Roivant Sciences: Risk-Transforming Deal Met With Crickets

Yesterday was a hectic day with many deals being announced pre-market. It's almost as if something has changed in the M&A markets. One pre-market deal I want to highlight as potentially very interesting is the Roche Holding AG (OTCQX:RHHBY) deal to acquire Telavant Holdings for $7.1B upfront and a near-term milestone payment of $150M. Telavant was formed by Roivant Sciences Ltd. (NASDAQ:ROIV) (75% stake) and Pfizer (PFE, 25% stake) to develop and commercialize RVT-3101 in the U.S. and Japan.

Roivant Sciences was up as much as 8% in the pre-market when I wrote this article yesterday. That put it at a market cap of $8.25 billion. At +8% and even +15%, I figured there was still room left for Roivant to appreciate by up to 10%. That turned out completely misguided and bafflingly the stock sold off. A ~$7 billion market cap biotech company with a number of assets announces it will flip an asset it acquired roughly a year prior for $45 million for $5.325 billion and as a result, it sells off...

There are three explanations that make partial sense to me. Buysidebio shared a broker's view on the matter:

Apparently HF's are using the volume as a liquidity event and getting out of the name, perhaps as a de-risking also means the forward volatility or forward beta goes down.

Bloomberg reported on rumors of a $7 billion+ deal for this asset and the market may have secretly expected even more. The share price action had been strong lately.

Finally, there is also a rumor that Roivant may want to acquire Immunovant, Inc. (IMVT) in its entirety. This windfall makes that a more realistic option. However, Immunovant also traded down yesterday, which is incongruent with this theory.

The sell-off still baffles me when I review the fundamentals (which I'll get to in a minute). I expect the shares to recover some ground today and into the upcoming earnings call. I think it would be helpful if management would clarify its ideas of what to do with the cash. I was incredibly wrong yesterday, so my confidence about the near-term price direction isn't very high.

Roivant already held $1.43 billion in cash before this deal. Net cash is ~$1 billion. After the deal, the cash hoard should add up to around $6.73 billion or $6.2 billion in net cash. This would be less if Roivant had to pay taxes on the deal. On the deal call yesterday, the company indicated the cash received is expected to be tax-exempt.

Meanwhile, Roivant is losing only 1 phase 3 and one phase 2 program. Yesterday's price action seems to imply this was considered its most valuable asset. Yet, VTAMA has been approved and is generating revenue. The company still has one commercialized asset, 2 phase 3 assets, 5/6 phase 2 assets, and 2 phase 1 assets:

For some of these assets, Roivant doesn't own 100% of the equity interests, like is the case with the Telavant assets:

A few of these companies even have publicly traded stock. Immunovant trades at a market cap of $4.99 billion, which implies Roivant's stake is worth $2.54 billion if I use the fully diluted value. If I use the current value, it is worth $2.85 billion.

Arbutus (ABUS) trades at a market cap of $291 million, implying the Roivant stake is worth $72 million.

The cash and publicly traded equity stakes put Roivant well ahead of its market cap.

The final thing I want to call out is Roivant's royalties on RVT-1301 and other products.

These assets are owned separately from the equity interests to my understanding, and the RVT-1301 royalty will still be owned after today's deal. It should become more valuable as a well-capitalized big pharma takes possession of the underlying asset.

The risk with Roivant used to be that its spending outpaces its sales and royalty income by a wide margin. The company just reported a $276 million quarterly loss, and that's not exceptional.

The incoming cash hoard removes any pressure to get something done or slash costs. The company holds its cash in a money market fund. A quick look at current rates shows the new cash hoard should yield around $363 million annually. The company got a lot of extra quarters to burn and get a few other assets over the finish line but it also effectively decreased its effective burn rate by 30%+.

Conclusion

In conclusion, the selloff following the Telavant Holdings deal announcement has left many of us scratching our heads. While several explanations have been put forth, it remains a perplexing turn of events. Roivant's significant cash position post-deal greatly de-risks the company. You could also argue management deserves some credit for creating value here. Moreover, the company's remaining pipeline of biotech assets and its continued ownership of royalties on products like RVT-1301 provide further reasons for optimism.

As we move forward, it would be helpful for Roivant's management to provide clarity on their strategic plans for this newfound cash influx. With the company's strengthened financial position and decreased burn rate, they have (and deserve) time to make well-considered decisions. The long-term prospects for Roivant Sciences appear promising (lots of cash + optionality). One thing is certain: the biotech landscape is as enigmatic as ever.

Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.

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