Takeover Atempt – 17%+ Upside
Failed biopharma Quince Therapeutics has received an expression of interest from Echo Lake Capital at $1.6/share. Shares trade at 17% spread to the indicated offer price. The $1.6/share proposal comes at a big discount to QNCX’s $94m net cash position ($2.55/share) as of Dec’22. The company has not responded and it is unclear if the offer is being considered at all. The downside to pre-announcement prices stands at 40%.
There is very limited information available Echo Lake Capital and it is difficult to assess whether we’re dealing with a serious buyer or if this offer is just an attempt to put QNCX in play and attract other potentially interested parties. The offer letter itself reads a bit like PR on the company’s undervaluation rather than an actual takeover attempt. Echo Lake Capital seems to be a tiny PE firm and calls itself one of the largest shareholders of QNCX. Given the absence of regulatory disclosures, it probably owns <5% stake. In 2017, the fund has been involved in CCNI (now HQI) where it managed to successfully push for a board reshuffle and installed one of its own nominees through a settlement agreement. Last year, it made a pretty strange takeover offer for GROW (covered on SSI here), which basically came dead on arrival and had no updates afterwards. Echo Lake says the proposal for QNCX is not contingent on financing. In any case, financing is unlikely to be an issue given such a wide discount to cash.
As Echo Lake Capital puts it, “Quince is essentially a company without any products”. Until recently, QNCX was known as Cortexyme and was developing a portfolio of small-molecule protease inhibitors. In Oct’21, its lead candidate failed Phase 3 trial, and in Jan’22 FDA completely halted the development of the treatment (the company wanted to develop the candidate for other indications as well). In mid’22 QNCX acquired Novosteo, a biopharma that had been developing NOV004 (treatment of bone fractures and osteogenesis). This acquisition turned out to be pretty much a reverse merger as eventually most of Cortexyme’s management resigned, the company changed its name, and in Jan’23 sold all of its legacy portfolio to the old management team. The old team now runs a privately held Lighthouse Pharmaceuticals with the only pipeline assets being QNCX’s legacy portfolio. In return, QNCX received a 7.5% stake in Lighthouse Pharmaceuticals and the potential for milestone payments of up to $150m based on certain regulatory approvals and global net sales thresholds. Together with the legacy portfolio sale in Jan’23, QNCX announced a restructuring – halted further development of NOV004 (phase 1), started to look for an out-licensing partner, and reduced the workforce by 47%. At the moment, QNCX is not developing any projects and management is looking for new acquisitions or in-licensing agreements. Quarterly cash burn stood at around $6-$7m, but is likely to be lower going forward as the announced restructuring is expected to result in $9.5m in annual savings.
The above-mentioned 7.5% stake in Lighthouse Pharmaceuticals, potential milestone/royalty payments, and out-licensing of NOV004, might deliver incremental value to the existing cash balance for Echo Lake Capital or any other interested.
Current QNCX chairman has a 10% stake. Based on the last year’s proxy, the old management (now at Lighthouse Pharma) might still own around 7-10% of QNCX. Given they are no longer employed at QNCX, the incentives should theoretically be very aligned to support the takeover.
QNCX is up over 20% since the write-up and now trades 6% above Echo Capital’s offer. The main reason seems to be that Kevin Tang disclosed a 10% position. The market probably expects a competing bid from Tang. The current 34% discount to net cash certainly allows headroom for that.
Kevin Tang is a very active player in the biopharma space and has been involved in multiple setups, which also were covered on SSI (MTCR, TCRR, and MGTA). Tang is currently acquiring another failed biopharma at a discount to net cash – JNCE (no spread).
The company has promptly instituted a poison pill preventing any investor from accumulating more than 10% of shares. Given the defenses from the management, it is unclear if any higher bids will be seen from Echo Lake or Tang, and whether any agreement can be reached. The company continues to sit a large pile of cash without any development products.
https://www.bamsec.com/filing/119312523092414?cik=1662774
One question I have about these (increasingly frequent) “busted biotechs” is: to what degree can activist shareholders force a liquidation or sale against intransigent management?
Because — unlike some other BBs where managements just says “we’re looking at everything,” which may be code for “hang tight, we’ll unload” — here management seems pretty insistent on doubling down on expansion, acquisition, and further drug development. To wit, the PR from January says the plan is:
“Prioritizing pipeline expansion through in-licensing and acquisition / Active diligence process to identify and evaluate actionable clinical-stage assets for in-licensing and acquisition / Primarily seeking clinical-stage assets targeting debilitating and rare disease therapeutic areas.”
So again, against determined management, how much can maybe-5% Echo Lake or 10% Tang really drive a liquidation? (And the poison pill suggests management really does intend to fight back.)
I think the poison pill is a big red flag in this case. This drastically limits flexibility by any potential acquirers or activists. What are Tang’s intentions on this investment, I have no idea. Maybe he believes that a discount to cash is sufficient here even in a no-liquidation no-sale scenario. Or maybe the poison pill was not the outcome he expected and he is a bag holder now, just waiting for how management will deploy the capital.
As you explain and as I noted in the write-up, management does not seem to be considering liquidation at the moment. So I do not think anyone is still expecting liquidation as a viable scenario.
But speaking of the activist in the biopharma space generally. There are multiple examples of activist campaigns that have worked pretty well. You can check MTCR, IMRA, CBIO, or the recent campaign of Tang Capital at JNCE. And of course, some cases fail as well like SNSE eventually ending up in value destructive reverse merger or ANGN among others.
Thats an offer of 1.8 been made