Description

Executive Summary

We believe that recent developments at LianBio suggest the company is in the process of winding down its portfolio of in-licensed drug candidates with the intention of returning cash to shareholders.  On October 24, 2023, the company announced it had agreed to sell its exclusive rights to develop and commercialize mavacamten in Mainland China, Hong Kong, Macau, Taiwan, Singapore and Thailand to Bristol Myers Squibb (“BMS”) for $350m.  Upon completion of the BMS transaction, the company will have approximately $600m net cash which compares to its current market capitalization of ~$434m USD. 

In conjunction with the BMS transaction, LianBio’s Board of Directors has initiated a comprehensive strategic review of the company and expects to provide an update in the first half of 2024.  We believe signs point to the Board and its majority shareholder, Perceptive Advisors, deciding to wind down the business and return cash to shareholders.  In this wind-down scenario, we expect LianBio’s shares to trade up toward the value of its cash holdings.  There is +38% upside from the current $4.05 share price (~$434m mkt cap) if LianBio shares trade up to the value of its $600m of cash ($5.60 per share).  Proceeds from the sale of some/all of its remaining drug candidates could provide further upside.

LianBio Background

LianBio is a clinical-stage biopharmaceutical company dedicated to developing and commercializing innovative medicines for the Greater China market.  The company was founded in 2019 by the life sciences-focused fund Perceptive Advisors which is run by “legendary investor” Joseph Edelman, 2 Biotech Stock Picks From Legendary Investor Joseph Edelman (yahoo.com)).  We think Perceptive was likely trying to capitalize on the high valuations that existed at the time for China biotech companies.  Today, Perceptive still holds ~54% of outstanding shares.  LianBio is an LLC organized and existing under the laws of Delaware, United States so ADR de-listing risk is not an issue here. 

LianBio’s business model has been to obtain the China development and commercialization rights to various drug assets.  The company has built out the infrastructure to conduct clinical trials and pursue regulatory approval in China.  To date, LianBio has in-licensed nine assets at various stages of development.

Mavacamten

LianBio’s lead drug candidate is mavacamten which is currently approved and sold under the name “Camzyos” in the US and Europe.  Mavacamten is the first and only cardiac myosin inhibitor approved by the U.S. FDA for the treatment of obstructive HCM (“oHCM”).  Bristol Myers Squibb acquired the rights to mavacamten (excluding LianBio’s China rights) through its $13b acquisition of MyoKardia in 2020.  BMS management has indicated they believe mavacamten has the potential to achieve peak sales of $3-4b.

LianBio has successfully conducted multiple mavacamten clinical trials in China and has received approval to sell mavacamten in Singapore and Macau.  The drug has been fast-tracked in China and the company expects to obtain regulatory approval for mavacamten in mid-2024, with commercialization soon after.

We first came across LianBio in late 2022, when it came up on a negative enterprise value screen.  At the time, LianBio was trading around $1.50 per share with a ~$160m market cap and $340m of net cash for a negative -$180m enterprise value!  Our crude estimates of the value of mavacamten China rights suggested the market was completely overlooking the value of mavacamten’s China rights and LianBio could potentially be a multi-bagger.  Specifically, a rough rule of thumb is that China can account for 10% of a drug’s global sales. 

• BMS paid $13b for MyoKardia, equivalent to a $12b enterprise value after taking into account cash at MyoKardia.  Applying the 10% rule of thumb suggested the mavacamten China rights could be worth $1.2b.
• BMS has suggested peak mavacamten sales could be $3-4b.  Applying the 10% rule of thumb suggests mavacamten could achieve peak China sales of $300-400m.  At 1-3x peak sales, mavacamten could potentially be worth $300m-1.2b.
  • For what its worth, the Yahoo! Finance article on Joseph Edelman linked above claims that “Edelman often uses a 3 times peak sales multiple to value potential drugs, though he will occasionally use multiples as high as 6 times sales.”  2 Biotech Stock Picks From Legendary Investor Joseph Edelman (yahoo.com)

Implications of the BMS transaction

The sale of mavacamten to BMS was a shocker given LianBio had obtained successful phase 3 data and appeared on track to receive China approval in mid-2024.  Investors took a positive view on the BMS transaction and LianBio shares have climbed +190% since the announcement.  We think the share price reaction reflects both the direct impacts of the BMS transaction as well as the increased likelihood of a corporate wind-down.

According to management, LianBio was approached by BMS about a potential sale of the mavacamten rights.  Management initiated a competitive sales process which BMS ultimately won.  The BMS transaction will result in a cash inflow of $350m.  The company expects no tax leakage based on conversations with its tax advisors.  In addition, LianBio will be released from payment obligations of up to $127.5m in remaining milestone payments under its license agreement with MyoKardia.  Furthermore, BMS has agreed to take on roughly 100 LianBio employees, roughly half of LianBio’s workforce.  As a result, cash burn is expected to decline from $100m per annum to $50m per annum. 

We believe the BMS transaction is also a strong signal that LianBio is going to wind down the portfolio and return cash to shareholders.  Mavacamten was LianBio’s lead asset and the main driver of corporate value.  Without mavacamten, there’s not much of a business left.

Other drugs in the pipeline

LianBio has a pipeline of nine assets under development.  Beyond mavacamten, the most promising asset is probably:

• TP-03:  an ophthalmic solution which targets the mites which cause Demodex blepharitis, a condition characterized by red, irritated, itchy eyes.  TP-03 recently received U.S. FDA approval and will soon be commercialized by Tarsus Pharmaceuticals.  Sell-side estimates of TP-03 peak sales are $600-800m. 
  • Applying the 10% China rule of thumb, TP-03 China peak sales could be $60-80m.  At 1-3x peak sales, TP-03 China rights could be worth $60-240m.
  • On Nov 1, 2023 LianBio reported mixed topline date from its Phase 3 LIBRA Trial of TP-03.  While the trial demonstrated statistically significant mite eradication in patients with Demodex blepharitis, the co-primary endpoint of complete collarette cure only showed a positive, but not statistically significant trend (p-0.15).  In contrast, Tarsus’ Phase 3 Trial met its primary endpoint with complete collarette cure achieved by 56% of patients on TP-03, compared to 13% on vehicle (p<0.0001).  It’s not clear at this time how the mixed Phase 3 results will impact the commercialization timeline of TP-03 in China.

What is the opportunity now?

As indicated in the BMS transaction announcement, LianBio has commenced a strategic review.  Management claims nothing has been decided yet, but we think the most likely scenario is that the company attempts to sell off its remaining assets and return cash to shareholders.  Perceptive will have a large say in what happens.

In terms of potential scenarios, possibilities include:

• Liquidate portfolio and return cash to shareholders:  healthcare investors we reached out to who are familiar with LianBio and Perceptive share our opinion that a wind down and return of cash is the most likely scenario.
• Continue developing the existing drug portfolio:  LianBio management said that simply maintaining the current portfolio is the least likely outcome of the strategic review.
• Continue forward by acquiring new assets, including rights outside of China.  While this is a possibility, it seems less likely to us than a wind down as Perceptive and management would be simply running things back again, this time WITHOUT a promising late-stage blockbuster drug like mavacamten.
• Perceptive decides to stuff one of its private investments into the LianBio shell:  we think this is unlikely due to the potential reputational hit on Perceptive.

We think Perceptive and management fatigue/frustration with the fundraising environment and market valuations of clinical stage companies likely played a large role in the decision to sell its mavacamten rights to BMS.  LianBio was still trading at a negative EV just prior to announcing the BMS transaction!  Deciding to run things back again WITHOUT a new lead asset virtually guarantees a stock that trades at a large discount to cash.  Even if management was able to find a new lead asset (as if they grow on trees), the company would continue to face the same difficult fund-raising and valuation environment. 

What are we playing for?

There is +38% upside if LianBio Shares trade up from the current $4.05 share price (~$434m mkt cap) to the value of its cash holdings ($5.60 per share, $600m of cash).  Proceeds from the sale of some/all of its remaining drug candidates could provide further upside.

Following the completion of the BMS transaction, LianBio will have roughly $600m of net cash which reflects approximately $250m by the end of 3Q-Sep23 plus the $350m from BMS.

The company’s cash burn rate is expected to drop to ~$50m per year.  Simplistically, we have taken the view that LianBio can at least offset the cash burn through the sale of its remaining drug pipeline.  As mentioned above, the TP-03 China rights could conceivably be worth $60-240m based on a 1-3x peak sales multiple.  For what its worth, one sell-side analyst has a revised $9.00 per share price target on LianBio following the BMS transaction.  We haven’t seen the report, but if correct, it implies ~120% upside from here.

Timing:  the company stated it expects to announce the results of its strategic review in first half 2024.  That said, management said they intend to move quickly so we think it is possible the company will provide an update sooner rather than later.

Catalyst

Company announces the results of its strategic review in 1H24