Premium: A SPAC deal leads to a special sit (Paywall)

Let me start this idea off with a disclaimer: it’s risky. If the idea doesn’t work, the downside is substantial. So please keep that in mind; sizing this properly is critical because the downside is so large (and, of course, nothing on this site is investing advice!).

That said, I think this is one of the better special situations I’ve ever come across. There are a ton of moving pieces here, but every moving piece suggests that a buyout offer is coming in the very near future. What price will that buyout be at? Tough to say... but I suspect it will be at a significant premium to today’s prices.

One last note: this is a little different than most of my premium posts. I still consider this a work in progress, and I don’t think there’s a ton of fundamental downside protection here. In addition, this is a pure event thesis. So take all of that for what it’s worth, but the situation and set up is so good that I had to share.

Ok, all that out the way, let’s turn to the idea: Buy Immunovant (IMVT) before Roivant makes a full takeover offer for them.

Some background might be helpful here. Immunovant went public through (what else) a SPAC merger in late 2019/early 2020. At the time, Roivant was the controlling shareholder and they remained a major shareholder post-SPAC merger. IMVT had one key drug, IMVT-1401, that had just begun phase 2 trials; the purpose of the SPAC merger was to get them enough cash to fund the trials.

Fast forward to March 2020; IMVT’s SPAC merger is done and the company announces positive results from their ongoing phase 2a studies. They followed this up with positive topline results from the trial in August 2020 with plans to start phase 3 in early 2021.

At this point, IMVT’s stock was a rocketship. By the end of 2020, the stock was consistently trading for ~$50/share versus the $10/share they had gone public at. But then disaster struck: in early Feb., IMVT paused their trial because some patients were experiencing high cholesterol. The stock cratered; going from the mid-$40s to ultimately the low teens (a bit below where it’s currently trading). This cratering makes sense: IMVT is a one drug company, so if their drug is worthless the stock is as well (they do have ~$4/share in net cash, so in a full liquidation there would be some recovery…. but it would be small and shrinking given the cash burn here).

Here’s where the story gets interesting. IMVT’s press release where they paused the trial noted they were doing so “out of an abundance of caution.” Critically, they noted they hadn’t seen the cholesterol issues in their other trials. Remember, IMVT’s stock fell from ~$45/share to ~$15/share on the news of the pause. If the pause was lifted / the concerns were proven unfounded, it’s reasonable to think IMVT’s market value would fall much closer to its prior price than the current one.

One person who might have seen value in IMVT’s new, lower price? Their controlling shareholder, Roivant. Roivant still owned ~57.5% of IMVT, having rolled their equity in the SPAC deal and having participated in IMVT’s equity raise at ~$33/share in September 2020. With IMVT shares languishing, Roivant filed a 13-D saying they were looking to take IMVT private. I’m going to quote the language below, as I think it’s interesting.

(a)-(j) Roivant intends to propose to the Issuer that Roivant and the Issuer evaluate a potential transaction pursuant to which Roivant or an affiliate would acquire all of the issued and outstanding shares of Common Stock of the Issuer not currently owned by Roivant. Roivant expects that any potential transaction would be at a per share price representing a premium to current trading levels, consistent with similar precedent transactions in the life sciences industry involving acquisitions of minority interests by majority shareholders, with the mix of cash or equity consideration to be mutually determined by Roivant and the Issuer. Roivant is evaluating a potential public listing that would take effect prior to the consummation of any transaction with the Issuer. As the Issuer’s controlling shareholder, Roivant has received nonpublic information about the Issuer and its lead product candidate. No assurances can be given that a proposal will be made to the Issuer, that any transaction with the Issuer will be consummated or that Roivant will complete a public listing.

IMVT’s shares were ~$13.50/share when they filed that 13-D; it’s tough to say what “a premium to current trading levels, consistent with similar precedent transactions” would represent, but I would guess it would fall anywhere from the high teens (on the low end) to the mid-$20s (on the high end).

If we stopped right there, IMVT would be interesting. But I think the next two data points are what make IMVT really edgy.

First, about two weeks after Roivant files the 13-D saying they are looking to take IMVT private, every person associated with the company is given off-cycle RSUs and stock options (or at least the look off-cycle to me). That includes the CEO, the CFO, the CSO, the CMO, the CTO, and multiple board members. Note that a big chunk of the management team’s gifts are stock options struck at $17/share.

Why does that matter? I think the board and management know a transaction is coming, and they are doing these gifts now to set themselves up for a windfall in a transaction. The $17 strike price of the management options is important; I doubt the team is gifting themselves $17 options without line of site to a bid at a big premium to that level. As I write this, IMVT is trading for ~$15.65, so even a small premium to the stock option price would work out well for shareholders today!

Second, on Monday, Roivant announced a deal to merge into a SPAC (MAAC); you can check out their merger slides here and their call transcript here. I’d encourage you to read the whole thing, but I’m going to highlight one part:

Step back and think about this. Roivant is going through a SPAC merger. Literally the second drug / product they talk about is Immunovant, and by my count ~20% of the deck is devoted to Immunovant. They also note multiple times the they “are in possession of nonpublic information” about IMVT.

Would Roivant be doing any of that if IMVT was about to fail? My bet is absolutely not. If IMVT shut down their trail tomorrow, it would be an enormous blow for the SPAC. Management would have burned all of their credibility in less than 48 hours; I think they’d have an incredibly difficult time getting the deal through.

My guess is Roivant has seen the data and is super confident IMVT will be fine; if they had seen the data and were worried about it, they would have disclosed that before announcing the SPAC deal so that investors (and their SPAC partners) could value Roivant on a post-IMVT basis.

In fact, I think announcing a SPAC deal now has an interesting twist: Roivant could use the SPAC funds to quickly buyout the minorities in IMVT. Roivant currently (i.e. before the SPAC deal) has ~$2.1B in cash on their balance sheet; they absolutely did not need to go public through a SPAC (or at all!). Which raises the question: why did Roivant go public and raise cash now? The biotech index has been a disaster this year, and the SPAC market is currently ice cold. Why chose to do a deal now, when one asset (IMVT) has hair on it and the backdrop is just awful?

A pessimist might say they are rushing to get a deal done before IMVT fails and their valuation took another leg down. I disagree; Roivant is rolling all of their equity into this SPAC deal, have agreed to a long term lock on their shares (50% of shares locked for 3 years), and most of the PIPE is coming from existing Roivant shareholders. That’s not the look of a company that’s desperate to cash out.

Instead, I think Roivant sees a wave of potential on the horizon, and striking a deal now gives them cash to replenish their coffers when they execute an IMVT deal and still be aggressive with M&A.

Maybe the timing is a coincidence. Maybe the SPAC deal is done with other objectives in mind. Who knows? What I do know is that every indicator, from the executive’s off cycle equity grant options grants to Roivant’s SPAC deal and the language around it to Roviant’s 13-D, suggest that IMVT’s issues are solvable in the near term. And, once they are solved, I suspect the stock will be materially higher. The question is if Roivant will be able to lob in a bid and take IMVT out before the issues are fixed; either way, I think IMVT shares are headed materially higher.

One bonus note: the core to this thesis is simply “every indicator, from exec’s options grants to Roivant’s SPAC deal, suggest that IMVT’s issues are solvable.” One more point in that category: IMVT noted in their call discussing the cholesteral issue that “Harbour BioMed is the license holder of 1401 in Greater China, and they have ongoing trials in myasthenia gravis and ITP. Harbour BioMed has informed Immunovant that, based on a preliminary review of blinded data in their ongoing studies, similar increases in cholesterol have not been observed,” which I think lends some extra comfort here.