The manager of RTW Biotech Opportunities (RTW ) believes buying out Acacia Research, ‘which has no business being invested in life sciences’, was a critical element of the deal to purchase Arix Bioscience (ARIX), despite all the criticism it has attracted. 

Speaking on its capital markets day on 14 November, RTW’s founder Rod Wong told Citywire that the deal (which will see the trust issue 1.4664 shares for each Arix share) is a ‘win-win’ for Arix investors, who will continue to hold a life sciences investment vehicle.

He added that the combination of assets, which will swell the dollar-denominated trust by two-thirds, provides additional firepower when biotech valuations are at historic lows.

Wong emphasised that Arix is an important part of the ecosystem in UK life sciences, but it was held back by its majority investor Acacia Research, which bought the company cut-price from Neil Woodford in June 2020.

As part of the agreement with Arix RTW will buy Acacia’s 25.5% stake in a £47.2m all-cash deal.

‘The unfortunate thing for Acacia is they’re a generalist firm and they inherited Arix,’ Wong said. ‘To be able to create the win-win we believe this deal is, it’s important that we solved that situation.

‘Acacia has no business being invested in life sciences; they weren’t interested in holding on or maximising value in Arix, which is an inconsequential position in their portfolio,’ said Wong (pictured below).

However, the decision to stump up significant cash to buy out Acacia has caused severe criticism, with some shareholders raising Section 172 of the Companies Act with the chair of Arix, Peregrine Moncreiffe. The section states that directors must ‘act fairly as between members of the company’.

One of Arix’s brokers Peel Hunt resigned in response to the deal, saying the terms were unfair to the fund’s smaller shareholders who will be left with illiquid and highly discounted shares in RTW.

The deal values Arix shares at 143p, a 46% premium to their closing price on 12 July, the day before it announced it was undertaking a strategic review, but a 21% discount to the September net asset value (NAV) of 180p per share.

Some shareholders have called for the liquidation of Arix’s portfolio, but Wong countered that it was always better to have an investor who wants in rather than someone who wants out, adding that liquidating Arix would have been a lengthy and difficult process, given a quarter of its assets are unlisted companies.

‘As specialist investors in this space, it’s important to understand there’s no secondary market for portfolios of private biotech securities, so any rapid liquidation would result in significant losses,’ he said. ‘The more realistic scenario is a prolonged period of time where we try to exit some of these private securities.’

Portfolio plans

If the deal goes through RTW will gain access to Arix’s remaining $60m (£49.2m) of cash which it can invest in depressed biotech shares, a £56m listed portfolio and £68m in unlisted assets.

Outlining the plans for Arix’s portfolio and cash, Wong said RTW separately has a stake in Arix’s largest position, unlisted company Artios Pharma, which is developing a new type of cancer treatment, but will assess the rest of the private and public portfolios in due course.

He said the team would continue to invest in private companies while looking to deploy some cash into royalty investments, which perform well in any interest rate environment and have been a major contributor to RTW’s performance year to date.

In RTW’s portfolio, Wong has recently added to Nasdaq-listed Sage Therapeutics, which is releasing the first-ever post-partum depression drug onto the market next month, but trades at close to cash, with the shares down 63% over the last six months. ‘It’s the sort of thing that would only happen in financial crises,’ he said. 

The Guernsey-domiciled fund announced a $10m share buyback programme earlier in the year, of which it has spent close to $2m.

‘We’ve done a lot over the last nine months to support the share price to NAV and will continue to build a foundation,’ said managing director Woody Stileman. ‘It’s one of many things culminating in the capital markets day today. One of the main reasons behind the Arix deal is to generate scale, better liquidity and lower costs, all of which should narrow the discount.’ 

RTW is suffering a 53% discount to the September NAV of 101.4p per share. Year to date its shares are down 40%, while its underlying assets are up 4.2%.