One of the most beaten-up areas of the market in recent months is the biotech space. There are dozens of companies in the industry trading as “net-nets” or below net cash. Of course, one has to be extra careful when looking at biotechs given their cash burn, and the nature of their businesses. I have been looking closely at some names that I think are particularly attractive. Here is one such name.
Pasithea Therapeutics Corp (KTTA) is a biotech company focused on treatments for psychiatric and neurological disorders. The company went public via IPO on September 17, 2021, when it sold 4.8m units for $5/per share. The IPO generated around $21m net of costs. Since then, the company has completed a reverse split, private placement, & some subscription agreements, raising cash totals to $50m as of the most recent quarter. It hasn’t even been a year since IPO, and already the share price has fallen ~79% to $1.07/per share, giving KTTA a market cap of $25m, or a 50% discount to cash net of all liabilities, including warrants.
(Tikr.com)
KTTA generates some revenue, but its operations are money-losing, and it doesn’t look like it will turn a profit any time soon:
(Tikr.com)
While KTTA is, of course, far from the only biotech company whose stock has been getting hammered recently, they are special in that there is some reason for optimism. A group of activists, representing ownership of 6% of KTTA have taken notice of the company’s position. On June 1st, the group wrote a letter to KTTA mentioning, among other things, the value destruction shareholders have endured, and the egregious compensation being given to executives/directors relative to respective shareholdings. The group believes the Board needs to be overhauled with directors who have relevant skills and experience, and requested the company adheres to the following three demands:
Take no action to amend the bylaws of the Company
Halt all major capital allocation decisions and all material contracts representing over 1% of the company’s assets
Refrain from initiating or modifying the employment contracts of any personnel or board member
If KTTA doesn’t cooperate, the group has threatened to take its case to the shareholders, who would seemingly have every reason to support them in a proxy fight.
This collective “group” that I speak of is made up of around 6 investment funds/other entities, Concord IP2 LTD, Elderhill Corporation, Leonite Capital LLC, Camac Partners LLC, Camac Capital LLC, and Camac Fund LLC. To make things simpler, Concord and Elderhill are both run by David Delany, and will just be considered Concord. Of course, the three Camac entities are also all under the same GP, in this case, Eric Shahinian. And lastly, Leonite is run by Avi Geller. These funds have been involved in various investments, and don’t just deal with public equities. Perhaps most interestingly is Camac Partners, who went activist in Cedar Realty Trust (CDR), appointing their own directors, and eventually getting the company sold.
At the time of the letter’s writing, shares were at $0.86 (currently $1.07), so KTTA has bounced off the lows, but it still trades at a massive discount to its $2.11 net cash position. The value/future of KTTA’s cash pile is of paramount importance. KTTA managed to burn almost $3m in cash this quarter, and based on the agreements they have with certain parties, compensation packages, as well as operating expenses, I expect them to burn another $6m at minimum in the next twelve months:
It’s hard to know how much revenue KTTA will generate given the nature of their business, but I can all but guarantee they will be in the red, net. Keep in mind, that my figure for operating costs is almost surely too conservative. Perhaps this is offset a bit by using op. costs, not op. loss, though there likely won’t be much of a difference
Assuming they don’t raise any more money, issue a significant amount of stock, or take on debt, that means net cash per share will be around $1.85-.90. Obviously, none of these assumptions are incredibly reasonable, but the resulting figures, I think, give us a good idea of what to expect moving forward.
The hope is that Camac and co. influence KTTA to make some significant changes/successfully force their hand. But unfortunately, there is no way of knowing when this might occur - at least not yet. Regardless, I believe KTTA is an interesting name to watch in the biotech space, and it will be fascinating to see how this situation unfolds. At current prices, I think there’s a good chance one will have a satisfactory investment.
Disclosure: None of this is investment advice, always do your own due diligence before investing