Achaogen Inc (NASDAQ: AKAO) is rocketing in the market this today, gaining as much as 62.92%. With no news out, many are wondering what’s going on. However, with no news, that means that anything mentioned as to the current run in value would be speculation. So, I’m not going to go there.
Where I will go is what we can expect to see ahead. With so much interest in the stock, I decided to dig in, and I believe that AKAO could prove to be an incredible opportunity in the very near term. Here’s why:
What Is Achaogen?
Before we get into why I believe that AKAO represents a compelling investment opportunity, it’s important that you know just what the company is. Achaogen is a commercial-stage biotechnology company.
In particular, the company is focused on the discovery, development, and commercialization of innovative antibacterial treatments against multi-drug resistant, gram-negative infections.
The company’s claim to fame is ZEMDRI, which is currently approved by the FDA for the treatment of complicated Urinary Tract Infections, also known as cUTIs. The indication includes pyelonephritis, due to certain Enterobacteriaceae.
While AKAO only has one treatment on the market, it is not a one-trick-pony. In fact, the company is working on developing a second product candidate, known as C-Scape. The treatment is an oral antibacterial that is a combination of an approved beta-lactam and an approved beta-lactamase inhibitor. It is believed that this treatment will have strong efficacy in patients with cUTI due to MDR pathogens.
The Big Story: Bankruptcy Sale
The truth of the matter is that the AKAO balance sheet isn’t a very nice one. In fact, by the end of 2018, the company only had just over $61 million in current assets. With a fourth quarter net loss of more than $47 million, the $61 million in current assets isn’t going to go very far.
Nonetheless, Achaogen plans on providing investors with a remedy to this situation. On April 15, 2019, the company announced a voluntary entrance into Chapter 11 Bankruptcy. The company’s goal in the bankruptcy is ultimately to sell itself.
In fact, in the release, AKAO said that it filed a motion seeking authorization to pursue an auction and sale process under Section 363 of the United States Bankruptcy Code. The company also intends on continuing normal operations during the sale process.
In the release, the company said that its secured lender, Silicon Valley Bank, has provided support of the sale process and made a $25 million financing commitment to fund the company’s operations throughout the process. Interestingly, this process is expected to take place incredibly quickly.
In fact, it is expected that all bids will be submitted by no later than May 29, 2019. The structured auction is targeted to take place by no later than June 3, 2019, and the final sale is expected to be closed by June 13, 2019.
Why This Is A Great Thing For Investors
AKAO investors have been dealing with hard times since June 26, 2018. On this day, the company’s ZEMDRI product was approved by the FDA. Of course, this would usually lead to strong gains, but reading between the lines tells the whole story.
Ultimately, Achaogen hoped that the FDA would approve the treatment for use in not only cUTI cases, but in Bloodstream Infections, also known as BSIs. Unfortunately, the FDA said that it did not see enough evidence of efficacy in the BSI indication, so only the cUTI indication was approved.
This proved to be a big hit to the stock. In fact, Since then, AKAO has fallen from more than $12 per share to its current price of $0.16. Making up the losses experienced by those left holding the bag isn’t likely. Nonetheless, those who are getting in now are likely to see gains.
The reality is that Achaogen has a great asset in ZEMDRI, that for the right suitor, could prove to be an overwhelmingly profitable product. This, in combination with the company’s C-Scape product could prove to be valuable in a takeover.
With a market cap of just over $10 million, the offers that come in could provide a strong premium. So, for those that get in at this low price, a strong return could be the result.
I’m Not The Only One Seeing Value Here
At the moment, institutional investors own about 46.8% of AKAO. In the past three months, that number has climbed by 29.38% according to Finviz. So, why aren’t these institutional holders selling after the bankruptcy and auction announcement? The answer’s simple, they see money to be made.
Risks To Consider
Any time an investment is made, there are risks to consider. That is particularly the case when investing in a company that is in the middle of a bankruptcy. In the case of Achaogen, the most pressing risks to consider in my opinion are as follows:
- No Bids – While I don’t think that this will be the case, if the company has no bids to field, a takeover will not happen. At that point, the company would be left to figure out how it’s going to make it past its financial struggles.
- Low Bids – There is no guarantee that any of the offers will provide the company and its shareholders with a premium. Should the bids come in at a discount to the current trading price, those in on the deal would take a loss.
While an investment in Achaogen at the moment would be a risky play, it would also have the potential to yield strong gains should all go well in the structured auction process. So, for those that are comfortable taking on some risk, AKAO is a compelling opportunity!
What Do You Think?
Where do you think AKAO is headed moving forward? Join the conversation in the comments below!