The Curious Case of Allakos
A Deep Value Play with $1 Billion in Hidden Tax Assets
I rarely publicly comment on biotechs, but this is one that interests me given the recent outcome in ContextLogic.
At first glance, Allakos Inc. (NASDAQ: ALLK) appears to be another biotech garbage dumpster fire– a $25 million market cap company trading at $0.28/share after discontinuing its lead drug program.
But beneath the surface lies one of the most asymmetric risk/reward profiles in small-cap healthcare: a cash-rich balance sheet, $1 billion in federal net operating losses (NOLs), and activist investors circling – all while the stock trades below liquidation value.
The Numbers Don't Lie
Let’s dissect the key figures:
1. Cash Position:
Q4 2024 cash: $81 million
Projected Q2 2025 cash: $35-$40 million after restructuring costs
Current market cap: $25 million
2. Tax Asset Goldmine:
Federal and State NOLS: $1 billion+ (estimated off 2023 annual report and 5 quarter burn)
Sources:
While Biotechs are notorious for losing money, NOLs have value for an acquirer or for someone that recapitalizes a business. Applying a 5% to 15% value on NOLS results in a net value of $50 to $150 Million.
This creates an enterprise value of negative $75 to $165 million when considering:
EV = Market Cap ($25M) + Debt ($0) - Cash ($40M) - NOLs ($50M to $150M)
The ContextLogic Blueprint
The recent BC Partners deal with ContextLogic (NASDAQ: LOGC) provides a playbook:
BC Partners is going to pay $150 million for LOGC’s NOL-rich shell, recognizing that tax assets alone justified the investment in return for 42% of the company (netting a market cap of ~$360 Million post deal).
Doing the math on this implies they valued the NOLS at ~8% (($360M Market Cap - $150M Cash)/$2.7B NOL).
The Kevin Tang Factor
The February 3rd Schedule 13D reveals activist investor Kevin Tang’s 9.7% stake through Tang Capital. Tang loves to buy biotech companies and force them into deals. Given his activist stake, it will be interesting to see how it influences the outcome in this situation. His entry was at 27.1 cents, which is slightly below the current price of the stock (trades at ~28 cents).
Conclusion
For value investors, this represents a rare "heads I win, tails I don’t lose much" scenario.
Either:
A) Management/Tang monetizes the NOLs (100+% upside), or
B) The company liquidates (probably a net neutral given it sells below cash)
With 13D activist pressure, NOLS and a clean balance sheet, the risk/reward skews powerfully to the long side.