Talaris Therapeutics (TALS) – Potential Liquidation – 25%+ Upside

Current price: $2.4

Liquidation value: $3.05-$3.30 per share

Upside: 25%-40%

Expiration date: 2023

This one ran up unexpectedly over the last two days without any news. So the timing of my pitch is a bit unfortunate. However, I think there is still a substantial upside from the current prices. The stock is surprisingly liquid with the daily trading volume reaching $1m+ over the last week.

Talaris Therapeutics is yet another failed biopharma that trades at a large discount to its net cash, has only a few employees left, and is currently running a strategic review of alternatives. It seems that the company is very likely to liquidate soon. The remaining balance sheet is quite clean and with conservative estimates the liquidation value amounts to $3.05-$3.30 implying a 25%-40% potential upside. The company is controlled by several prominent PE/VC firms (led by Blackstone) that own 57% of TALS combined. Management, many of which are affiliates of these PE/VC firms, owns a further 17%. All parties have clear incentives to maximize shareholder value as proven by certain recent developments. The timeline is short and I expect the strategic review conclusion to be announced over the coming months.

The main risk is that a reverse merger is chosen instead of liquidation. However, the way the situation has been developing so far suggests that liquidation is much more likely. The credibility of the parties involved also significantly lowers the risk of a value-destructive reverse merger.

A wide discount to net cash provides a sufficient margin of safety to wait for the outcome of the strategic review.

One potential red flag: Chief Scientific Officer and founder of the company, Suzanne Illdstad, has been a seller of the stock lately and over the last few days disposed of over 200k of shares. As I understand she and the CFO are the only execs that have not been let go yet. However, she seems to be the only insider that is selling the stock and likely a big part of her net worth is tied in this stock – she founded the company back in 2002 and also acted also as CEO till 2018. So I am tempted to think she just wants to cash out at least part of her holdings without thinking too much if TALS might be worth an additional +30% in a liquidation scenario. Over the last two years, she has already seen the value of her stake diminished from almost $100m post-IPO in 2021 to $10m today. Thus her rush for the exit seems understandable, especially now that the company has fully suspended the drug development pipeline.

 

Net cash calculations

TALS liquidation value calculations are provided below.

  • $181.3m – cash as of Q4’22.
  • Less $8.7m – combined expenses of February’s and April’s reorganizations (severance, admin expenses, etc.).
  • Less $12m – estimated Q1’23 cash burn. The average cash burn in 2022 was $15m per quarter.
  • Less $10.5m – accrued expenses and accounts payable as of Q4’22.
  • Less $3m – further cash burn until liquidation. Assuming a further 2 quarters until liquidation, that’s about $1.5m for operating expenses per quarter. Should be conservative enough for a company with only 7 employees left.
  • Less $2m – remaining severance and change of control bonuses for executives and other employees.
  • Less $1m – lease termination expense estimated as 1-year rent expense.
  • Less $5m – any further liquidation-related expenses.

This results in a liquidation value of $138.5m or $3.30/share or almost 40% upside from the current prices.

In the calculations above, I am using a non-diluted share count of 42m. Further share dilution is difficult to estimate as it’s not clear how many RSUs or shares reserved under the equity/stock purchase plans will vest. Most of the stock options are way out of the money. Counting all of the outstanding RSUs and shares reserved for issuance under incentive plans (a total of 3.5m) results in the estimated liquidation value of $3.05/share, implying a 25% upside.

If management is able to realize any further upside from the remaining IP assets (development pipeline), it would be a nice cherry on top. However, I do not expect anything on this end.

 

Events leading to the current setup

TALS was running 3 trials on autoimmune disease therapies. 2 trials were focused on kidney transplant recipients and the other one on the autoimmune disease scleroderma. In October’22, one of the patients died in a trial focused on kidney transplant recipients. In February, the company halted the two kidney-related trials, laid off 1/3rd of its employees, and started exploring strategic alternatives. In March, it also suspended the scleroderma trial. Last Friday, TALS announced it is letting go a further 95% of its employees, including most of the executive suite. The company is clearly focused on minimizing the cash burn and maximizing shareholder value.

Moreover, the company has amended its severance and change of control plan which specifically spells out ‘complete liquidation or dissolution as one of the change of control options. Additionally, the change of control period definition was amended so that it would be applicable also to all executives that were employed by the company 3 months before the announcement of the event. Given that the whole executive suite is departing at the end of April/May, the announcement of the strategic review outcome can be expected over the next few months.

This text from the 2021 severance plan:

TALS1

Has been changed into the below on the 30th of March.

TALS2

TALS has also amended the terms of its lease agreement for the Louisville facility and shortened the renewal notice period from six months to three months.

On March 1, 2023, the Company entered into an amended lease agreement for the Louisville Lease. The amendment increased the number of successive one-year renewal terms from three to five. The amendment also reduced the written renewal notice period for the successive one-year terms from six months in advance to three months in advance.

 

Parties involved

What gives additional confidence in TALS is the background of the parties who run and control the company. See current major shareholders in the table below. Blackstone owns 25% of the company and has 2 affiliates on the board. The remaining major shareholders are prominent VC firms, some of which (Qiming and Longitude Venture Partners) also have representatives on the board. The CEO, Scott Requadt, owns 2.9%.  The CSO, Suzanne Ildstad, owns 10% and a further 3% is in her children’s trust. Together management and major shareholders control close three-quarters of TALS shares.

TALS shareholders

Both CEO and Chairman also appear to be affiliated with Blackstone and come from very reputable backgrounds, unusual for a tiny biopharma like TALS:

  • CEO (Scott Requadt) – used to be a managing partner at Clarus, life sciences investment firm, which was acquired by Blackstone in 2018. Clarus raised $2.6bn from its founding until the acquisition. The business now operates as Blackstone Life Sciences. The 19.5% TALS stake indicated as “Entities affiliated with Blackstone” is the previous Clarus’ stake.
  • Chairman (Francois Nader) – independent director of Moderna and, interestingly, is a current chair of Neuvrati Neurosciences. Neuvrati is also one of Blackstone Life Sciences’ portfolio companies and is very vocal about this fact in its marketing materials. Francois Nader was also CEO of NPS Pharmaceuticals, acquired by Shire (biotech giant) for $5.2bn in 2015, and a chair of Prevail Therapeutics, sold for $1bn to Eli Lilly in 2020.

From this point onwards, there are only two ways this is going to play out – a reverse merger or liquidation.

The reverse merger scenario seems unlikely and troublesome for the parties involved. A value-destroying reverse merger with some third-party biopharma is obviously out of the question. So the only remaining risk then is that TALS could get merged with some other company of Blackstone Life Sciences at a discount to net cash, providing funds and listing to the target. Given the involvement of multiple other VC firms that are major shareholders here, it seems like orchestrating such a move and getting approval from all parties could be difficult. However, even if such a deal materialized, there’s a solid chance that a reverse merger with Blackstone’s portfolio company that received nods from all these VC firms would turn out to be value-creating and have a positive impact on the share price.

Also, it’s worth noting that the company’s NOLs are not that material, which reduces its attractiveness for a reverse merger. As of Q4, the company had $96.9m of US federal NOLs and $97.1m of Kentucky state NOL carryforwards.

Liquidation still seems like the most rational option here. In this scenario, the 16.6% management’s stake would net them around $22.8m vs around $2-$3m annual salaries combined. The CEO would net $4m vs $750k total salary in 2021 and the founder/CSO would net $16m vs $560k total salary. The additional RSUs and shares that would vest under the incentive plans, by my count would add up to $10m in incremental exit value for the management.

31 Comments

31 thoughts on “Talaris Therapeutics (TALS) – Potential Liquidation – 25%+ Upside”

  1. Thanks for your great write up (/confirmation bias for me ;-) )

    I got very similar numbers to you but was left chasing the price the last few days as even after it jumped ~10% after the 8K release that mentioned “liquidation” and further reduction in workforce it has kept on going as you alluded to.

    At 2.46 (at 21-Apr-23) it is out of my strike range in terms of MOS/upside, but given the additional insight you provided with regard to the parties involved maybe I ought to reconsider my current (anchor) price limit and pay up. Simultaneously, I am kind of expecting (hoping) that a few more such opportunities crop up during the year and I simply have to move/work faster and be willing to bid to my limit sooner rather than later…

    Clark Street was into this one early , but the most recent 8K completely changed the risk reward dynamic as you so nicely laid out.

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    • Thank you for your kind words. As you suggest the risk-reward is very different now compared to February when the company laid off only 1/3 of employees and still had 70-80 employees remaining. The trials on TALS’s last drug development program were continuing. Cashburn was excessive and visibility into the future direction of the company was limited. At the time it seemed too risky to me.

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  2. I’m torn here. What were your thoughts on the Mary Kay Fenton retention agreement 8K on 4/14. Term for strategic transaction included both a Reverse Merger and a complete dissolution or liquidation?

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    • It is the same as with additional disclosures in the ‘Severance and Change of Control Plan’ documents referenced above. The change of control definition has been expanded/detailed to include all the likely outcomes of the strategic review. A reverse merger is definitely a possible outcome for TALS, but given the parties involved, I am tempted to think it will not be value destructive vs the liquidation scenario.

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  3. TALS released Q1 earnings. The cash burn in Q1 has been rather in line with my expectations. No updates were provided regarding the ongoing strategic alternatives review. 95% workforce reduction is expected to be substantially completed by May 2023.

    In my initial calculations, I probably underestimated the size of the cash burn during the current quarter. Given that part of the workforce was still employed in April/May, cash burn from ordinary G&A activities during Q2 will most probably be in the range of $5m. My updated calculations are below.

    $166m net cash as of March 31;
    – less $5.8m restructuring, and severance costs that the company expects to incur in Q2;
    – less $9.4m accrued expenses and accounts payable;
    – less $0.7m of estimated lease termination costs;
    – less $5m in Q2 cash burn;
    – less $12m in Q3 cash burn misc. other liquidation-related expenses;

    This results in $135m or roughly $3.2/share of cash remaining for distributions in a liquidation scenario. If the company is able to sell any of its assets (strategic review noted “divestiture of the Company’s cell therapy CMC capabilities”), any generated funds would come on top of my cash estimate. I have no clue how likely the sale of the assets is and assume they are worth 0.

    https://www.bamsec.com/filing/95017023022228?cik=1827506

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  4. I have decided close TALS position and remove it from the active ideas list. The current price of $2.9/share is not far from my liquidation scenario calculations. With a limited upside remaining and uncertainty regarding the company’s path going forward (will TALS pursue liquidation?), I think exiting now makes sense. Also, the ongoing cash burn and any other liquidating expenses could easily turn out to be higher than in my calculations. In other words, the margin of safety is rather narrow at current price levels.

    Might turn out that I am leaving a lot on the table. As per my comment above TALS is likely exploring the sale of their cell therapy CMC capabilities. Two of its clinical trials were halted not because the treatments failed, but due to “the pace of enrollment and the associated timeline to critical milestones”. So these assets might be of some value to the buyers, my liquidation scenario calculations gave benefit only for the cash on the balance sheet. However, I have no idea how to assess the potential value here.

    Disclosure of an increased position by BML Investments at the end of April (breached 5% threshold) as well as lack of recent open market share disposals by Ildstad Suzanne (she was an active seller at much lower prices), also suggests something might be happening behind the scenes.

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  5. Great exit DT, now TALS back to original idea levels – is the story unchanged and worth another look?

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  6. I think TALS is interesting again at current prices and I am bringing the setup back among active ideas at $2.4/share

    The recent weakness in TALS seems to be at least partially driven by the renewed open market shares sales by one of the company insiders, Suzanne Illdstad. Here is what I said about her in the initial pitch:

    “One potential red flag: Chief Scientific Officer and founder of the company, Suzanne Illdstad, has been a seller of the stock lately and over the last few days disposed of over 200k of shares. As I understand she and the CFO are the only execs that have not been let go yet. However, she seems to be the only insider that is selling the stock and likely a big part of her net worth is tied in this stock – she founded the company back in 2002 and also acted also as CEO till 2018. So I am tempted to think she just wants to cash out at least part of her holdings without thinking too much if TALS might be worth an additional +30% in a liquidation scenario. Over the last two years, she has already seen the value of her stake diminished from almost $100m post-IPO in 2021 to $10m today. Thus her rush for the exit seems understandable, especially now that the company has fully suspended the drug development pipeline.”

    There were two new fillings by Suzanne Ilstadt in June and if I understand these correctly, the reported disposals already amount to 280k shares. That’s a significant amount as the average daily volume is only c. 100k-200k shares. Given the recent downward price pressure, some further share sales by her might get reported in the coming days. I have not seen any other news that might have caused this sell-off from $2.9 to $2.3. As explained above, I do not think Ilstad’s sales signal anything about TALS value in liquidation or any other strategic alternative scenarios. She is just taking some chips off the table and still has 5m shares left. Obviously, I might be wrong in my interpretation, but I think this is a good opportunity to reopen the position.

    https://www.bamsec.com/filing/195004723001123?cik=1827506
    https://www.bamsec.com/filing/120919123034287?cik=1827506

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    • Suzanne Ilstadt continues to gradually reduce her TALS stake. Since my comment above, she has disposed of additional 210k shares selling in the market almost on a daily basis.

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  7. Do we have any idea if Suzanne’s sales are pursuant to a predetermined Rule 105b-1 plan (and if so, when that plan was put in place), versus “ad hoc” sales being done at her daily discretion?

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  8. Can anyone provide information on the preferences expressed by Blackstone/Clarus Ventures, LLC regarding the future direction of the company? It appears that they refrained from voting to elect Suzanne to the board.

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  9. You’re right, just saw that on the 6/14/23 8k. Nice find. Weird. Maybe as simple as a protest vote against a director who shortly won’t have skin in the game?

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    • Why vote for her though?she is stepping away.i don think this would change their mind

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  10. BOOM. Merger. Talaris shareholders will receive ~$3.43 for each of their shares, including a cash dividend up to ~$65M.

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    • And 21.3% of the merged entity. Not sure what that’s worth but seems like this should be trading above 3.43….

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      • Looking at where its trading ($2.66), I must be missing something fundamental (not uncommon) about the nature of the consideration and value of the combined entity.

        Hopefully DT can provide some insight as I wallow in ignorance.

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  11. hmm, if I understood the release correctly, current TALS s/h get 21.3% of the post-merger entity. That implies about/at least 196mm shares post-merger. Pre-merger we get a $65mm distribution, and the post-merger company will have $210mm of cash.

    $65/41.8 = 1.55/share
    $210/196 = $1/share
    Minimum value to current TALS holders of about $2.62/share. Assuming the new entity trades above cash value you could get $3+/share.

    Very back of the envelope. That sound right?

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      • the Tourmaline deck states the pro-forma value of the combined company is $387.5mm.

        387.5/196 = $1.98/sh + $1.55 dividend = $3.53/share. Not too far off from the 3.43, assuming the share count is a little higher and/or there’s leases etc to account for.

  12. I am exiting TALS at $2.8/share. Here is my thinking about the announced transaction.

    TALS shareholders are getting:
    – $1.51/share in cash (management appears to be using 43m share count for TALS).
    – 21% of the combined company, which according to management is worth $1.92 per TALS share.

    I think the latter part is materially overstated.

    Press release values the combined company at $387.5m comprised of:
    – $230m value of Tormaline (59.4%)
    – $82.5m value of Talaris net of $64.8m cash. (21.3%)
    – $75m private placement (19.3%)
    See the presentation for details: https://www.bamsec.com/filing/119312523171895/7?cik=1827506

    The biggest question mark in this list is obviously the value of Tourmaline. I have no clue how valuable their TOUR006 development program is. The pre-merger Tourmaline seems to have c. $70m of cash on its balance sheet and appears to have recently raised $112m in series A funding (not clear for what portion of the company). Tourmaline’s valuation as indicated by management is supported by the fresh $75m private placement from new and existing shareholders.

    Nevertheless, this case reminds me a lot of TYME/SYRS merger that was covered on SSI in Jul’22. Although that transaction involved two listed companies, the valuation of the combined company was supposed to be supported by the private placement at premium prices from notable biotech investors. After the merger SYRS stock has sold off and currently trades at c. 1/3 of the private placement valuation. (see full post from last year here https://www.specialsituationinvestments.com/2022/07/tyme-technologies-tyme-merger-arbitrage-33-upside/)

    Thus I strongly doubt the combined Talaris/Tourmaline will be trading materially above its cash balance, i.e. $210m. In this scenario 21.3% of the combined company would be worth $45m, or just over $1 per TALS share. So in my eyes, TALS shareholders are getting $1.51/share in cash + $1/share of value in the combined company. Or $2.5/share in total. Therefore my decision to exit at $2.8/share.

    Maybe I am looking at this setup too conservatively, but that stems mostly from my ignorance of the biotech driven peculiarities/upside for this case.

    Aside from the treatment pipeline, on which I am not able to comment, I am quite impressed by the line-up of people and investors behind this transaction and Tourmaline. Co-founder/CEO has previously served as a COO at IMVT ($2.7bn mcap biotech). Meanwhile, the chairman of combined company will be Tim Anderson – current partner and co-founder of Cowen Healthcare Investments, which is an indirect subsidiary of Canadian banking giant TD Bank. Cowen has recently raised $550m for its 4th fund. The fact that existing Tourmaline shareholders (Cowen, Deep Track Capital) keep putting additional funds into the company is a very positive sign. And in this case Cowen has even decided to get involved more closely by appointing Tim Anderson as a chairman.

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  13. New Real Money Pipe shareholders are in at $1.875 (I haven’t seen any warrants here)
    TALS shareholders are in at the same price ($82.5m/44m = $1.875)
    $3.34 per TAL share is where Real Money has priced the stock.
    If TALS asset sales (contemplated in the merger agreement, the stock ratio value increases for TALS)
    You’ve got cash till 2026, an excellent mgmt. team, and access to additional cash if you need it.
    Suzanne Ildstat’s 10b05 sell program probably on overdrive, given volume

    Not sure I’d be in such a hurry to sell.

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    • You might be proven correct eventually. But as I explained above, that would mean the combined company trading significantly above cash (1.85x). A very similar story with the ‘new real money pipe’ did not pan out as expected for SYRS shareholders last year (see pitch for TYME/SYRS merger on SSI). Every biotech is different and there are individual exceptions, but my impression is that before the results of clinical trials are known, the average biotech company tends to trade at or below its cash balance.

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    • Investing is all about staying inside your circle of competence. I can’t handicap the future for this merger so I’m out.

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  14. A couple of things worth noting here that are important for the analysis:

    1) RA Capital, an influential Biotech investor that was also involved in the Tormaline PIPE, has recently *also* bought a 5.5% stake in TALS in the open market. Basically, they are buying more of the Proforma company in the open market at a discount. RA Capital is as savvy and sophisticated as they come.

    It is also worth asking what all the existing Biotech shareholders (Blackstone etc) will do with their $1.47/sh dividend, if they can pick up Tormaline at < $1.96 ($3.43/sh pre div) when the merger closes.

    2) Asset sales at TALS will further accrue to the benefit of TALS shareholders (via ratio adjustment).

    3) TYME / SYRS is not a good or even a relevant precedent. It was not a reverse merger with a PrivCo, where price discovery for the PrivCo happens. TYME/SYRS was a merger between two listed companies, that both had a price associated with them in the Public Market. Plus, the PIPE financing in that merger, fully funded warrants et al., should be evaluated in more detail to see what the true quality of the PIPE was – nature of investors and the true price at which they were investing.

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    • Thanks for the additional thoughts on TALS. While it is intriguing, investment in TALS is now a bet either (1) on the success of Tourmaline drug development programs or (2) on the skills of RA Capital and other shareholders.

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  15. The new company, TRML, on it’s 1st day of trading fell 15%. in the 6 days since then, TRML is up ~70%. $9.46 to $16.49

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