Chris DeMuth's State of the Markets December 2023

Episode Summary

Executive Summary: Andrew Walker and Chris DeMuth review Roivant’s portfolio and potential IP litigation, debate the antitrust case against JetBlue’s acquisition of Spirit, and consider prospects for merger activity in 2024. They also discuss remutualizations, biotech deals using CVRs, and governance reforms aimed at curbing value-destructive capital allocation and conflicts between managers and shareholders.

Main Topics: Roivant, its subsidiaries, and potential litigation: DeMuth sees Roivant as inexpensive relative to its cash and assets, with Immunovant a possible sale candidate and Arbutus’ litigation against Pfizer and Moderna potentially valuable. He notes Roivant’s uneven capital allocation and share issuance history, which complicates the investment case. JetBlue–Spirit antitrust case: The hosts believe the government’s case did not adequately demonstrate consumer harm, while acknowledging that airline consolidation presents more serious antitrust questions than some other recent deals. They discuss the possible consequences of a ruling that treats any nominal price increase as sufficient grounds to block a merger. Potential 2024 deal activity in financials and biotech: DeMuth expects deal opportunities to improve if markets stabilize. He highlights remutualizing small, publicly traded thrifts trading below tangible book value and activist-driven biotech acquisitions as areas with potentially attractive transaction economics. Biotech CVRs and conflicts of interest: The speakers describe contingent value rights as useful when deal value depends on unresolved events, but warn that targets may be managed by the same buyer responsible for paying the CVR. They recommend scrutinizing deal-process disclosures to understand who proposed a CVR and how credible its payout prospects may be. Capital allocation and shareholder-oriented governance: They question acquisitions justified as growth when a company’s own shares trade at a lower valuation, and propose mechanisms such as buyback alternatives in merger votes and periodic shareholder choices to return capital. Closed-end funds trading below asset value are also discussed as candidates for liquidation.

Key Arguments: Arbutus’ patent litigation could have strategic value beyond its standalone scale: a royalty or settlement may matter materially to Arbutus while representing a comparatively small cost to Pfizer or Moderna, and could affect the larger companies’ intellectual-property positions against one another. Roivant’s record is mixed: successful drug development and asset transactions coexist with repeated equity issuance and investment decisions that shareholders may find difficult to reconcile. The hosts see the stock as potentially cheap but recognize these governance and capital-allocation concerns. DeMuth argues that the government’s Spirit case was weak on evidence of harm. He believes a clean government victory could broaden antitrust intervention by making nominal post-merger price increases, without demonstrated material harm, a basis to block transactions. The airline market’s ability to respond quickly matters to the merger analysis: other carriers indicated they could move onto routes Spirit leaves, which the speakers viewed as evidence of competitive adjustment and against the government’s theory. Rapidly changing interest rates widen the gap between buyer and seller expectations because financing costs can materially alter transaction economics; a period of greater stability could support more deals. Small financial institutions trading below tangible book value may be candidates for remutualization, while cash-rich biotech companies trading below cash may attract activism, acquisitions, or CVR structures that return some value to shareholders. CVR analysis should include the background section of transaction documents, not just fairness opinions: the negotiating history can reveal whether the payout was supported by competing bidders or was an optimistic claim made by the party that must later deliver it. Management should explain why buying another company creates more per-share value than repurchasing its own undervalued shares; without a convincing comparison, acquisition-led growth may serve managerial interests rather than shareholders.

Data Points: Arbutus market capitalization: Approximately $400 million - DeMuth contrasted Arbutus’ scale with Pfizer and Moderna while discussing the possible value of its litigation. Pfizer market capitalization: Approximately $162 billion - Approximate size cited during the discussion of the relative scale of the parties to the IP litigation. Moderna market capitalization: Approximately $38 billion - Approximate size cited during the discussion of the relative scale of the parties to the IP litigation. Telavant transaction value: $7.1 billion - The hosts cited Roivant’s sale of Telavant as an example of a substantial asset transaction, while noting Roivant might not receive the entire amount. Roivant secondary offering price: $5 per share - A November 2022 secondary involving Roivant and SoftBank was cited as an example of share sales that investors found puzzling given the company’s cash and subsidiary value. Roivant secondary offering price: $7.50 per share - The host cited an offering early in 2023 as another example of Roivant issuing shares at a price he considered difficult to reconcile with the company’s assets. Potential Bristol Myers Squibb CVR payments: Approximately $6 billion - The host argued that delayed approval of a drug associated with the Wibb CVR may have affected whether the contingent payment was triggered; this was presented as his interpretation, with litigation potentially determining the issue. Illustrative airline fare increase: 5% - DeMuth used a hypothetical fare increase to illustrate the risk of antitrust policy treating a nominal price rise as sufficient reason to prohibit a transaction.

Pivotal Quotes: "I don't believe the government proved their case. I don't believe that they proved that there was harm." — Chris DeMuth: His assessment of the evidentiary basis for the government’s challenge to the JetBlue–Spirit merger. "The easiest math is to remutualize them." — Chris DeMuth: His argument that small, publicly traded financial institutions trading at discounts to tangible book value could be taken private and returned to mutual ownership. "Every shareholder of a buyer should get to say, Yes, I agree that strategically that deal is so wildly valuable that it's better than paying me a premium for my stock that I already own." — Chris DeMuth: His proposed governance reform requiring a direct comparison between an acquisition and returning capital through a buyback.

Implications: The discussion highlights opportunities in corporate actions and overlooked assets, but stresses that deal outcomes depend on evidence, stable financing conditions, and governance. Investors should scrutinize CVR incentives and test acquisitions against buybacks; the Spirit ruling could influence future merger enforcement.