Yet Another Value 的特殊机会：Sage Therapeutics $SAGE

I had so much fun with my idea of the year this year, Full House Resorts, ticker FLL. I am long the stock, and you can listen to the podcast from early January if you are interested. One of the things I wanted to do with the very small platform I have is shine a light on situations where I think active shareholder engagement and input to the company, management, and board could lead to a better outcome for everyone.

Let’s start with the disclaimer, the same way I start every podcast: Nothing on this podcast is investing advice. Please consult a financial adviser. I am long the stock, and I have huge impostor syndrome all the time. I don’t really know if anyone should listen to me, so do your own work, consult a financial adviser, consult a tax adviser, or consult any type of adviser you want. Just don’t listen to me.

Every slide in this deck comes from publicly available resources, with 1 very obvious exception that we’ll get to. If you see the formatting switching back and forth between slides, it’s not me. I just took screenshots of public sources, mainly SEC filings and company presentations.

It is not lost on anyone who follows the financial markets that passive investing has overtaken active investing. I have a chart from 2021, so it’s somewhat old, and it has gone even further since then. In 2021, assets under management in passive strategies outnumbered assets under management in active strategies for the first time, and that has only grown since then.

That raises lots of questions for investors. There’s a popular question: If passive investing goes to 100% of investing, who is setting prices at the margin? Who is doing the price discovery? Those are very interesting questions, but what I want you to keep in mind is that, from a corporate-governance perspective, passive managers don’t have the same incentives as active managers.

Passive managers generally own the index. They own the market, and they take a very formulaic, check-the-box approach to stock ownership in general. Not all the time, but in general, that is how they approach corporate governance. They ask, “Are you following best practices on corporate governance? Do you have the right number of independent directors? Are there a lack of related-party transactions?” If you check the boxes, you can get away with an awful lot.

I know plenty of companies where, from a passive standpoint, they check all the boxes, yet there is absolutely no doubt they are incinerating shareholder value. They can get away with it because they are passive shareholders. The passive shareholders vote for it because the companies check all of those boxes, and often it takes an active manager coming in, pointing it out, and raising a huge storm to get them to change their ways.

If you are an active investor, look at your portfolio and the companies in it, and really think about how many of those companies are being run in a way where every capital-allocation decision, every public-relations decision, and everything they do is completely aligned with what they would do if the CEO owned 100% of the company and was purely interested in maximizing long-term value. I guarantee there’s almost not a single company in your portfolio that would follow that rule.

There are small things, like a CEO who spends time on investor relations. If he owned 100% of the company, he wouldn’t have to spend any time on that, so by definition it is suboptimal. But there are lots of other things. I think of companies that are married to a dividend strategy or married to debt strategies that their index funds may love but that aren’t optimal.

I know there are index funds that actually reward lower insider share ownership over higher share ownership. I can tell you that, with very few exceptions, I would always prefer insiders to be aligned with me and to make money when the stock goes up. If the stock goes down and they own nothing but still have huge pay packages, they still do all right.

Why do I say that? Sage Therapeutics, the company we’re talking about, has a largely passive ownership base. What I have here is a screenshot of their top 6 holders. The number 1 holder is Biogen, which we will be talking about in a moment. They have filed a Schedule 13D and own 10% of the company.

Behind Biogen are basically 5 passive owners. BlackRock, Vanguard, Morgan Stanley, and FMR each own between 7% and 8% of the company, and they have all filed Schedule 13G filings. The 5th-largest shareholder owns about 7% and filed a 13F. They seem to be an active manager—I know absolutely nothing about them—but their Sage stake is an extremely small stake for them, so I would probably consider them passive. I don’t know them, and I’m not saying that definitively; maybe they are very active. I’m just saying this because Sage is a company with a largely passive ownership base, and that is going to come into play as we continue through the story.

I have a theory of shareholder engagement, and I call it my Penny theory. If you have a dog, you know there are 2 types of “leave it.” You’re walking on the street with a very good girl, Penny, and let’s say there’s a chicken wing at the corner. Chicken wings are a disaster for dogs. The bones are hollow, and they will tear their insides up.

A good girl like Penny, if she sees a chicken wing, is of course interested. She’s going to smell it, and if you tell her, “Leave it,” Penny will never go to that chicken wing. Penny will never consider picking up that chicken bone. However, if you are not paying attention and the chicken bone is at the corner, the light is red, and you walk right up to the chicken bone and stop, waiting for the light for 20 seconds, after 10 seconds Penny is going to be staring at that chicken bone, and she’s probably going to pick it up. The temptation is just too great.

The second type of “leave it” is when you’re walking a girl who’s not quite as good as Penny. She sees a chicken wing and starts lunging at it. Maybe she lunges at it and gets it in her mouth. Now your “leave it” is, “Leave it, leave it, leave it,” and you may have to grab the dog by the mouth, open it up, and reach in there to get the chicken wing out.

I think those are 2 really good analogies for shareholder engagement. There is the first type of engagement that can happen when shareholders comment and talk to the board and tell them, “You need to maximize shareholder value. There’s a clear path to maximizing shareholder value. You need to go that route. We think you’re going to go that route, and we hope you’re going to go that route.” That is the route I hope and expect will happen at Sage as we walk through the story. We can encourage the company to leave the proverbial chicken wing.

I think there are 3 companies in my portfolio that have some type of shareholder engagement. I hope and expect Sage to be more along the Penny line: Let’s just remind them that they need to leave that chicken wing. Then there are some where it might be the firm “leave it, leave it, leave it.” Those are the companies where somebody may need to file an active 13D, come in, fire everyone, and change everything around because the company has put the chicken wing in its mouth and is about to ingest it. That will tear its insides up, and no one will be happy, although they might be happy because they don’t own any stock and are going to get paid.

I have a position in Sage, and I have disclosed that I am long. I’m letting the company know the route I hope and expect it to take. I’m not looking to form a group with anyone; I’m just laying out the facts. I do believe in good shareholder engagement and shareholder alignment.

You can disagree with me. You can think the routes I think are crazy are reasonable. Reasonable people can disagree. If you believe the chicken-wing route is the route the company should take, go with God and let the company know that. But if you believe, as I will make a compelling case for in this episode, that the company should leave the chicken wing on the table and ultimately sell itself, you should let the company know that you are a shareholder.

It is your money—your hard-earned money. You will make a return if the company goes the correct route, and I think there is compelling evidence you will not make a return if it doesn’t. All I’m saying is, reach out to the company. Send the investor-relations team a note that says, “I own the stock. I expect the board to do what’s rational. Here’s what I think is rational.”

Shareholder engagement makes a big difference. The board has hired an investment bank, and we’ll talk about all of this in a moment. They are going to ask what they should do. If the investment bank sees 1,000 emails from shareholders saying, “Go the rational route; here’s the rational route,” the board is going to say, “You don’t have a choice. Anything else you do will cause your shareholders to erupt.”

As a management team and board, you can go 1 of 2 ways. You can try to eat the chicken wing, and your shareholders will fire all of you. You’ll be unemployable, with a scarlet letter on your résumé saying that you were voted out by your shareholders because you tried to destroy shareholder value. Or you can leave the chicken wing, take the route that makes sense, and have a good mark on your résumé. In the future, boards will look at you and say, “Those people did right by their shareholders.” If I see any of these shareholders or board members in the future, I can say, “Those people did right by me.” They can be on future boards, and they will have better career prospects.

I want to leave that in mind. The good-girl route is what I want Sage to take. I want shareholders to engage and tell the company what they think makes sense. Let’s talk about what that good-girl route is, what is happening at Sage, and why I’m so interested.

In mid-January, Sage’s largest shareholder, Biogen, offered to buy Sage for $7.22 per share. This was a nice premium to Sage’s price the day before; the stock had been trading in the low-to-mid-$5 range. Sage quickly rejected that offer as undervalued and immediately engaged in strategic alternatives. The fact that they are engaged in strategic alternatives gives me hope that they are going to take the good-girl route I’m hoping they take.

Why did Sage reject the bid as undervalued? I think they rightfully rejected it as undervalued. Sage owns 3 main assets.

The first asset, which I think we can quickly set aside, is most of its unapproved pipeline. There are 4 drugs in that pipeline. One is SAGE-324, a drug that Sage partnered on with Biogen. Bad results came out in 2024, and Biogen is walking away from that partnership, so it is very unlikely there is value there.

The other 3 drugs are 2 preclinical and 1 in Phase 1. I don’t ascribe much, or any, value to them. Of course, if a Phase 1 drug goes all the way through approval and there is a big market, I could be wrong. But Phase 1 drugs have less than a 33% chance of making it all the way through approval, and who knows what the market or anything else will look like by then. It would take a lot of money to get these drugs to approval. I don’t see much value there, and the market has never assigned much value to them.

The second set of assets is Sage’s cash on the balance sheet. When Biogen made the bid, Sage’s market value was about $470 million. Sage had about $570 million in cash as of its September 30 balance sheet. The company burned about $70 million in the 4th quarter, so it was down to just over $500 million. That works out to about $8 per share in cash on Sage’s balance sheet, while Biogen’s offer was $7.22 per share. Biogen was offering to buy Sage for less than its cash value. That is a red flag that the offer was too cheap.

Sage’s other asset is Zurzuvae. This is an approved drug that was approved in late 2023 and launched in 2024. Sage had hoped to get a much wider label, but Zurzuvae is approved for postpartum depression, or PPD.

I think this is going to be a blockbuster drug. You don’t have to take my word for it. Sage and Biogen are 50/50 partners on the drug; they share 50% of the costs, 50% of the development, and 50% of the profits. It launched in 2024, and what I have here is a quote from Biogen’s head of North America in December, before Biogen made its bid.

“Zurzuvae has been a pleasant surprise. The drug has taken off quite well. There has been very little resourcing to the drug. We didn’t plan on getting PPD, so we didn’t have a lot of resourcing for it, but we’ve been very thoughtful. We got some stuff wrong, but now we’re starting to get momentum.”

They thought psychiatrists were going to be the big prescribers, but it turns out OB-GYNs are going to be the big prescribers. The drug is starting to grow and gain momentum. They made some tweaks to their go-to-market model, and they expanded the sales force on January 1. Biogen said, “You’re going to see increased reach and increased frequency.”

They were saying that the drug was going well. As I’ll discuss, I think this drug in particular is going to be very important.

An expert interview with an OB-GYN from January offers some useful context. The OB-GYN said, “Having people come in with postpartum depression is its own struggle. All the treatment options are awful. It’s difficult to convince my patients to take any of the 3 treatment options. Postpartum depression is highly, highly underdiagnosed and substantially undertreated. One in 5 women suffer from postpartum depression, and only 10% of patients are treated.”

What are you hearing? Before Zurzuvae, there was a huge postpartum-depression market that was completely underdiagnosed, and the treatment options were awful. When I hear that, it is extremely sad. I have a 15-month-old daughter, so it’s extremely sad to hear about the state of postpartum depression.

But I also think, “You have Zurzuvae, which is approved as a first-line, way-superior product. The growth potential here is huge.” Zurzuvae did about $100 million in sales in its first year, and if you map that against other drugs, you might say it reaches peak sales in the $300 million to $500 million range.

I would contend that mapping it against other drugs is not right because this is an underdiagnosed and underdeveloped market. That means the growth ramp is higher and longer than it is for other drugs. I would not be surprised if Zurzuvae reaches $700 million, $800 million, or even $1 billion in sales.

As OB-GYNs get more experience with the drug, that will be important. OB-GYNs are not used to writing prescriptions for psychological issues, but as they gain more experience and become more comfortable with it, I think penetration will be huge. I think this is a really big product that addresses a substantial unmet need.

The same expert said, “By the end of their 14-day treatment, they’re feeling incredible. When I talk to people who’ve had multiple pregnancies and compare their previous pregnancies with using Zurzuvae now, they’re just like, ‘This is genuinely life-changing.’ They don’t have to leave their kids for treatment. With the previous treatment, you had to go to an inpatient day program. They can continue their lives as normal.”

She also said, “Almost every patient that I’ve prescribed it to since the fall of 2024 has had it fully covered under insurance.” She later discussed why insurance is covering it. She thinks insurers see the benefit of covering it now rather than having to treat postpartum depression later.

Here’s my favorite quote: “This is 1 of the few drugs that I’ve seen that has made a miraculous difference in people’s lives, and I wish more people knew about it and more people had access to it.”

When I’m giving you all these quotes, Biogen and Sage have always said that this drug has blockbuster potential. That’s 1 thing. But here is an OB-GYN in the field saying that the state of treatment was absolutely terrible and that this drug is incredible. It is a game changer for everyone taking it.

All of my friends are starting to have kids, if they haven’t had them already. We just had a child, and I can see how postpartum depression is underdiagnosed. Now that there is a once-a-day pill that you take without having to go through inpatient treatment, I can see how these issues will be diagnosed and treated much more often. I really think Zurzuvae has blockbuster potential. I think this is great for humanity and great for society.

We’ve now gone through the 3 assets. There is Zurzuvae, which has blockbuster potential. There is the cash on the balance sheet. Then there is the pipeline, to which I assign zero value.

The board needs to weigh its options very carefully. In its 4th-quarter 2024 earnings release, the company said it had $500 million in cash on its balance sheet, and that cash was expected to support operations until mid-2027. With about 60.5 million shares outstanding, that is about $8 per share in cash.

The company is planning to burn a lot of cash through mid-2027, and I think the board really needs to weigh the opportunity cost of that cash burn. When it does, I think it will be extremely clear that the answer is that this company cannot be a standalone company.

You don’t have to take that from me. I understand there are issues with using a stock price as a measure of value, but the company really needs to take a long, hard look in the mirror at its stock price over the past 6 months. Sage has traded well below its net-cash position.

Every time the company comes out and says, “We have this great plan, and we’re going to burn all this cash on these Phase 1 drugs,” everyone should say, “You have 2 major assets: the cash on your balance sheet and Zurzuvae. The market has been trading you below the cash on your balance sheet. The amount of value destruction the market is pricing into your stock is astronomical.”

You are not creating value with this cash. I understand the company may say the market is focused on the short term, but when you have that much cash burn and the market is discounting it so heavily, it is incumbent on the company to prove that it is creating value with the cash burn. I am not seeing that.

More importantly, there is a standalone path for Sage that would not involve much cash burn. Sage has an opt-out right. Right now, Sage and Biogen own 50% each of Zurzuvae, so they share the expenses, revenue, and everything else. Sage has an opt-out clause under which it can say, “Biogen, you have 100% of the rights, and we just get a royalty in the mid-teens to low-20% range of sales.”

If Sage exercised that opt-out right, it could instantly become a 1-asset company. You could imagine a world where Sage takes that opt-out right, everyone is fired, and there is 1 accountant who audits the royalties Biogen earns and sends the royalty checks to shareholders.

That company would need zero overhead and zero cash on the balance sheet. It could distribute the $8 per share in cash to all of its shareholders, and then simply send the royalty checks to them. Someone would probably buy the royalty stream. There are plenty of finance companies that buy royalty streams.

If Sage did that, it could pay an $8-per-share cash dividend to shareholders almost immediately, perhaps a little less because it would need to pay some severance payments. Biogen would take the drug, and it is already running at a $100 million sales rate in the 4th quarter of 2024. I mentioned $300 million in sales, which I think would be a very low estimate for what this product could do a few years from now.

Let’s say the drug reaches $300 million in sales in 3 or 4 years. At a 20% royalty, Sage would get $60 million. With about 61 million shares outstanding, that would be about $1 per share in royalties for 5 to 7 years. There is a patent cliff at some point, but you might get royalties for 7, 10, or even 12 years. I don’t think it will go that long, but it is incumbent on the board to prove that it can create more value through a different route than that.

I don’t see it. The company hasn’t provided the information, and the market was certainly skeptical, given that it was trading at $5 per share when it had $8 per share in cash. The market was suggesting that everything else the company was doing was destroying value rather than creating it.

I would note that shareholders should write to the board and encourage it to do what they think is correct. If you think Sage should invest in the Phase 1 drugs, pursue mergers and acquisitions, or follow some other standalone plan, you should let the company know.

I should also note that I think having the 50/50 partnership with Biogen is better net present value than taking a royalty stream because Zurzuvae is going to be very big. But there is a lot of other overhead at Sage, and that is what I’m really pointing to when I talk about reducing the cash burn. If the company can’t reduce that cash burn without going to the royalty model, then I think the royalty model should be in play.

There is a very cautionary tale that is relevant here. The company is Ironwood Pharmaceuticals, ticker IRWD. Ironwood had circumstances very similar to what Sage has. It had a 50/50 partnership with AbbVie for a drug called Linzess, and that drug was producing enormous profitability.

Linzess was doing, I believe, about $900 million per year in sales. Ironwood was getting 50% of that, and its margins were in the 60% range. It was a 1-drug joint-venture partnership company. It should not have been public, and it should not have been standalone.

However, Ironwood decided, “We have this partnership. Let’s go out and buy something so we can use that partnership to sell more drugs.” It bought VectivBio in 2023. On the day it announced the acquisition, the stock was down 15%. About a year later, VectivBio’s key asset, apraglutide, announced disappointing Phase 3 results, and the stock was down 40%.

If you look at the chart, the stock is now down more than 85% over the past 4 or 5 years. It is in true distress. Ironwood matches Sage to a T, and I think it presents a very interesting cautionary tale that the board and any shareholders who want the board to explore a standalone path need to be able to rebut.

I think it is very difficult to rebut that on a risk-adjusted basis. Your stock was at $5 per share when you had $8 per share in cash. You have clear value in Zurzuvae, and Ironwood looks exactly like what you did, with the stock now down 85%.

When I say the stock is below cash and that there is clear value in Zurzuvae, it is very difficult to say there is a risk-adjusted argument for doing anything other than either firing everyone, going to the royalty-and-dividend model, or more likely selling to Biogen.

Speaking of Ironwood, another interesting thing is that its insider ownership looks a lot like Sage’s. Ironwood had 1 large shareholder who owned about 10% of the stock and was on the board, but every other insider, director, and executive owned extremely little stock. All of that ownership was through options that became increasingly underwater as the stock underperformed.

That mirrors Sage. Biogen obviously owns 10%, and some passive funds own 5% to 8% of the company. Executives and insiders own almost nothing. The CEO owns about 1% of the stock, but almost all of that is through options that are now well underwater.

Sage’s board and management team are very well paid. The directors are paid about $400,000 per year. They might argue that $350,000 of that is stock, but that stock is all underwater, and about $60,000 is cash compensation.

The CEO received about $6 million in 2023 and $6 million in 2022. The CFO received about $2 million in 2023, 2022, and 2021. These are very well-paid people at a company trading below cash. When you have very well-paid people at a company with a lot of cash trading below cash, and they don’t own much stock, I think there is a temptation to follow the Ironwood model and buy something.

I would argue that is the bad-girl route from the Penny discussion earlier. It is incumbent on shareholders to say, “Do not go that route. That is not a risk-adjusted route, and it does not create shareholder value.”

I understand that you are very smart people, and that you have an interesting take on science. You need to do that on your own time and with your own money. You can’t do it with shareholders’ money because you’re basically lighting it on fire.

The risk-adjusted path here is 1 of 2 things: Negotiate with Biogen, or with a strategic or financial buyer, for the highest bid. If none of them will meet the net present value of going the royalty route, distributing the cash to shareholders, and shutting everything down, then you go the royalty route.

Here’s a quote from the Sage lawsuit against Biogen. Sage sued Biogen for breach of contract when Biogen made its offer publicly. This is from an interview that Biogen’s CEO gave right after the offer. He said that Biogen already owned half of Zurzuvae, so buying the other half through an acquisition of Sage simply made sense.

He also said that a broader relationship between the 2 companies was no longer possible because of Sage’s research setbacks and financial difficulties. I understand that it can be difficult to hear that, but he is correct.

Sage has 2 assets: the cash on the balance sheet, which should belong to shareholders and should be given back to them, and the joint-venture partnership with Biogen. It does not make sense for a company with 1 main operating asset—a joint-venture partnership with a much larger company—to be a standalone company.

It does not make sense for Sage to incur all the overhead of being a standalone public company: the public-company costs, the $400,000 per year for 1, 2, 3, 4, 5, 6, 7, 8, or 9 directors, the $6 million per year for the CEO, or the $2 million for the CFO. None of that makes sense. All of it needs to be rationalized.

Sage’s 1 asset belongs inside another company, and the cash belongs to shareholders. Either Biogen buys Sage and cashes out the shareholders, or Biogen buys the joint venture and the cash is distributed. One of those 2 things should happen. It simply makes sense for Biogen to buy Sage.

My hope and expectation is that Sage, now that it is in play with a Schedule 13D from Biogen, will go the good-girl, Penny route. It should ignore the temptation to spend that $500 million investing in low-probability Phase 1 drugs or buying other companies.

Shareholders need to tell the board, “If you try to do an equity deal, we will vote it down. If you do not do what is right—which is either to go the royalty route and distribute the cash to shareholders, or more likely to sell to the highest bidder—this board is going to get turned over. We will hold your feet to the fire.”

I think that is best for everyone. I think it makes everyone happiest, healthiest, and richest.

Biogen has offered to buy Sage. The first offer was obviously laughably low, but that does not mean an acquisition does not make sense. As Biogen said, it simply makes sense.

Sage needs to explore strategic alternatives to the maximum of its abilities, sell to the highest bidder, and, if the highest bidder is offering below the value of going to the royalty route, then it needs to go that route, distribute everything to shareholders, and start sending out royalty checks.

I highly suspect that, given Zurzuvae’s blockbuster potential, the best route is simply to sell to the highest bidder. Sage needs to know that this is what its shareholders demand and expect, and that it is what will make them better off.

The more clearly shareholders communicate with the company, the more likely everyone is to have a happy outcome that works for everyone. If you own Sage stock, I encourage you to reach out to investor relations. Whether you agree with me or not, make your views heard, because shareholders making their views heard gives us the best chance of going the good-girl, Penny route.

Nothing here was financial advice. I am long Sage.