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:

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

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.

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.