On a Potential Sale of ESSA Pharma ($EPIX)

Broken biotech at a ~35% discount to net cash. ESSA is engaged in a strategic review and has no ongoing operations. Activist involvement from Tang Capital points to a sale in the near future

Jan 30, 2025

Situation Overview

ESSA Pharma ("ESSA", "$EPIX", or "the Company") is a broken biotech. Following a failed Phase 2 study in October 2024, ESSA announced a review of strategic alternatives and, importantly, terminated all clinical trials and preclinical development programs.

The Company subsequently engaged in a reduction-in-force ("RIF") in November 2024 to preserve cash. Details around the cost/number of employees impacted were not disclosed, but I assume the RIF covered the majority of the ~50 employee workforce (only ~35 employees by mid-December 2024 per the FY24 10-K, multiple existing employees indicating they will be open to work on LinkedIn by the end of January 2025, etc.).

It seems pretty clear to me from the above that ESSA essentially has no ongoing operations today.

Despite this, a clean balance sheet with minimal cash burn, a formal strategic review underway, and activist involvement (which we'll get into), the market is valuing ESSA well below liquidation value (>$125m in cash and marketable securities and only ~$4m in total liabilities vs. a market cap of ~$80m).

Theoretically (and far too simplistically), if you had ~$80m, you could buy all of the Company's outstanding shares and immediately pocket ~$120m in cash after paying off all liabilities (~50% upside).

A more realistic look at my calculations of the Company's enterprise value and discount to net cash are below:

Notes:

Cash, marketable securities, and total liabilities as of Q4 FY24 (QE 9/30/24)
PF severance costs estimated based on 50 employees and RIF costs/employee for similar biotech cash shells, including Aerovate, Ikena, AlloVir, Athira, and HilleVax. Hard to know exactly, given variations in contracts, level of individuals impacted (e.g. if execs are included), etc., so feel free to use your own number
Assumes Q1 FY25E cash burn in line with Q4 FY24. Likely conservative given ~$4.2m in R&D costs in Q4 FY24 that likely fell away/declined materially following October 2024 termination of all clinical trials and preclinical development programs
Arbitrarily assumes three quarters of ongoing G&A costs from Q2 FY25E at $5m/quarter, in line with similar biotech cash shells (e.g. Eliem Therapeutics). Likely conservative given just ~$3.5m in ESSA G&A costs in Q4 FY24)

Based on the above, ESSA trades at a ~15% discount to its pro-forma net cash balance (assuming a completion of the strategic review process by 9/30/26, i.e. 11 months after the process commenced).

Analysis

Apart from having no ongoing operations and likely very few employees left, there are a couple of additional reasons I think that it's likely ESSA is likely to be sold in the coming year.

First and foremost is the involvement of experienced biotech activist Tang Capital Management ("Tang"), who accumulated a ~9.7% interest in the Company following the strategic review announcement. Tang filed a 13D as part of this accumulation, which usually signifies intent to influence control of a company through a sale, reverse merger, etc.

At this point, Tang's playbook for companies where it files a 13D are relatively well known - Tang often attempts to acquire the underlying company (through Concentra Biosciences ("Concentra"), where Tang is the controlling shareholder) at some discount to net cash and, if relevant, offer a contingent value right ("CVR") to capture additional value from any incremental asset disposals, IP/R&D, etc.

I've included just a few examples of Tang's offers below over the past couple of years (I'm sure I'm missing some):

Jounce Therapeutics (offer by Tang in March 2023, ultimately acquired by Tang in May 2023)
Rain Oncology (offer by Tang in October 2023, ultimately announced acquisition by Pathos AI in December 2023)
Theseus Pharmaceuticals (offer by Tang in December 2023, ultimately acquired by Tang in February 2024)
Reneo Pharmaceuticals (offer by Tang in December 2023, ultimately announced a reverse merger with OnKure Therapeutics in May 2024)
Singular Genomics (offer by Tang in September 2024, ultimately announced acquisition by Deerfield Management in December 2024)
Kezar Life Sciences (offer by Tang in October 2024)

The range of outcomes (for both Tang and other shareholders) has varied, but the pattern is clear. It seems likely that Tang will make a similar sort of bid for ESSA, particularly given the Company's clean balance sheet, large discount to net cash, and lack of remaining operations.

Importantly, numerous other experienced biotech investors own material stakes in ESSA, including BVF Partners (~26.3%), Soleus Capital Management (~9.7%), and BML Investment Partners (~9.4%). In my view, the involvement of such shareholders makes it incrementally more likely that there will be a fair/value-accretive outcome here (whether that be from a Tang acquisition offer or otherwise).

Another reason a transaction appears likely is incentives - ESSA's C-suite executives have a severance package that provides cash severance equal to 1.5x of each officer’s base salary (and in the case of the CEO, target bonus plus base salary) in the event of termination from a change-in-control transaction.

There are a couple things to watch/keep in mind with any investment in ESSA:

The Company is incorporated in Canada (British Columbia). I'm not sure how much more difficult a cross-border sale/reverse merger transaction is (if at all) and how that would impact timing
Per the FY24 10-K, ESSA is classified as a passive foreign investment company (“PFIC”). I can't speak to this in detail, but my understanding is that the PFIC classification adds additional tax considerations if you're a U.S. investor buying ESSA in a taxable account. Something to potentially watch out for/look into