GRPH pulls off a miracle
I've never seen a reverse merger I liked, but at first glance Graphite Bio's merger with Lenz looks like a winner
UPDATED Nov 16, 2023: See additional note at end.
In February Graphite Bio (GRPH) discontinued its development of nula-cel and initiated a strategic alternatives search to apply its remaining cash hoard, laying off 91% of employees over the next 6 months. In August it appointed Kim Drapkin to run the company and the search, with a bonus for a strategic transaction, and a kicker if signed before November 18th. As of September 30th, GRPH held $235M in cash, and in November Ms. Draper closed an agreement to pay off their existing $88M silicon valley lease (nearly all of their liabilities) for $36M.
And today she got the strategic transaction in, just under the “kicker” wire. This morning GRPH announced a reverse merger with LENZ Therapeutics, where Graphite Bio shareholders would own 35% of the resulting company (before a PIPE investment), and receive a roughly $1 dividend at closing. The market reaction was “mixed”, GRPH closed at $2.29 yesterday, hit a low of $2.01 today and closed at $2.25.
My reaction was mixed as well. I hate reverse mergers so I started my day in a foul mood, but after reading the release, the agreement, the presentation, and doing a little research on the LENZ product, I have to congratulate Ms. Draper (and Chief Strategy Officer Chris Garrett). I think they found something very interesting that looks to be the first value accretive reverse mergers I’ve been involved with.
So why? Do you hate needing reading glasses as much as I? LENZ Therapeutics is developing once a day eye drops to ease near-sightedness enough to eliminate the need for reading or computer glasses. Trials have already demonstrated it has great effectiveness. Even better, its based on a drug (aceclidine) that’s already been approved for use in Europe for Glaucoma for nearly 50 years, so odds are very high it’s safe. Lastly they are already in Phase III trials, and targeting apprvoval for sale by next summer.
So what are the risks here? Besides not getting approval (which seems unlikely), they aren’t the first eye-drops to target age related near-sightedness. The current market leader is Vuity, which has been out for about a year. Here is an 50,000 foot level description of how these drugs work from me, a know nothing investor. The reason we develop near-sightedness as we age is that our lens grow too stiff for the lens’s ciliary muscles to reshape it to focus on nearby objects. The way these drugs get the eye to focus on closer things again is by temporarily shrinking the pupil. There are two muscles they stimulate, the iris muscles for the pupil itself, and the ciliary muscles. LENZ claims their compounds (LNZ100, LNZ101) strongly stimulate the iris muscle while stimulating the ciliary muscle far less than Vuity does. Why is this important? They claim compressing the lens with the ciliary muscle reduces focus sharpness (though in people under the age of 40 it can be beneficial since their lens is still flexible).
What this means is that if LENZ meets its claims, it’s going to be a better product for most of the market. It should improve eyesight significantly better than Vuity for people over 40. And each dose also lasts significantly longer than Vuity, about 10 hours vs. 6 hours. Lastly, stimulating the ciliary muscle creates the side-effect of headaches for about 15% of Vuity users. They usually go away over time, but LENZ should not have them at all.
Vuity has a retail price of about $75 a month. The potential market size is enormous, over 100M patients in the US alone. Running a SWAG forecast of 1% to 5% penetration at similar or better pricing generated annual net profits of anywhere from 50 cents to over $10 per share (at estimated post-closing share count including a PIPE financing).
So what are we paying for the hypothetical value of LENZ succeeding? At current prices its roughly $1.25 after the special dividend. I haven’t found LENZ’s financials yet so I don’t know how much net cash they are bringing to the party but between GRPH and a PIPE financing I’m estimating post merger LENZ will have close to $1 per share in cash, so that upside is on sale very cheaply at the moment. And the stub might actually cost less, as the merger documents say GRPH can pay a larger dividend if their cash balance at closing exceeds the agreement requirement. My calculation is it could potentially be as high as $1.20/share, though it can also be less than $1/share if they undershoot the cash balance requirement.
So essentially each share of LENZ post closing at current price has a very high return potential if LENZ succeeds. Obviously thats far from given, as besides Vuity, there are other potential solutions in trials that could be out on the market soon too. But I do like the odds here, a lot.
Disclosure: This isn’t investment advice. Do your own research, and double check everything especially as I am writing this up very quickly after reading everything for the first time. I may have gotten important information wrong (please tell me in the comments if I do). Make your own decisions, I may just be wrong in general. Lastly, I own a lot of GRPH already. I may buy more or sell it all in the future if I find new information or mistakes I’ve made. I try to update my posts when I do, but I can’t promise to always do so so don’t rely on it.
Update Nov 16, 2023: So one question I’ve been asked is what are Vuity sales? This is what I’ve found so far. AbbVie reported revenues of $207M in "other eye care" for Q3, and $622M for 9 months of 2023. But that's not just Vuity, it includes Xen, Durysta, Ozurdex, and Refresh/Optive. Haven't been able to break them apart, but revenues for the entire segment are up about 14% over last years Q3.
But they also reported taking a big write-down on Vuity in September 2022, "the company made a strategic decision to reduce ongoing sales and marketing investment related to Vuity... Based on the revised cash flows, the company recorded a pre-tax impairment charge of $770 million." So it looks like they had huge expectations and it fell short. How short is unknown.
So what is holding Vuity back in the market, and can LENZ address those issues? The first negative review I've found is an article from the NY Times. She said Vuity stopped working too soon (can only be applied once per day), stung on application and left her eyes red all day (and made bags under her eyes baggier). She felt benefits weren't worth the $3/day expense. LENZ should work nearly twice as long, so it may address her main complaint. I don’t know whether Aceclidine will sting or turn eyes red, LENZ claims it’s "well tolerated'. The Glaucoma treatments that use it in Europe (Glaunorm) report similar range of side-effects to Vuity but they use 10 times higher Aceclidine concentrations than LENZ. Also Aceclidine’s listed side effects are excessive salivation and slow heart rates, but only in “excessive dosage levels” according to Wikipedia.
To get an idea why Vuity isn't a big hit I acquired a prescription and tried it for the first time today. It cost $72 at my pharmacy for what I think is a months supply. I put the drops in at noon, and they worked fairly quickly. I could read my computer screens and phone screen without glasses or squinting. No headache or red eyes, but I could feel a little tension in my eyes that always reminded me that I had taken the drops. Then about 4 PM I noticed the effect was fading.
So overall I like the effect but can see why customers sour on it because of how quickly it fades. Its a lot to pay for only a half work day of effect. If LENZ truly doubles the effect time as it claims it should be a significant competitive benefit. I'm also wondering if the eye tension that I felt would not be as noticable given LENZs lower impact on the Cillial muscle.
Hey - I wrote this up: https://amadeusvalue.substack.com/p/aclaris-therapeutics-acrs
Would love to hear your thoughts.
Best,
Amadeus