Hitting the jackpot

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. News that Merck & Co is to acquire portfolio company, VelosBio, for $2.75bn cash, giving ARIX >12x return on its investment, will help to smash these targets.

• 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.
• Acquisition of VelosBio: Major pharmaceutical company, Merck & Co (MRK), has announced the acquisition VelosBio for $2.75bn cash, to boost its position in oncology and provide it with another breakthrough technology in this field. The transaction, subject to approval under the Hart-Scott-Rodino Antitrust Improvements Act, is expected to close by the end of 2020.
• Return on investment: VelosBio was introduced to ARIX by its strategic partner, Takeda Ventures. ARIX co-led the company’s Series A funding round in 2018, committing $11m/£8.6m, and made a further investment of $4.0m/£3.2m in VelosVio’s Series B in July 2020. ARIX is expecting to receive $185m/£142m for its stake, representing a 12.3x return.
• Market reaction: Although the market responded favourably to this news, with the shares rising 55%, this equates to an increase in market capitalisation of only £74m compared with the £121m valuation uplift from the VelosBio consideration, and has expanded the discount to NAV from 31% to 34%. This suggests that the shares have much further to go.
• Investment summary: The principal reason that ARIX has been trading on a discount to its NAV has been the “lack of a track record”. Management tried to allay the market’s concern with its interim results when it highlighted the portfolio’s IRR of 20% since inception and set itself some ambitious targets for the next three years. The trade sale of VelosBio means that these targets should be easily met and the market should be giving far more credit to the company.