Merger Arbitrage (covered at $2.66)
Yet another busted biopharma play with a pending merger and Tang on the front lines. A month ago, Acelyrin agreed to be acquired by Alumis in an all-stock transaction, with merger consideration equivalent to $2.20 per share at current prices. Two weeks later, Tang made a $3 per share cash + CVR offer, which management has since rejected. SLRN stock trades between the two offers, and the spread remains wide (15%+).
I have initially thought that this is a clear short and that Tang’s higher offer is doomed to fail. However, yesterday another activist emerged and muddied the waters. I am sharing my research on this situation below—I know we have several biopharma specialists on SSI, and I’d love to hear your take on the situation.
Here is a short version of what SLRN shareholders are currently facing (for a more detailed version, see the full timeline in the next section):
- $4.5/share of gross cash on SLRN’s balance sheet as of Dec’24. This likely gets reduced to $3.3-$3.5/share in any liquidation scenario.
- A signed agreement to merge with ALMS, which at current prices is worth $2.0-$2.2 per SLRN share.
- The already-expired offer from Tang at $3/share + CVR.
- Two activists with a combined 11% stake in SLRN, majority of which was acquired closer to $2/share. Activists’ agendas going forward are unclear.
- Staggered board and 24% of SLRN shareholders already supporting the merger with ALMS.
The market seems to believe that the likelihood of the merger with ALMS getting derailed is quite high. I am skeptical of this, which is why, until yesterday, I thought SLRN was a good short at current levels. SLRN management had the opportunity to engage with Tang—the merger agreement allowed SLRN to do so under the ‘Superior Proposal’ clause—but the board chose not to, even though Tang’s offer was arguably 50% higher than the ALMS merger consideration.
There isn’t much else activists can do. The board is staggered, so even if SLRN shareholders vote down the merger with ALMS, the company will most likely proceed with the planned Phase III study of Lonigutamab—the same study that ALMS intends to shelve post-merger. I doubt management would voluntarily opt for liquidation or sell the company to Tang; their actions so far do not suggest that.
The chart below illustrates how SLRN’s management justifies its decisions—even the standalone value is significantly higher than Tang’s offer or any reasonable liquidation scenario.
Tang acquired most of his position near $2 per share, so he is not risking much even if his efforts fail and the ALMS merger proceeds as planned. His move might simply be an opportunistic gamble. The same applies to Trium Capital—most of its position was built at $2 per share, with the rest added after Tang’s offer, potentially in anticipation that SLRN would choose to sell to Tang.
It is unclear whether these activists themselves see a realistic way to force management to change course, especially after their initial efforts to engage failed to produce results.
While Tang has a well-documented track record in biopharma space, with a number of activism campaigns (some successful and some not), Trium Capital is not a name you’d expect in a situation like this. Trium is a small London-based hedge fund that positions itself as ‘quiet’ activist. Trium’s portfolio is rather scattered (at least its U.S. holdings) with very limited exposure to biopharma. So chances are high that Trium was simply betting alongside Tang.
With only a 13% spread to Tang’s cash offer and limited chances that anyone will be willing to offer more (already a fairly narrow discount to estimated net cash), the market is likely overestimating the chances of activism succeeding in this situation. Activists’ efforts might help convince shareholders to vote against the ALMS merger, but even in that scenario, SLRN management will likely choose to pursue the supposedly higher standalone value.
But hey – I am just a guy looking at public fillings and trying to guess who thinks what. Whereas, Tang and Trium Capital have put incremental $5m each down the line at prices of $2.5-$2.6/share. That’s what gives me a pause.
In the rest of the write-up, I share some additional thoughts and details on several points:
- Detailed timeline of recent events
- A higher bid from Tang looks very unlikely.
- Shareholders are likely to approve the merger.
- ALMS is not able to offer better merger terms.
- Recovery in ALMS share price is unlikely.
Timeline of the recent events
Below is a short timeline of the recent events – I am indicating stock price moves just to show market sentiment to those events.
- Sep’23 – Acelyrin’s lead drug candidate Izokibep fails the key trial. Stock drops by 60%;
- May’24 – Founder / CEO resigns;
- Aug’24 – Acelyrin shifts efforts from Izokibeb to a previously non-core potential treatment for thyroid eye disease, Lonigutamab. Phase III trial is expected to start in Q1 2025. Stock drops by 20%;
- 6th of Jan’25 – Additional Phase 2 data for Lonigutamab is released, showing signs of efficacy and safety. Company reaffirms intentions to proceed with Phase III trial in Q1 2025. Stock drops by 40% and continues to trade at around 45% discount to cash.
- 6th of Feb’25 – Stock-for stock merger between Alumis (ALMS) and and Acelyrin. Stock consideration is set at 0.4274, equivalent to $2.81 per SLRN share on pre-announcement prices (vs $4.5/share in gross cash on the balance sheet, on net basis probably closer to $3.5/share). ALMS is likely interested only in the Acelyrin’s $450m cash pile and on the merger call indicates that Lonigutamab will be shelved. The merger is subject to shareholder approval on both sides, but 62% of ALMS and 24% of SLRN shareholders have already signed support agreements.
- 7th-20th of Feb’25 – Buyer’s stock continues to slide down from $6.59/share pre-announcement price to $5.13/share. In turn, the merger consideration for SLRN falls to $2.2/share—an even larger discount to cash.
- 20th of Feb’25 – Tang announces 5.3% position in SLRN and offers to buy the company at $3/share in cash + CVR for 80% of potential net proceeds from disposal of any of SLRN’s programs / IP. The non-binding bid is set to expire on Feb 27. Tang has accumulated the stake during February at an average price $2.1/share. SLRN stock jumps from $2.2 to $2.6.
- 27th of Feb’25 – Tang increases the stake in SLRN to 7.3% with new purchases done at c. $2.6/share.
- 4th of Mar’25 – Acelyrin’s board rejects Tang’s offer as “not superior” and reaffirms the merger with Alumis. SLRN’s shares barely budged and continue to trade at a big premium to ALMS merger consideration.
- 6th of Mar’25 – 13D from Trium Capital with a 5.4% stake, noting “plans to engage and have discussions with the Issuer’s management and Board relating to the Merger”. The stake was accumulated during February, 2/3rds of it at around $2/share and the rest at c. $2.5/share. SLRN stock jumps to $2.66/share.
A higher bid from Tang looks very unlikely
Tang’s $3/share cash offer is already at just 11% discount to SLRN’s $3.37/share net cash (see my calculations below). That is right in line, if not on the aggressive end, of the typical discounts at which Tang bids in similar biotech situations. You can find more background on this previous offers here.
The CVR, and SLRN’s remaining pipeline, seem to be worthless. SLRN is now left with two candidates – Lonigutamab (just finished Phase 2) and a Phase 1 drug that the buyer didn’t even bother mentioning in the merger presentation. As for Lonigutamab, this was already a second rate choice for SLRN, i.e. not the key drug candidate and the founder of the company did not want stay on to progress with this treatment. On top of that, ALMS basically said that Lonigutamab will be shelved post-acquisition:
We have done some preliminary work on the lonigutamab program and in lieu of pursuing Acelyrin’s previously planned Phase III, we plan to undertake a comprehensive analysis, including reviewing all available data to identify the most capital-efficient plan to confirm differentiation for the program. We look forward to sharing our plan in the future. And basically, we’ll continue to review this.
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I think the most important thing is lonigutamab has some really interesting features. The question is how can we translate those into advantages and ultimately benefits for patients. And I think we’re focused on really figuring out how that differentiation can work and what data will provide us that differentiation.
If my uneducated eye understand correctly, the key problem with Lonigutamab is that it is not likely to be significantly differentiated from an already commercialized treatment for TED, Tepezza.
So net cash is basically all that SLRN currently has, and I see no realistic path for Tang – or anyone else – to bid above the previous $3/share offer, let alone anything close to management’s estimates of company’s intrinsic value of $4.59-$5.68/share. Any smaller price bump (I guess Tang could theoretically still raise by 3%-5%) wouldn’t move the needle and would almost certainly just get turned down as well.
Shareholders are likely to approve the merger
The merger already has strong support from both sides. The transaction requires approval from both ALMS and SLRN shareholders. So far, 62% of ALMS and 24% of SLRN shareholders have already signed support agreements.
There is also one major mutual shareholder – Ayurmaya Capital – which holds 22% of ALMS and 9% of SLRN. Ayurmaya has board representation on both sides and a clear interest in seeing this deal going through, as it effectively rescues and strengthens its larger investment in ALMS. My guess is that Ayurmaya was instrumental in getting ALMS/SLRN merger signed.
There are a few other large SLRN shareholders that haven’t entered into support agreement: FMR – 9%, T. Rowe – 13%. However, these are giant institutional investors for which SLRN’s stake is less than a speck. Doubtful they will actively oppose board’s decision by voting down the merger.
SLRN’s management owns almost no shares, and will receive 2 board seats (out of 7) on the combined company.
Given the existing support and Ayurmaya’s vested interest, the odds are strongly in favor of the merger proceeding as planned.
ALMS is not able to offer better merger terms
I think the current offer is already the best that ALMS can come up with. This merger is a simple capital raise for the buyer and ALMS is already giving away 45% of the combined company to SLRN shareholders in exchange for cash. I doubt that ALMS can go any higher than the current 45%/55% split – it would send a very negative signal to the market of how desperate ALMS is, likely pushing the buyer’s stock further down (even this merger was already treated as a sign of desperation).
Recovery in ALMS share price is unlikely
ALMS’ stock price has been in a straight decline for almost a year, dropping by 70% since the $16/share IPO in mid-2024. So it might seem that part of upside in the merger comes from ALMS trading materially below its intrinsic value, however, I do not think that is the case. At the time of IPO, ALMS prospects were valued at $870m (I assign no value to cash as expectation was that all of it will get burned in drug development). The current merger effectively values the prospects of the combined company at $500m (100m shares x $5), again assuming that all cash will be spent on drug development. While this new ‘valuation’ is 40% below the expectations at the time of IPO, the prospects seem to have changed more than that to the negative side.
The main reasons ALMS has been in freefall over the last year is that cash burn has been significantly higher than anticipated (that’s why this merger is required) and that the outlook for ALMS key treatment for Plaque Psoriasis has gotten substantially worse. The treatment is now in Phase 3, with results expected in H1 2026.
Plaque psoriasis is an autoimmune condition that causes scaly, inflamed patches on the skin. There’s no cure, but there are plenty of FDA-approved treatments that help manage symptoms. The only oral solutions (the others are intravenous) for this condition are drugs based on TYK2 inhibitor, which targets a protein involved in immune system regulation. ALMS’ treatment is also based on TYK2.
There is already an FDA-approved TYK2 treatment for plaque psoriasis is Sotyktu, which was launched by Bristol Myers Squibb at the end of 2022. Bristol Myers had high hopes for Sotyktu. It was projecting peak sales of $4bn and was expecting $1bn in annual revenue by 2025-2026. Sotyktu sales so far have massively disappointed – reaching only $264m in 2024 and showing minimal YoY growth (10-15%) during the last two quarters. Key issues seem to be “severe payer access restrictions“, pricing pressures, and growing competition.
The competition is only heating up. Takeda’s TYK2 inhibitor treatment expects to have Phase 3 trial results in early 2026. J&J’s JNJ-2113 is moving through its own Phase 3 trials, targeting IL-23 inhibitors, which have already proven to be more effective than TYK2 inhibitors in intravenous form. These are pharma heavyweights with deep marketing budgets and massive distribution networks. For reference, last year Takeda was hyping its Phase 3 trial as having “unprecedented patient diversity.”
All of this puts substantial headwinds in front of ALMS and makes any sudden stock price recovery in the near term highly unlikely. No major trial results are expected anytime soon. Unless something really unexpected happens, the downward pressure on ALMS should persist.
You could still hedge ALMS exposure risk by going long the buyer’s stock, but if the merger falls apart and ALMS tanks (due to losing an attractive cash raise deal), that hedge could wipe out all your gains on the short side.
T. Rowe Price has slashed its position in SLRN from around 13% to just below 5%, which is a significant positive for the short thesis. T. Rowe used to be the largest shareholder. I previously thought there was a chance they would support Tang and the opposition. Now, I don’t see how Tang succeeds.
https://www.bamsec.com/filing/189761225000113?cik=1962918
A couple of new developments on SLRN:
– Tang continues to build the position, now at 8.8%. He was buying almost on a daily basis over the last couple of weeks at around $2.7/share.
– SLRN announced poison pill in response to this. Tang is now limited to 10% stake.
I am struggling to see what Tang’s game plan is. Even if he convinces shareholders to reject the merger with Alumis, management will then likely proceed with the already-planned Phase III study of Lonigutamab and the cash on the balance sheet will simply be incinerated.
Tang’s filling – https://www.bamsec.com/filing/121465925004290/2?cik=1962918
Poison pill – https://www.bamsec.com/filing/119312525053552/4?cik=1962918
Is it possible that he’s also shorting ALMS (disclosure not required), and betting that in a merger break scenario ALMS will fall more than SLRN?
Why would he do a pair trade then and not just only short ALMS?
It’s just my speculation, but his stake in and a potential higher offer for SLRN is probably the only thing that may lead some SLRN shareholders to vote against the ALMS merger.
ALMS has collapsed, but SLRN has actually appreciated, trading at $2.78, or 66% above the stock consideration of now merely $1.67.
So the “market” is thinking that not only will the SLRN/AKMS deal break, but also SLRN will receive a higher offer from Tang or someone else.
ALMS signed a licensing deal with Kaken Pharmaceuticals, a $1bn market cap Japanese drugmaker, for developing and commercializing ALMS’ ESK-001 in Japan. ALMS will get $40m in upfront and co-development payments in 2025–2026, and up to $140m in potential milestones. So basically, a relatively large third party is saying that maybe ALMS isn’t worthless after all. ALMS went up 6%, while SLRN dipped slightly. SLRN still trades at a big premium to ALMS’ offer, implying high odds of the merger break.
SLRN’s price action is puzzling. It’s completely decoupled from ALMS price volatility: it was appreciating a bit when ALMS was previously in a slow motion train wreck, and it was not responding much today when ALMS shot up 50%.
If the market is seeing a high prob of merger break, which party (ALMS or SLRN) do you guys think is the most likely initiator of the break?
I don’t think SLRN shareholders are now LESS interested in the the merger after the ALMS licensing deal.
Yeah, it’s a weird one. I think ALMS is actually pretty keen on getting this deal done. No way they’re walking away. It’s the opposite for SLRN’s shareholders, who are getting a very bad deal here. The Kaken deal makes things look a tiny bit better, but it’s still hard to argue with how the market is pricing it.
SLRN is now trading at a discount to the ALMS stock consideration.
However, ALMS borrow is not available at this moment.
Are people looking at the likely consideration from whoever acquires this as being +/- $3 cash? Is there an out for the ALMS holders that signed support agreements if the stock consideration gets above that fair value level? Or do you think this is purely bc no borrow is available
The discount has been eliminated, but completely by ALMS price coming back down to earth; naked long SLRN lost money during the “convergence”.
Time to short SLRN/long ALMS again?
After yesterday’s run-up in ALMS share price, merger consideration is now equivalent to $3.1 per SLRN share. This puts merger consideration in line with the Tang’s offer. I think this increases the likelihood that ALMS/SLRN merger will close and activists’ efforts will fail, especially if the positive perception towards ALMS is maintained till the voting date. If there was any borrow available on ALMS, I would be happy to put a hedged merger arb trade on the current 20% spread. Unfortunately, ALMS borrow is not available and very expensive (96% annual rate).
With regards to ALMS stock itself, the market reacted positively to collaboration agreement with Japan’s Kaken Pharmaceuticals, which has taken licenze to commercialize Alumis key drug in Japan in exchange for $20m upfront + $20m in development costs over the next two years + milestones and royalty payments. Fund injection is not as important, as a vindication that ALMS treatment for Plaque Psoriasis might be a commercial success—a knowledgeable party is betting $40m just for Japan’s licenze.
I am not in a position to argue with this investment from Kaken Pharmaceuticals. My previous assessment of dubious of prospects for ALMS was based on lackluster sales of BMY’s Sotyktu (same/similar indication) as well as high number of other treatments for Plaque Psoriasis slated to come to the market over the next few years. This increasing competitiveness in the field remains unchanged, but Kaken’s decision here carries way more weight than my own superficial analysis.
If anyone had a short on SLRN (in expectation that Tang’s efforts with a higher offer will fail and management will force merger with ALMS), I do not think it makes sense to hold this short position any longer—SLRN short is basically a bet that ALMS stock price will collapse back to $5/share.
Finally, the 20% spread to ALMS merger consideration does not tell anything about the likelihood of ALMS/SLRN merger closing. With no borrow and no possibilities to put the arb on, SLRN might simply trade at the level at which the combined company is likely to settle post merger. So it is not surprising the two stocks move independently.
Although we can’t short ALMS, what prevents some existing shareholders of ALMS from selling their shares and switch to SLRN between now and closing, and by doing so lowering their cost basis by 30% and closing the price gap a little bit?
If you want you can short ALMS now. That 500% borrow rate(!) will devour your arb quite quickly though.
A borrow rate below 100% is potentially acceptable, given the 3 month timeline to deal closing.
Are we expecting deal closing by end of Q2?
The shareholder meeting has been set for May 13, so I think it’s fair to expect the deal to close by the end of May, which is less than two months from now. The spread to the ALMS deal is currently 72%, but borrow fees are extremely high. The spread is getting wide enough to consider going long anyway. But I don’t like the volatility of ALMS and have no idea of how to handicap the risk of it falling back down until the deal closes.
The company also released a merger proxy. The only noteworthy detail was that just two weeks ago, it received an offer from an undisclosed “Party D”: $2.70/share in cash plus $3.00/share in a CVR. The company was prepared to treat this as a superior offer and notified ALMS accordingly. But just a few days later, Party D walked away, without giving a reason.
It’s an interesting twist. On one hand, it suggests there was at least one other buyer who sees value in SLRN’s pipeline, which I’d previously assumed was mostly worthless. On the other hand, something clearly scared them off, as they backed out quickly.
The companies have just amended the exchange ratio, and surprisingly, it was adjusted upwards from 0.4274 to 0.4812. Probably after ALMS dropped back down by 50% over the last 2 weeks, the risk of shareholder rejection became much higher. At current prices, the new ratio implies a consideration of only $2.26/share — still significantly below both the rejected Tang’s offer and the current net cash level. SLRN is currently trading slightly above the implied value of the consideration. It kind of looks like the merger break thesis might become interesting again, especially with the shareholder meeting just a few weeks away.
The revised proxy was just filed, and it essentially confirms that SLRN received shareholder feedback indicating that the risk of rejection had meaningfully increased, prompting them to adjust the ratio upward. It’s unclear which shareholders they spoke with, but the discussions were held.
Can Tang’s offer come back to the table if the merger breaks?
He can still come back, but it would be at a lower price than his initial offer. Meanwhile, the risk of SLRN management rejecting that offer and continuing the development of the remaining drug instead would be high. Thus, even if Tang made a bid, there would likely be a meaningful spread. If he does not come back, there is a very good chance of a meaningful drop following the rejection of the ALMS deal by shareholders. SLRN has historically been, and continues to be, a cash-burning machine, so the discount to net cash and thus downside could be massive. As I noted, the short looks interesting here.
What do you think would happen to ALMS stock price if the merger breaks?
Collapsing too, because ALMS would need to raise dilutive financing?
Yeah, that could be the case. The company has $300m in cash, which is equivalent to about five quarters of cash burn based on Q4 numbers. In real terms, the runway is now less than a year, so its stock price probably should also collapse. That said, they do have successfully progressing drugs, so I wouldn’t be able to handicap any surprises from data releases or similar events properly. Plus, shorting both is certainly not a great idea if this deal closes, and if I had to choose between the two, SLRN seems like a much better setup.
If Tang comes back with the same $3 cash + CVR offer, will management be more likely to say yes this time, with ALMS out of the way and with the increased volatility in the market?
Trium Capital, a 5.4% shareholder, has released a detailed letter opposing the merger with ALMS.
The activist argues that liquidation is a far superior outcome vs merger with ALMS. Based on their estimates, the liquidation value is around $3.53–$3.67/share, assuming no value for lonigutamab, versus just $2.06/share under the ALMS deal based on the current exchange ratio.
Beyond valuation, the activist raises several concerns around potential conflicts of interest and management conduct. Most notably, they criticize management and the board for failing to seriously consider liquidation as a viable alternative during the strategic review process.
Additionally, Trium finds it suspicious that both companies initially downplayed the value of lonigutamab, at one point even suggesting it might not enter Phase 3 studies, only to later highlight its strategic importance and the potential synergies of combining both pipelines. I found this odd as well. At the time of the merger announcement, all indications were that lonigutamab held little to no value—at best, it was treated as an afterthought. The sudden re-framing of its value seems more like a justification for pushing through a speculative merger at a steep discount to net cash, despite more certain alternatives being available to shareholders.
Another interesting point raised by the activist is the highly questionable behavior surrounding the decision to adopt a poison pill. Initially, SLRN management chose not to implement a poison pill on March 10, only to reverse course and adopt one just two days later. This decision came immediately after Mr. Babler (Chairman and CEO of Alumis) contacted Mr. Gosebruch (Chairman of SLRN’s transaction committee) to “suggest that Acelyrin adopt a Rights Plan” in response to Tang accumulating an 8.8% stake. The poison pill was adopted right after that conversation.
What I missed during my initial evaluation was the fact that Mr. Gosebruch, the very chairman of the merger committee, is apparently joining the ALMS board. That is a clear conflict of interest and reflects serious bias on the part of SLRN management in favor of the ALMS deal.
From this letter, we now know who was behind the shareholder pressure that forced management to improve the exchange ratio. We also now know that the combined stake of Trium Capital and Tang is around 15%, compared to the 21% of SLRN shareholders who previously supported the merger. This is a meaningful level of opposition that, together with broader shareholder sentiment, could be enough to block the transaction.
Despite that, I still don’t believe we’ll see favorable value realization under the current board or management. The board is clearly conflicted, staggered, and if the merger fails, there’s still a strong chance that management will continue pushing speculative development efforts. So I wouldn’t count on liquidation or a Tang-led buyout materializing here.
Also, I think the activist’s liquidation estimates are overly optimistic. Net cash today is likely around $3.10/share, accounting for ongoing cash burn. With additional liquidation expenses and severance costs, that figure would be even lower. And even if Tang were to make an offer, it would likely come at a discount to net cash, which has meaningfully shrunk.
So, after the 12.5% run-up on the back of Trium’s 13D filing, I think SLRN is now fully ripe for a short. Worth noting, SLRN also trades at a 17% premium to the ALMS offer today.
Activist’s letter can be found here https://www.bamsec.com/filing/196386025000015/2?cik=1962918
The silver lining from KRON is that the SLRN short thesis has gotten stronger, now that we know that Tang is very cheap and is not very likely to offer a fair price, in particular after the ALMS merger breaks.
ALMS ran up by 26% simply because SLRN board “reiterated benefits of value-maximizing combination with ALMS”?
Looks more like a short squeeze?
And SLRN stock price barely reacted.
SLRN already trading above the deal price so probably that is why.
caused by SLRN shorts trying to cover at lower costs by buying up ALMS?
ALMS does feel like a meme stock lately
Another 13D filer has joined the list of SLRN shareholders with a 5% stake and plans to vote against the ALMS deal. Madison Avenue has been accumulating its position since mid-May, mostly buying in the low to mid-$2 range. The activist has opposed the merger with ALMS and criticized the board’s decision to adopt a poison pill, suggesting it may have been influenced by the ALMS CEO.
As for the increase in ALMS’s stock price, it could be a short squeeze, but it’s hard to say for sure. A portion of the move can certainly be attributed to SLRN management’s reiteration of the transaction value. ALMS needs this deal way more than most SLRN shareholders, given the liquidity situation.
https://www.bamsec.com/filing/168316825002956?cik=814586
SLRN shareholders have voted to approve the merger. Interestingly, the stock dropped ~15% following the news, mostly in line with ALMS’s share price drop on approval. This reaction is somewhat surprising, considering the deal is/was highly beneficial for ALMS. This was quite a ride.
https://finance.yahoo.com/news/acelyrin-stockholders-approve-merger-alumis-170000766.html
Unfortunately borrow rate for ALMS currently stands at 140%, or nearly 18% for 1.5 months. So it’s not possible to arbitrage the remaining discount.