Adaptimmune: TCR2 Merger Represents Opportunity For Enthusiastic Investors

Two weeks ago, Adaptimmune (NASDAQ:ADAP), a struggling developer of TCR T-cell therapies (called SPEAR T-cells), announced a definitive merger agreement with another struggling, much smaller TCR therapy developer, TCR2 Therapeutics (TCRR). ADAP stock is down 30-40% as a result, while TCRR is up 40%.

I have followed both companies for a while. ADAP has its own heavy burdens, as does TCRR. ADAP’s lifeline, as I noted before, is afami-cel, and the stock was down in the bottom for a long time because there was no clarity about the progress of afami-cel. In November, however, the company noted that they would be completing a rolling BLA by 2023. The stock went up 50% on this news within a few days.

Then came this so-called merger which took ADAP down again. I call this merger so-called because it is not a merger of technologies, it is simply a tricky way to get some additional funds. Recall how I noted in my recent study of TCRR that it was trading below cash. The company had cash that was nearly double its market cap at that time. Recently, the stock went down a third of its January 2022 valuation - when I had covered it - so it had way more cash than its market cap.

ADAP “purchased” this failing company not for its technology or for the manufacturing unit it recently acquired in Maryland - those are side benefits - but for its cash. And in order to do so, ADAP effectively diluted its stock by giving TCRR shareholders 1.5 ADAP stocks for every TCRR stock they hold. Thus, ADAP is issuing 60 million new shares, diluting itself by around 30%, and with this approximately $80mn, it is getting access to TCRR’s cash and getting the pipeline for free. In this manner, they raised some $150mn and extended their cash runway.

Sounds smart, but why is the market perceiving it differently? Because I suspect the market is questioning ADAP’s ability to manage this merger to its best advantage. The market probably prefers ADAP to stay with its afami-cel rolling BLA submission, complete it appropriately, and only after strong regulatory progress, involve themselves in financial magic tricks.

Jacob Plieth over at Evaluate agrees with some of this assessment. Like he says:

Behind the hype, however, a more prosaic rationale emerges: Adaptimmune is issuing stock to get its hands on TCR2’s cash, and the transaction is basically a glorified equity raise.

However, ADAP indeed did something smart. It found itself a small company with a lot of cash but no future, and it offered them a terrible deal they couldn’t refuse because they had no option. TCRR stock is up a little and those who came in recently are running for the door, but long term TCRR shareholders are left holding the bag. Meanwhile, ADAP managed to “pay” $80mn in diluted stocks to gain access to nearly $150mn in funds, extending their cash runway. While they talk about merging two leading TCR companies and retaining TCRR’s pipeline, I doubt there’s anything much of importance in that pipeline to merit attention.

How good is this for ADAP? Let's see what I wrote in December:

ADAP has a market cap of $294mn and a cash balance of $79mn. They had revenue of $7mn as well. Annual operating expenses were $50mn, so they are in a precarious cash position. They do have marketable securities of another $120mn. The company de-prioritized some of its non-core programs and undertook a major restructuring, reducing headcount by between 25 and 30%. This, they say, will extend their cash runway to 2025.

TCRR thus had nearly double the cash of the much larger ADAP, and while TCRR had nothing much of immediate importance in its pipeline (despite some early positive data), ADAP has afami-cel. Using this cash, ADAP can now have the freedom to complete the regulatory work for afami-cel. If approved, afami-cel will be the first approved engineered TCR therapy. Thus, this looks like a smart deal for ADAP.

ADAP has had its own problems with afami-cel. Earlier, they had planned to complete some of the regulatory process by last year. But then they discovered a manufacturing problem after a “chromosomal abnormality” was identified in the original batch of afami-cel. This pushed back their timeline by nearly 18 months, and also forced them to cut back on costs, reducing workforce and shelving less critical trials. The company recently acquired new programs from GSK, and these are going to continue. A few older programs are being shelved. However, after a change at the helm at GSK, the partnership with ADAP was shelved.

The company’s rolling BLA submission is for synovial sarcoma. The registrational SPEARHEAD-1 trial saw a 34% response rate, well above the historical threshold of 18%. Synovial sarcoma is a small market, but afami-cel is not a single product but rather a platform. The company hopes that if afami-cel can somehow manage to get one foot into the FDA threshold, it will be able to extend its labels quickly and target a market that's 40 times larger than synovial sarcoma alone.

Bottomline is, with this merger, ADAP is looking at a largely extended runway, does not need to pay TCRR any cash, has the afami-cel program nearing completion, and all these things are broadly good for the company. Thus, the dip in the stock price represents an opportunity - for ADAP’s potential investors.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

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