TCR2 Therapeutics (TCRR) – Merger Arbitrage – 14% Upside

Current Price: $1.48

Offer Price: $1.69

Upside: 14%

Expected Closing: Q2 2023

This idea was shared by Dan.


An interesting all-stock merger between two cancer-focused biopharma companies. Despite tiny market caps, liquidity is quite decent, and borrow for hedging is cheap.

TCR2 Therapeutics ($58m market cap) is getting acquired by a larger peer Adaptimmune Therapeutics ($180m). The merger consideration stands at 1.5117 ADAP per TCRR share. The stocks trade at a wide 14% spread, part of which is likely explained by this being a micro-cap clinical-stage biopharma merger. Another potential reason for the spread is uncertainty regarding shareholder approvals, which will be required on both sides of the transaction. I believe the market is overexaggerating the risks.


ADAP share price drop and shareholder approval

This is probably the elephant in the room. Following the merger announcement, ADAP share price plunged by 25% initially and now trades 35% below the pre-announcement levels. A downfall of this size would normally indicate a value-destroying transaction and in turn difficulties in obtaining shareholder support for it. However, a deeper look suggests that this is not the case. ADAP is actually getting a solid deal here. At the pre-announcement levels of $1.75/ADAP share, the acquisition price stands at $105m (60m new ADAP shares to be issued), and for this amount, the buyer is getting $130m of TCRR’s net cash plus TCRR’s drug development programs. At today’s ADAP trading levels of $1.1/share, the acquisition price of $65m vs $130m of net cash looks even more attractive. Hard to see how this merger and the prospective 25% equity dilution could have driven such a sharp share price reaction. ADAP itself has most of the time traded at a premium to cash on the balance sheet and there seems to be no reason why investors should suddenly start valuing the to-be-acquired cash at a much wider discount, let alone push the valuation of the buyer significantly lower.

The only other explanation for ADAP’s share price drop that I can think of is that this acquisition has somehow reduced investors’ confidence in ADAP, in its own drug development pipeline and commercialization prospects. The market potentially saw this as a signal that the existing ADAP’s drug development programs are not progressing as expected if the company decided to pursue M&A. This seems to pile on top of its previous setbacks and the organizational restructuring announced with Q3’22 results (as explained by this article):

That move has pushed back the expected clinical trial readiness of the program by two years, now slated for 2025. It’s the most significant update among a flurry of pipeline amendments Adaptimmune disclosed as part of its third-quarter earnings report, which was capped off with the company deciding to lay off up to 30% of staff to extend its cash runway into 2025. The cuts are expected to be completed in the first quarter of 2023.
The pipeline and staffing reductions come as Adaptimmune’s financial reserves dry up. The company has spent almost half of its available cash and equivalents entering 2022, with $79 million still available. And the layoffs are thought to only extend that runway an additional year, with the current forecasting showing enough money to last into early 2024.

I’m just speculating here and my long ramble here is simply to show that the likelihood of ADAP’s shareholder approval should not be judged by the post-announcement share price decline. The merger does look accretive for the buyer and extends its cash run-away. Even if the investors’ confidence in the ADAP’s pipeline was impacted, this shouldn’t directly affect the merger approval

Another big positive in favor of the buyer’s shareholder approval is that ADAP’s management owns 17.4% stake. This includes 11% shares held by VC firm New Enterprise Associates, which has a representative on ADAP’s board. Other major shareholders are – Matrix Capital Management Master Fund (investment manager, 25% of ADAP), Baillie Gifford & Co (investment manager, 10.5% stake) and Baker Bros. Advisors (hedge fund manager, 6.3%). So far, no shareholders have voiced any pushback on the deal. The 25% owner Matrix Capital Management holds a very concentrated portfolio of only 17 holdings (ADAP is a small position) and I am guessing was involved in the discussions or at least would have raised the objections by now (almost 3 weeks have passed since the announcement).


Strategic rationale

This acquisition is quite important for ADAP and will allow it to raise a substantial amount of cash amid the financing troubles that prevail in the biopharma industry. The biopharma cycle peaked in September 2021 and last year saw a rapid deterioration of the financing environment following a steep rise in interest rates and a sharp drop in available VC funding. Some VC players even consider the current financing environment to be the worst biopharma industry has ever seen. Industry experts say that going forward only the companies that have managed to generate really meaningful clinical data and have a strong promise of reaching regulatory milestones will be able to access financing, while others will be in trouble.

At current prices, ADAP is getting $130m of TCRR cash (estimated at end of March’23) for $65m worth of ADAP stock. Although the buyer will acquire some incremental opex as it intends to keep developing TCRR’s assets, ADAP will have complete control over TCRR’s pipeline and will definitely be able to adjust the cash outflows in the short term. Following this merger, the buyer expects to extend its cash runway from early 2025 to 2026. The timing is important as ADAP is about to file a BLA for its leading candidate Afami-cel (used for the treatment of synovial sarcoma, soft tissue cancer). Filing is expected to be finalized in mid’23 with the approval to be expected in 2024. The extra cash will allow the company to focus on commercialization without the immediate pressure of liquidity risk and allowing to seek financing at better terms afterward. Moreover, the buyer’s second most advanced trial SURPASS-3 for ADPA2M4CD8 program (ovarian cancer) is expected to report phase 2 results by the end of 2024. Thus the acquisition of TCRR’s cash balance will also position ADAP better for the upcoming phase 3 trial.


TCRR’s shareholder approval

From the TCRR’s shareholder approval perspective, the obvious concern is the deep discount to cash entailed by this merger, especially after the sharp drop in ADAP’s share price post-announcement. At current prices, consideration values the target at $66m vs $130m TCRR’s net cash as of Mar’23. Cash as of Q4’22 stood at $149m and I’m deducting $19m for Q1 cash burn (in line with the most recent cash runway guidance). Despite this visually large valuation gap, here’s why I think TCRR shareholders are likely to approve the merger:

  • TCRR insiders own a 25% stake. Additionally, a prominent biopharma investor Kevin Tang owns 7.25%. No shareholder objections to the transaction have been voiced so far.
  • TCRR is a struggling cash-burning machine, which was forced to lay off a large part of the workforce in 2022 and in 2023. Following the latest portfolio reprioritization, the cash runway was extended into early 2025. However, the cash burn rate is still massive ($75m per year) and TCRR’s pipeline is still relatively early stage (leading treatment gavo-cel is in phase 2) with many years of trials lying ahead. Meanwhile, the cash is melting very fast and the financing environment in the industry has soured, especially for companies that are still far away from commercialization. Without this merger, TCRR investors are poised for either a few more dilutive equity raises or a potentially lengthy strategic review process, which will continue to burn cash and could easily result in an even less favorable outcome such. All of these prospects are illustrated by the fact that before the merger announcement, TCRR used to trade at a 65%+ discount to net cash.
  • The merger consideration, even at depressed ADAP levels, comes at a 40% premium to TCRR pre-announcement prices.
  • ADAP operates in the same space (TCR therapy for cancer) and it appears to be willing to continue developing TCRR’s therapies going forward. Overall, the all-stock merger will allow TCRR shareholders to keep their exposure to TCR therapy treatment space while holding shares of a larger/safer combined company that is closer to having its first treatment commercialized.
  • A large part of the merger consideration’s discount to cash is due to the sharp ADAP’s share price drop since the announcement. The discount would narrow if ADAP’s share price rebounds.


A bit more background and merger details

ADAP and TCRR focus on developing T cell engineering (TCR) therapies for treating solid tumors which represent approximately 90% of all cancer cases. So far only T-cell treatments for liquid tumors have been approved and both companies see a big potential in applications for solid tumors as well. TCR therapy is a process, where the patient’s blood is drawn out, T-cells are isolated and enhanced to kill cancer cells (a gene for a receptor gets added which allows T cells to attach to specific cancer cells), and then the changed T cells are infused back into the body.

The pipeline of the combined company is presented below:


While the acquisition of the cash balance seems to be the main goal of this merger (my assessment only, and I might be incorrect), management also sees cost benefits from several overlapping clinical hubs, manufacturing capabilities, establishment costs, and other expenses.



  • With TCRR up 30% and ADAP down 30% compared to pre-announcement prices, the potential downside from both legs of the trade looks very large. However, due to the reasons outlined above I am not sure that assuming a full burn of the short position is the correct approach here. If the merger was in fact taken as a signal for potentially weakened prospects for ADAP, then it’s possible the current share price simply trades at the new baseline and won’t rebound much even if the merger is terminated.
  • There is also a risk an activist could appear and derail the merger by demanding TCRR pursues a liquidation path instead, similar to what happened at MTCR. I think this risk is much lower than at MTCR as it would be significantly more difficult for an activist to build a strong campaign at TCRR. TCRR is 2x larger company and insiders own a 25% stake, so a significantly bigger investment would be required for an activist to get enough weight to make a change. Additionally, there is a material timing risk at TCRR for the liquidation scenario as the cash burn rate is very high and unless a potential activist managed to turn the tables in the next several months, the upside in a liquidation scenario would evaporate shortly after mid’23.


11 thoughts on “TCR2 Therapeutics (TCRR) – Merger Arbitrage – 14% Upside”

  1. Short squeeze on ADAP. Currently at 12% p.a. on IB. Larger shorts have to cover. Not ideal.

  2. Really strange share price movement for ADAP. Although, I’m not sure if a 20% price increase this month can be called a short squeeze, especially given the previous 40% drop following the merger announcement. It’s not clear what has prompted this move as the only update that came out recently is a transfer agreement of certain programs from a partnership with GSK back to ADAP. As part of this transfer, ADAP will receive a payment of $37m (vs $206m cash as of Dec’22), which is certainly positive, but not to the extent that the stock price has moved upwards.

    The spread looks attractive given the estimated closing timeline in Q2. However, hedging has been more difficult with the tighter borrow and there is a clear risk that this ‘squeeze’ and fee rise will continue.

    • Yesterday around 15:00 GMT there were nearly no shares available to borow at IB, this indicates a recall from a large supplier so I’d assume some larger shorts got “squeezed”. Usually this happens over certain corp actions ex dates but this is not really applicable in this case (more of a Europe centric issue). There were 137k shares available to borrow EOD.

  3. TCRR and ADAP Q1 results are out, so sharing an update. TLDR: I think the merger is still on track. 9% spread remains.

    The merger is expected to close in Q2. Shareholder approvals from both sides remain outstanding. The meeting dates are due May 30. The spread has significantly narrowed over the last month and now stands at 9%. ADAP’s borrow rates have so far remained unchanged at under 10%. If this gets approved, the spread will likely get eliminated right away. With no vocal objections heard so far, I believe the vote should pass easily. That decision is 1.5 weeks away.

    ADAP has just held a general shareholder meeting for ordinary matters, director re-election, compensation and etc. All resolutions were approved with overwhelming support. Although none of the vote questions were directly related to the ongoing merger, I am guessing the results would have been very different if any of the larger shareholders were looking to vote down the deal.

    Both companies have burned through c. $40m of cash during Q1. At current prices, ADAP is trading at 75ct on the dollar of cash on the balance sheet and TCRR at 67ct on the dollar of cash. Valuations relative to cash become identical at the acquisition price. Disregarding any valuation differences in TCRR/ADAP drug development portfolios, shareholders of both companies seem to be getting a fair deal.

    Trading prices as well as the spread have been very volatile since the merger announcement and it is likely the current 9% spread just reflects this volatility rather than any risks of merger breaking.

    There has been no vocal opposition to the merger so far. 11.7% ADAP’s and 23.8% of TCRR shareholders have entered into support agreements.

    Another interesting point is that Kevin Tang has just increased his stake in TCRR from previous 7.1% to 10.7%. Given the ongoing cash burn, it’s difficult to believe that Tang sees TCRR as an attractive biopharma net net, so quite likely he is betting on the arb spread.

  4. I have exited my TCRR/ADAP arbitrage position at the current levels. Yesterday, the merger spread narrowed to 2.5%, and the stocks traded at this spread for almost the entire day. I do not believe the remaining 2% is worth the wait for the voting results and the closing of the transaction.

    • Dan, thanks for sharing this arbitrage idea. Will be interesting to see if the vote will pass as easily as you suggested in the pitch. Agree, that waiting for the vote with only 2-3% spread is probably too risky. Any idea why the spread suddenly narrowed with hardly any new information, just the meeting date coming closer? Just a month the spread on this arb was at 25%+.

      • Nasdaq delisting notice for TCRR came out which says the deal will close Thursday June 1 – subject to shareholder vote of course. That doesn’t change the risks, but it does appears to have caused the tightening.

Leave a Comment