I drafted this before some recent events in both companies but think its even more relevant today:
Denali & Bioasis, why not?
Denali has established itself as a BBB leader and has a large market cap that reflects analyst and investor confidence. Importantly Denali has a deep bench at the board, and at the scientific and management levels, with plenty to gain as they advance their strategy to establish their offering as the go-to BBB transport solution. The medical need and the market potential are substantial, some of which is priced into DNLI. Presumably the Denali team and investor base also have much to lose if they are not able to sustain their best-in-class BBB positioning.
Bioasis is pursuing its own path to becoming the best-in-class BBB solution and is slowly but steadily building its case in the science community and in the financial press. The Bioasis method of BBB transport is reported to have distinct advantages over Denali centred around a greater payload delivery of medicines to the brain while avoiding serious side effects typical in other competing BBB transport solutions.
The argument here is that Denali’s dominant BBB positioning is at risk if Bioasis (or any other contender) is able to demonstrate a superior BBB transport solution. Denali’s current market value of $7B reflects investor optimism that its BBB solution will become the marketplace leader once it completes the approval and commercialization process. Bioasis is bringing peer-reviewed facts that indicate it has what appears to be a superior BBB transport solution, and by a significant margin. For Denali this would be a threat that could undermine its scientific value and significantly erode its financial prospects. Ignoring a viable threat would be negligent and financially irresponsible.
Up until recently the threat from Bioasis may have seemed minimal as Bioasis had very little substance in the market (scientific or financial) and had recurring internal issues that held it back. Of late Bioasis seems to be executing on a plan to ramp up awareness of its superior BBB IP and to match the scientific disclosures (peer reviews) with investor news (BNN…) and with added alliances (Chiesa, Aposense…).
If the presumed Bioasis strategy succeeds it will hit a long-sought tipping point that could rapidly accelerate growth in market cap and pharma partnerships. Success on both those fronts would be a blow to Denali.
If you are $7B Denali why wouldn’t you leverage your financial strength and negotiate a deal with Bioasis before Bioasis hits a tipping point? The combination of Denali’s current strength augmented with the Bioasis IP is a great opportunity for Denali to lock in the long-term win that they have been positioning for. Given that Bioasis is ramping up its efforts for approval and eventual commercialization, Denali should see a narrowing window to act.
But I/we do not know Denali’s strategy, maybe they have other avenues to grow or maybe they do not think the threat is real. We’ll see! As a Bioasis investor, I am not advocating a take-out deal (unless it fully reflects the inherent value of the Bioasis solution), just looking at what Denali and Bioasis shareholders may have to be prepared for.
Relevant Assumptions:
Denali (NASDAQ:DNLI):
Mkt Cap: $7B
Value Prop: Owns good BBB technology and proprietary drug(s) and will license their BBB technology
Strengths: Reasonable IP, management depth, analyst coverage, well financed, easy access to capital markets, strong partnerships
Threats: Competitors with better BBB would/could materially erode value prop, market cap and future earnings
Bioasis (TSX Venture:BTI)
Mkt Cap: $0.1B
Value Prop: IP that supports best-in-class BBB transport, available for licensing, suitable for many drug therapies
Strengths: IP is well protected and is gaining increasing scientific and media attention and partnership interest
Threats: Weak share price despite apparent IP superiority makes it vulnerable to takeover or stall-out