Amgen/BioVex another positive catalyst for Harris & Harris

by Stephen_Waite on January 26, 2011

High­lights:

  • The recently announced Amgen/BioVex deal is a pos­i­tive devel­op­ment for Har­ris & Har­ris Group as it rep­re­sents the first exit for the pub­licly traded nan­otech ven­ture cap­i­tal firm in over five years.
  • We expect to see fur­ther such exits from the Har­ris and Har­ris Group port­fo­lio com­pa­nies announced over the next 12–18 months.
  • We believe renewed exists from the Har­ris and Har­ris Group port­fo­lio jus­tify a more tra­di­tional 2x to NAV val­u­a­tion.   Our base case Intrin­sic Value esti­mate for TINY con­tin­ues to be $12.

In our research report on Har­ris & Har­ris Group (H&H), pub­lished Jan­u­ary 10, 2011, we noted that the envi­ron­ment was becom­ing more favor­able for exits and that renewed liq­uid­ity would likely drive H&H’s NAV and val­u­a­tion higher in the months ahead. On Mon­day of this week, H&H port­fo­lio com­pany BioVex Group announced they had entered into a defin­i­tive acqui­si­tion agree­ment under which phar­ma­ceu­ti­cal giant Amgen (AMGN) agreed to acquire the pri­vately held Woburn, MA-based company.

BioVex is one of two late stage invest­ments cur­rently in the H&H port­fo­lio, the other being Metabolon, which we view as another promis­ing health­care com­pany. They are devel­op­ing a novel oncolytic vac­cine known as OncoVEXGM-CSF, which is cur­rently in Phase 3 clin­i­cal devel­op­ment. BioVex’s oncolytic vac­cine is viewed as rep­re­sent­ing a new approach to treat­ing melanoma and head and neck cancer.

A Strong Endorsement

We see Amgen’s acqui­si­tion of BioVex as a strong endorse­ment of BioVex’s nano-enabled drug tech­nol­ogy plat­form. Under terms of the agree­ment, Amgen will pay up to $1 bil­lion: $425 mil­lion in cash at clos­ing and up to $575 mil­lion in addi­tional pay­ments upon the achieve­ment of cer­tain reg­u­la­tory and sales mile­stones. The trans­ac­tion has been approved by the boards of direc­tors of each com­pany. It is sub­ject to cus­tom­ary clos­ing con­di­tions, includ­ing reg­u­la­tory approvals, and is expected to close in the first quar­ter of 2011. Fol­low­ing the com­ple­tion of the trans­ac­tion, BioVex Group will become a wholly owned sub­sidiary of Amgen.

H&H made its ini­tial invest­ment in BioVex in Sep­tem­ber 2007. As of Sep­tem­ber 30, 2009, the com­pany owned 2.8 mil­lion shares of Series E Con­vert­ible Pre­ferred Stock, nearly 7 mil­lion shares of Series G Con­vert­ible Pre­ferred Stock and 285,427 war­rants for the Series G Con­vert­ible Pre­ferred. H&H was car­ry­ing the total invest­ment in BioVex at $2.8 mm as of Sep­tem­ber 30, 2009, just over $1 mil­lion below their cost basis of just under $4 million.

In accor­dance with past prac­tices, H&H does not plan to pub­lish how the pro­ceeds will impact NAV and future val­u­a­tion. The com­pany will likely employ a steep dis­count rate to value cer­tain mile­stone pay­ments until such time that it receives the cash. That said, with the upfront pay­ment and some of the early mile­stones, we see the BioVex invest­ment as pro­vid­ing a high qual­ity return for H&H.

Exits Sup­port Higher Valuation

Impor­tantly, this is the first exit for H&H in more than five years and a wel­come sign for the com­pany whose spirit is cap­tured in founder Char­lie Har­ris’ motto, “Sur­vive to thrive.”  H&H’s last exit was back in Novem­ber 2005. Dur­ing that time, the com­pany sold its shares in Neu­roMetrix (NURO) fol­low­ing a suc­cess­ful IPO in July 2005. H&H net­ted $30.2 mil­lion on a total invest­ment of $4.4 million.

The BioVex/Amgen deal is con­sis­tent with the out­look for H&H that we pub­lished ear­lier this month.  We view the BioVex exit as a pos­i­tive cat­a­lyst for H&H and expect to see fur­ther exits from the port­fo­lio in the next 12–18 months.  The next likely oppor­tu­nity for an exit will be with NeoPho­ton­ics, which is cur­rently doing a road show for an IPO that has fil­ing range price of $9-$11. Our Intrin­sic Value (IV) of NeoPho­ton­ics is in the $13-$14 range and we would be sur­prised to see H&H sell­ing shares below this esti­mate. That said, the out­look for NeoPho­ton­ics is favor­able and we believe H&H will be oppor­tunis­tic in cap­i­tal­iz­ing on their invest­ment in the company.

In sum, we believe solid oper­at­ing per­for­mance across the H&H port­fo­lio com­pa­nies, cou­pled with an envi­ron­ment of heighted M&A and IPO activ­ity, jus­ti­fies a more tra­di­tional 2x mul­ti­ple to NAV for H&H stock val­u­a­tion.   Our base case IV esti­mate for TINY con­tin­ues to be $12.

[Dis­clo­sures: Har­ris & Har­ris is a cor­po­rate research client of Research 2.0.  We received com­pen­sa­tion in exchange for pro­vid­ing ongo­ing inde­pen­dent research cov­er­age.  We main­tain our own inde­pen­dent research process, full edi­to­r­ial con­trol of all pub­lished con­tent and apply the same stan­dards to Har­ris & Har­ris as we do to all com­pa­nies we fol­low. Research 2.0 employ­ees are gov­erned by fair deal­ing and “client first” rules that are sim­i­lar to com­pli­ance rules at broker/dealers and banks.  For addi­tional infor­ma­tion about our spon­sored research pro­gram, please visit our spon­sored cov­er­age page on the web­site. For addi­tional infor­ma­tion about Research 2.0 dis­claimers, dis­clo­sures and employee poli­cies please visit our legal page.]

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