DURHAM – Shares in Durham-based pharmaceutical firm Chimerix are surging after the company rejected a call from a major stockholder to liquidate the company.

Rubric Capital Management LP issued its call in a letter published on Thursday morning.

“We do not believe a liquidation of Chimerix is in the best interests of all of our shareholders as it would deprive them of the significant upside potential of ONC201 and our other assets. It would also be irresponsible to patients with this deadly disease as it would halt critical progress on ONC201 simply as a means to appease a shareholder making such demands. While we are confident that the continued successful execution of our strategy will drive significant shareholder value, our Board and leadership team regularly consider all opportunities to create or enhance value,” Chimerix responded in a press release.

The release was issued after the markets closed Thursday.

The companies have been talking about Rubric’s call for liquidation since May, Chimerix (Nasdaq: CRMX)  said.

“Rubric expressed a lack of confidence in the Company’s strategic direction and cited the share price’s substantial discount to liquidation value,” Rubric stated in a press release. “Accordingly, Rubric calls on the Board to begin a winddown process and conserve cash to maximize liquidation value available to shareholders, while simultaneously exploring strategic alternatives for ONC201.”

The cancer drug is a promising candidate at Chimerix.

In September, Chimerix sold rights to another drug in a deal worth some $238 million.

Durham biopharma company Chimerix completes $238M+ deal

The response

Here is the Chimerix response:

At Chimerix, we focus on oncology therapies most likely to have profound impact on patients and create the greatest value for shareholders. We have a fully funded Phase 3 neuro-oncology program, ONC201, a highly differentiated asset in an area of high unmet need and little competition, and multiple paths toward potential regulatory approval. The upfront capital gained through the sale of TEMBEXA^® positions us exceptionally well to fund the ongoing development of our oncology franchise.

Our engagement with Rubric regarding their interest in a liquidation began in May. We had a number of meetings with them on this topic and have tried to engage constructively with them, including as recently as a few weeks ago. We take feedback from our shareholders seriously and have significant shareholder representation on the Board.

We do not believe a liquidation of Chimerix is in the best interests of all of our shareholders as it would deprive them of the significant upside potential of ONC201 and our other assets. It would also be irresponsible to patients with this deadly disease as it would halt critical progress on ONC201 simply as a means to appease a shareholder making such demands. While we are confident that the continued successful execution of our strategy will drive significant shareholder value, our Board and leadership team regularly consider all opportunities to create or enhance value.

Chimerix is poised for significant future value creation as we continue to advance ONC201 and the rest of our product pipeline. Based on our strong Phase 2 data for ONC201, we are confident in the path forward and believe we have the right strategy and team in place to deliver on our financial and operational goals.

The Rubric letter

The full text of the letter follows:

Dear Members of the Board:

I am writing you on behalf of Rubric Capital Management LP (together, “Rubric”, “we”, or “our”), whose managed funds and accounts collectively own approximately 8.5% of the common stock of Chimerix, Inc. (the “Company” or “Chimerix”). On October 19th, we met with Mike Sherman, Mike Andriole, and Josh Allen in our office. As in past meetings, they professed a desire to engage on the path forward for the Company. During the meeting we explained why we thought the Company’s strategy was destructive to shareholder value. It seemed that, at least philosophically, Mike Sherman agreed with us. As a result, we were extremely disappointed to see Chimerix doubling down on the go it alone strategy with ONC201 when they reported third quarter results. We have tried to engage constructively. The Company has persisted in its strategy of spending all its remaining capital on ONC201, so we are forced to write this letter publicly.

Chimerix is on the wrong path and is being frivolous with shareholder value. Continuing to invest in ONC201 despite the likely need for an expensive phase 3 trial is not an appropriate course of action for a company of this size and with such an onerous cost of capital. Considering this, we believe the Board must simultaneously begin a winddown process to maximize liquidation value available to shareholders and commence a strategic alternatives process for ONC201. The market appears to agree with us, as simply liquidating the Company would result in a return of up to 125% from the close on Tuesday, November 8th. Beyond the share price, shareholders have clearly demonstrated their dissatisfaction via the most recent annual meeting. Despite there being no alternative slate, no board nominee received a majority vote of the shares outstanding. One candidate only received 29% of the votes cast. Clearly shareholders are dissatisfied.

Downside Protection is as Important as Upside Potential

During our October 19th meeting, we gave the management team an example of two potential hypothetical investments and asked them to choose the one that they would prefer to invest their personal money. In “Investment A”, a $1 investment is guaranteed to be worth at least $2. In “Investment B”, a $1 investment has a 20% chance of being worth $10, but an 80% chance of being worth $0. Both investments have an expected value of $2, or a 100% return. Our view is that if given the choice, we should absolutely invest in Investment A because we would be guaranteed to make money whereas in Investment B we would most likely lose all our money. Investment A has total downside protection, while Investment B will most likely result in a total loss of capital. We were very glad that Mike Sherman agreed with us that he would rather put his personal money in a hypothetical Investment A.

Chimerix is in the unique position of being able to choose between these two investments right now. On the one hand, the Company could partner out ONC201 and return cash to shareholders for a guaranteed positive return. While this strategy would forgo the potential upside of developing ONC201 internally, it protects the downside and eliminates the possibility of investors receiving zero on their investment. It also ensures the continued development of ONC201 and would allow shareholders to participate in its success, albeit in a smaller way. Thoughtful capital allocators would never choose to invest in a lottery ticket instead of an investment with a substantial guaranteed return. The Board has provided bad incentives for this management team resulting in a misalignment of interests.

Chimerix Trades at a Substantial Discount to Liquidation Value

Chimerix is currently trading substantially below its liquidation value. In other words, the market is ascribing a negative value to management’s ability to allocate capital going forward. The Company has essentially no significant clinical trials ongoing and no in-house manufacturing infrastructure. As a result, committed spend and thus wind-down expenses should be limited. We believe the liquidation value of the Company is between $2.95 and $4.36 per share, depending on how much the Company receives in milestone payments from the sale of Tembexa. That represents a 52% to 125% return to Tuesday November 8^th’s closing price of $1.94. This liquidation value excludes any consideration for ONC201 which is likely quite conservative.

Current Burn Rate is Extremely High; Time is of the Essence

In the most recent quarter, the Company’s burn rate was approximately $20mm. Going forward, the Company has guided that it expects the quarterly burn to come down to about $15mm. At year end, the Company disclosed it had 87 employees. Every quarter the Company continues to operate reduces the value that can be returned to shareholders by ~7%. This is an unconscionably high spending level for a company with no ongoing clinical trials. In order to maximize value to shareholders, the Company should immediately begin reducing costs and head count as much as possible.

Closing Thoughts

Chimerix is currently in a unique position to create value for shareholders while preserving the value of ONC201. It is completely within the Company’s control to give shareholders a compelling total return with almost no risk. Choosing to develop ONC201 without a partner would be completely foolhardy as the Company has an effectively infinite cost of capital. Management must immediately begin winding down operations and conserving cash. We hope you act on this advice in the constructive way it is meant. We reserve our rights to take further action.

Sincerely,

David Rosen

Rubric Capital Management LP