ARCA biopharma: The pressure can make it a liquidation game (NASDAQ: ABIO)

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ARCA biopharma, Inc. (NASDAQ:ABIO) is a clinical-stage biopharmaceutical company that has been destroying shareholder value for decades and recently failed in its COVID treatment program. Around this time, an activist Cable Car Capital began aggressively buying shares and has so far amassed 15.2% stake, while call advice to stop spending money on new developments, minimize operating expenses and explore strategic alternatives. A few days later, the council established a special committee to assess strategic options for maximizing shareholder value. ABIO is currently trading at $2.35/share versus $3.19/share net cash (after deducting all liabilities). The biggest risk is that the board decides to pursue development of its remaining drug and further erode shareholder value. However, the activist’s confidence and aggressive stock buying is a positive signal.

Balance sheet with the latest Q1 results:

ABIO report

Financial report Q1’22

The history of ABIO

ARCA biopharma is a classic example of how to destroy shareholder value by pouring funds into the same drug development program for decades with a slightly updated/modified story each time.

The company’s lead/flagship drug in development has been Gencaro – a beta-blocker for the treatment of heart failure. The first studies (2003) did not yield positive results, so the company refocused on a narrower subset of treating mild/moderate heart failure. The NDA was rejected by the FDA in 2009. ABIO then decided to slightly modify the targeted therapy for patients with atrial fibrillation and left ventricular ejection fraction. New studies took years when finally, in 2018, the company failed its phase 2b trial. The ABIO has done the rounds one last time and again refocused on a subset of patients (atrial fibrillation) who have genetically defined heart failure. New phase 2b study was released on March 19 and the company was successful in obtaining a SPA (special assessment protocol) from the FDA, which means that if certain specific endpoints are met during the phase 3 trial, the treatment would be more likely to be approved (although not guaranteed).

However, Gencaro, the phase 3 trial did not start in 2020, and once COVID-19 hit, the company decided to pursue the newly presented opportunity. ABIO announced a new COVID development program in May 2020 and the stock skyrocketed from $3.8/share to $20/share, but then quickly fell back as management began issuing highly dilutive stock, increasing the number of shares by 10 in one year. Gencaro’s atrial fibrillation trial has taken a back seat and the company has become very active in printing its PRs related to COVID treatment.

Almost 2 years later, on March 31, 2022, ABIO finally announcement that the drug in the COVID development program failed the phase 2b trial and showed no significant improvement from standard of care. No further studies for COVID treatment will be performed. In the announcement, ABIO also noted that “the company is currently evaluating options for the development of its assets, including partnership and other strategic options.”

Needless to say, for all these years the company had diluted shareholders into oblivion by constantly raising new equity for trials and doing 4 reverse splits to stay afloat. Adjusting for splits, the number of shares has increased by more than 4100x since 2009.

In 2021, R&D expenses were $15 million (mostly for covid drug development), while general and administrative expenses were $5.5 million. Management is paid quite well here with the CEO’s total compensation in 2020 at $1 million and the CFO’s at $0.6 million. Management only owns a negligible number of shares, so there is a major risk that they will choose to continue with business as usual instead of liquidating the company and returning the money to shareholders.

The activist

Very little information is available on the activist. The Funicular Fund (the entity that acquired shares) is managed by Cable Car Capital, which is described as “a generalist, global and value-oriented investment research supporting a concentrated and hedged portfolio”. His website is reportedly unavailable due to redesign work and will launch later in 2022. Cable Car Capital is led by Jacob Ma-Weaver (LinkedIn). The track record is limited, but SEC filings show the activist has been involved with Insignia Systems (in-store advertising solutions for brands/retailers) since 2017 and appears to have left the job three years later at a loss.

Cable Car Capital announced its first 13D with ABIO (6.49% stake) on March 28, just days before ABIO reported failed COVID treatment results. Apparently, Cabe Car Capital had also sold $2.5/share put options in March 2018 – 602,000 from February 22 to March 18. Bonuses received ranged from $0.19 to $0.57. Some of them were exercised, but the activist apparently benefited here in the end.

On April 4, Cable Car Capital announced a 13.5% stake in ABIO (incremental purchases at $1.65 – $2.26/share) and said the following:

The reporting persons believe that the issuer should immediately focus on preserving shareholder value. The Issuer must discontinue additional clinical trial projects, minimize operating expenses and refrain from any additional investment in its development program. The Reporting Persons believe that the continued discount between the Issuer’s market capitalization and its net cash signals market disapproval of management’s actions. The Issuer must take into account the interests of its shareholders and explore strategic alternatives.

On April 14, the activist reported a 15.06% stake (incremental purchases at $2.3/share) and a few days later, ABIO management announcement a special committee to review strategic options. The committee is made up of 3 directors, including the chairman, who has served on the board since 2013 (chairman since 2014).

The activist still buys shares and recently increased the stake to 15.2%, while in writing 14.5k put options ($2.5 strike price).

Conclusion

The recent failure of COVID treatment development, activist involvement, and the recently launched strategic review make this an interesting hold for the next few months to watch how things unfold.

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