones and to pay the Company royalties on the sale of any drugs developed as a result of the research collaboration with the Company or through the use of the Company's drug discovery technologies. Both Bristol-Myers Squibb and SmithKline Beecham hold stakes in Cadus although BMY has been a consistent seller.

Cadus also had an equity interest in Axiom Biotechnologies. This was merged with Sequenom (SQNM) and Cadus received 441,446 shares of common stock – approximate value is 1.5M.

Other Liabilities: Cadus is not currently party to any legal proceedings. Cadus leases storage space in Tarrytown New York on a month to month basis only and the cost is not material. The company has no employees. If liquidated, I would expect the liquidation costs to be low.

Options: Options to purchase 270,000 shares are outstanding at an average exercise price of $1.47. There are also 253,334 options granted at prices in range 1.50 to 2.37.

Ownership The company is 37.8% owned by Carl Icahn. Mr Icahn is a director and the CEO (Michele Paige) is an employee of Icahn Associates. One of the other directors (total six) is a former President of Icahn Associates.
Bristol-Myers Squibb owns approximately 6% and GlaxoSmithKline own 5%

Liquidity: Although this normally trades only a few thousand shares per day, Bristol Myers-Squibb own about 6% of the shares and they have been consistent sellers (at lower prices than this), so it may be possible to purchase in larger quantities.


Sale, liquidation or acquisition
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