Quick Pitch: Talis Biomedical (TLIS)

Strategic Review – TBD Upside

The idea was shared by SSI member Jim.

This is a strategic review of a tiny biopharma services company that trades at a significant discount to its net cash position. The situation appears fairly interesting, but there’s an added complication of ongoing litigation, which is difficult to handicap without a legal background. Any feedback or insights from the members would be appreciated. Despite the company’s size, average daily liquidity is around $100k.

Talis Biomedical is a molecular testing equipment developer that has just laid off 90% of its workforce and launched a strategic review. With only 10 employees remaining, TLIS is essentially a cash shell trading at an unusually large 64% discount to its current net cash. The company will explore various options under the strategic review, but the extent of the reorganization suggests that a reverse merger or liquidation may be among the likely outcomes.

A significant positive here is TLIS’ impressive shareholder roster. Baker Brothers, one of the most successful biotech investors and a major TLIS shareholder since 2021, holds a 66% stake and one board seat. David Einhorn’s (one of the most prominent hedge fund managers of all time) Greenlight Capital owns a 10% stake. TLIS management also holds an 8% stake. The presence of these reputable shareholders provides some protection against potentially value-destructive transactions, while the substantial discount to net cash offers a margin of safety as we await the outcome of the strategic review.

The major uncertainty that contributes to the discount is that TLIS is involved in a litigation process. Several equity holders have filed a securities fraud lawsuit against the company claiming that it failed to disclose material information in the IPO prospectus related to a study of TLIS’ Covid-19 testing system. The study was done to obtain emergency use authorization (EUA) approval, which is sort of like the FDA approval but for emergency situations, when regulators have no time to wait for all the information that would be needed for an FDA approval. One month after the IPO (completed in Feb’21), TLIS announced that it had withdrew the EUA application after FDA had said that comparator assay used in the study was not appropriate to support the application. This resulted in substantial share price drop. In turn, TLIS announced plans to launch another study (with a different comparator assay), which led to material delays in the development timeline and further share price decline. The full complaint is available here. Damages have not been specified. In December 2022, the court dismissed the initial complaint filed by the shareholders, but the plaintiffs successfully amended their complaint, and the court denied TLIS’s subsequent motion to dismiss in April 2023. The lawsuit is still in its early stages, with the discovery process currently underway. I am not a legal expert and I’m not in a position to assess the likelihood of the plaintiffs’ success or the potential damages that could be awarded if TLIS loses the case. However, to my uneducated eye, this type of lawsuit is looks like something that should be relatively common in the biopharma space and it should probably be very difficult to prove that management intentionally misled investors about the studies. Nonetheless, the ongoing litigation creates several difficulties for the strategic review thesis, including a diminished likelihood of a liquidation, potentially prolonged timeline and additional expenses. It might also deter potential suitors from pursuing a reverse merger with the company. Some (and maybe significant) discount should exist here, yet the current gap to net cash seems just a bit too large to just ignore.

Net cash calculations are provided below:

  • $88m – net cash as of Sep’23.
  • Less $7m of cash burn from Sep’23 until the strategic review announcement in mid-November. This estimate is in line with the cash burn displayed over the last quarters.
  • Less $6m of restructuring costs. This is the upper range of management’s restructuring cost guidance of $5m -$6m (see here, p. 22). The above results in $75m current net cash.
  • Less $6m in cash burn for two additional quarters. TLIS’s management did not explicitly state that they will discontinue R&D on its key asset. However, with the reduced workforce and one of the two facilities closed, a $3m/quarter cash burn rate seems to be conservative enough.

This results in a net cash estimate of $69m as of Q1’24. Delving further, solely for illustration purposes, and deducting working capital liabilities ($6m), lease termination expenses ($3m, equivalent to one year’s rent expenses), and remaining wind-down/severance costs ($10m), we arrive at a liquidation value of $50m compared to the current market capitalization of $27m. This liquidation value does not assign any value to TLIS’s intellectual property assets.

TLIS has been developing Talis One, a rapid testing system that consists of a portable device and a cartridge into which a patient’s nasal swab is inserted. After facing initial delays in securing approval for its COVID-19 testing system, the company eventually obtained emergency use authorization from the FDA in November 2021. However, it has since encountered difficulties in initiating a commercial launch due to manufacturing-related challenges. The recently announced strategic review stems from TLIS’s unsuccessful commercialization attempts, its deteriorating net cash position, and a challenging broader financing environment.

 

21 Comments

21 thoughts on “Quick Pitch: Talis Biomedical (TLIS)”

  1. What is the net effect of convertible preferred stock on potential distribution?

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  2. “trading at an unusually large 64% discount to its current net cash”

    I don’t think it is once you account for the preferred equity, please verify.

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    • That was what i came to the conclusion of but maybe i am missing something.

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      • Commitments and contingencies (Note 5)
        Stockholders’ equity:
        Series 1 convertible preferred stock, $0.0001 par value—60,000,000 shares authorized as of
        September 30, 2023 and December 31, 2022; 29,863,674 shares issued and outstanding as of
        September 30, 2023 and December 31, 2022; aggregate liquidation preference of $3 as of September
        30, 2023 and December 31, 2022 3 3
        Common Stock, $0.0001 par value; 200,000,000 shares authorized as of
        September 30, 2023 and December 31, 2022; 1,819,136 and 1,811,396 shares issued and outstanding
        as of September 30, 2023 and December 31, 2022, respectively — —
        Additional paid-in capital

  3. There is no mistake and the effect of the preferred convertible shares has already been accounted for in the write-up, using the 3.81m of diluted shares outstanding. This consists of: 1,821,128 outstanding shares of common stock + 1,990,910 common shares which would be issued during the pref. stock conversion.

    The confusion probably comes from the recent 1 for 15 common stock stock split, which did not impact the number of outstanding convertible pref. shares (29.8m), however, accordingly changed the conversion ratio into common from 1 for 1 into 1 for 15. So 29.8m of outstanding pref. stock is now convertible into 1.99m common shares. The pref. stock is convertible at any time at the discretion of the holder, or upon any sale or transfer of such shares. As I understand, all of the convertible pref. stock is held by Baker Brothers.

    Moreover, TLIS doesn’t have warrants, the options are out of money and the amount of outstanding RSUs is miniscule.

    I hope this clarifies it.

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  4. What timeline would you put against any sort of a deal? Does the strategic review give the plaintiff of the lawsuit more leverage?

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    • Usually, as a rule of thumb, 2-3 months should be enough to come up with some sort of an action plan, especially for a company like this with minimal operations and assets. Regarding your second question, maybe, but I just do not have the capacity to evaluate the lawsuit dynamics.

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  5. “The Company has engaged TD Cowen to act as a financial advisor in its review of strategic alternatives. Seyfarth Shaw has been appointed as legal advisor to the review process.”

    Is that a bad sign for liquidation? I’ve fly-specked some of these busted biotechs, and invested in a few, and it *seems* like the majority of the time, the companies DO NOT hire outside I-banks or law firms immediately….even if they end up doing a deal.

    That the company has done so here, at the outset, suggests they really, really want a deal or transaction of some kind, rather than a liquidation.

    Or am I wrong in my assumption?

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    • I wouldn’t read too much into this without conducting a proper backtesting analysis.

      FWIW, spent an hour checking failed/broken biopharma/biotech strategic review cases that were posted on SSI since mid-2022 (when these setups became more common), don’t see any relation between hiring advisors and liquidation.

      – ABIO -> did not hire anyone, still trading/no liquidation as of yet.
      – TYME -> engaged Moelis & Company LLC as its financial advisor and Faegre Drinker Biddle & Reath LLP as its legal advisor. Entered into a merger with another company/no liquidation.
      – IMRA -> did not hire anyone. Entered into a merger with another company/no liquidation.
      – SIOX -> engaged SVB Securities. Liquidation announced.
      – FNCH -> did not hire anyone, still trading/no liquidation as of yet. Note that the company used a slightly different language in its strategic review announcement.
      – MGTA -> did not hire anyone. Entered into a merger/no liquidation.
      – OTIC -> did not hire anyone. Announced liquidation.
      – TALS -> did not hire anyone. Entered into a merger/no liquidation.
      – MEIP -> engaged Ladenburg Thalmann. Announced liquidation.
      – AVRO -> did not hire anyone. Still trading/no liquidation as of yet.
      – GRPH -> did not hire anyone. Entered into a merger/no liquidation.
      – THRX -> did not hire anyone. Still trading/no liquidation as of yet.

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  6. its safe to assume on this one there wont be a liquidation. Baker probably will look for fairness opinion on some asset they want to reverse merge in.

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  7. Do you think $6M in remaining restructuring costs PLUS $10M in “wind-down severance” is double-dipping a little, and thus maybe a bit high?

    On the other hand, if there is a non-liquidation strategic transaction, I think you’d have to include some deal fees for the the bankers + lawyers to paper, maybe a couple mil.

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  8. I was curious how these busted biotechs that result in a deal rather that liquidation have done, and here’s some rough numbers drawing on Lukas’ work above and a little browsing. Some of my start and stop dates are a little arbitrary — if DT closed it out I used his numbers, else I followed until the delisting. Barchart.com is helpful for charts on delisted stocks. Probably some I’m missing.

    IMRA -> did not hire anyone. Entered into a merger with another company/no liquidation. +400%

    TYME -> engaged Moelis & Company LLC as its financial advisor and Faegre Drinker Biddle & Reath LLP as its legal advisor. Entered into a merger with another company/no liquidation. +33%

    LMNL -> 25%

    TALS -> 20%

    ARIX -> +4%

    NLTX -> 0%

    GRPH -> did not hire anyone. Entered into a merger/no liquidation. -3% (so far)

    MGTA -> did not hire anyone. Entered into a merger/no liquidation. -18%

    Pretty decent results. There’s a long comment thread on MGTA I haven’t gotten to review in detail, and I wonder what kind of lessons can be derived from MGTA.

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      • Yikes, brutal chart. I see it wasn’t covered on SSI though, despite the similar set-up. I wonder what gave DT and others pause.

      • Not sure what were the reasons for others to skip FIXX, but I have looked at it multiple times since August, and I just could not see much upside here. Any upside would have come from the CDMO business side, on which we basically had zero visibility.

    • Another busted biotech that did a reverse merger that was originally terrible but has become a big winner in last couple days is AMTI. It went from trading at a nice discount to liquidation value at 21 cents, announced the reverse merger in early October and traded down to 13 cents by early November. It’s merger partner announced some kind of positive FDA meeting this week and it shot up as high as 30 cents and is around 28 cents now.

      The problem with it, and with FIXX is the lack of activist shareholders IMHO. That might be why DT dodged it (but not me, unfortunately).

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      • What’s your view on FIXX? OXB valued Homology’s put option at $25.8 million as of 6/30 taking into account sales declines from Homology ceasing operations. So the CVR maybe looks interesting? Not sure what to make of Q32’s prospects but looking at its spending it should have a long runway from here.

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      • FIXX was a 10% position for me before the merger announcement and I continue to hold. No idea on Q32 prospects, but in liquidation I have to think its worth close to $1.50/share. For example, FIXX is being valued at $1.37 in the deal, and I think that’s what the PIPE shareholders have agreed to pay. So I’m hoping shareholders vote down the merger, or the company does something to sweeten the deal to get the stock price up and increase likelihood of it getting voted through.

        I don’t think the put option is likely worth anywhere near $25.8M at the moment, Homology pulled all their business from OXB after June 30th, reducing it’s revenues which also reduces the put option value significantly. And OXB has to have the cash to pay it. That said, OXB has 2 years to build the business so there is upside, but right now I’ve marked it down to about 20 cents per share in value ($12M) to be conservative.

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  9. Talis spent $100m on equipment and inventory ($60m) which were all expensed. There is probably some value.

    Pref share liquidation value is $3 dollars. Virtually none.

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