Arix Bioscience

Artios attracts Merck KGaA in deal up to $7bn

07 Dec 2020 / Corporate research

Arix Bioscience (ARIX) is a listed global venture capital (VC) company that presents an opportunity for institutional and retail investors to participate in the high risk-return profile of early-stage biotech investing. ARIX minimises risk through a combination of an expert investment team and portfolio diversification. Along with its 2020 interim results, management provided the market with some aspirational targets for the next three years, which would see the NAV double to ca.£500m. Last month, Merck & Co declared the acquisition VelosBio for $2.75bn, now Merck KGaA has announced a collaboration with Artios, potentially worth up to $7bn.

  • Strategy: ARIX sources investments from an established network and a strong scientific reputation. The portfolio is diversified by therapeutic area, treatment modality, stage of discovery/development and geography to balance the risk-reward profile. Value is realised when ARIX successfully exits its investments.
  • Artios Pharma: Merck KGaA has announced a strategic collaboration with Artios to gain access to its novel DNA Damage Response (DDR) technology in oncology. Merck will pay $30m in upfront and short-term milestones in return for rights for the exclusive development of drugs for up to eight targets. If Merck exercises this option, in addition to double-digit option fees, Artios would be eligible for milestones of up to $860m per target, giving a potential headline deal size of $7bn.
  • ARIX holds 14.6%: ARIX is the biggest shareholder in Artios, with 14.6% of the outstanding share capital (12.7% on a fully diluted basis). Since inception, ARIX has invested in every tranche of Artios’s two funding rounds, making a total investment of £13.8m. The holding value of this investment at 30 June 2020 was £19.1m, representing 9.4% of the gross portfolio value.
  • Market reaction: As expected, the market responded favourably to this news, with the shares rising 18.5p, or 12%, adding £25m to the market capitalisation, reflecting the potential NAV uplift, additional credibility in the ARIX story, and a narrowing of the NAV discount. In the event that just one of the collaboration targets is successful, Merck will have to make a decision about whether it will be cheaper in the long term to own the whole of Artios.
  • Investment summary: Two major deals in quick succession have demonstrated that ARIX has invested in interesting technologies that are attracting keen interest from the pharmaceutical majors. Having set itself some ambitious targets for the next three years, these deals suggest that the targets should be met comfortably, so the market should be narrowing the discount to NAV.
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