Talaris Therapeutics: Cashing Out Ahead Of Tourmaline Merger

Talaris Therapeutics (NASDAQ:TALS) initially attracted my attention several months ago. At the time, TALS was a failed biopharma trading at a big discount to its net cash and running a strategic review. After a death of a patent in one of the trials in late 2022, TALS subsequently suspended the development of its clinical pipeline and laid off the vast majority of its workforce which seemed to indicate that the company was laser-focused on minimizing cash burn and maximizing shareholder value. While it was not entirely clear if a liquidation was in the cards, the significant presence of prominent VC/PE firms on TALS's register (including Blackstone with a 25% stake) and their control over the company/management indicated that a value-destroying reverse merger was out of the question. Here's how I described the setup to Special Situation Investing subscribers in April:

What has happened since? Well, given TALS's highly volatile share price, I was able to play the situation successfully more than once. Initially, I exited the position when the shares ran up to $2.90/share and the gap to the estimated net cash narrowed substantially, leading to a 20% gain. The market presented another opportunity to play the situation as TALS share price retraced back to $2.40/share, enticing me to re-enter the position. The anticipated positive announcement came several weeks after the re-entry as TALS concluded the strategic review, agreeing to a merger with a late-stage biopharma Tourmaline Bio. TALS share price jumped as much as 31% on the day, allowing me to close the position at $2.80/share.

Since then, TALS share price has continued their ascent before settling in the $3.03-$3.20/share range ($3.07/share currently), proving my second exit to have been a bit early. Having said that, at current share price levels I am inclined to stay on the sidelines given limited further upside. As part of the announced transaction, TALS equity holders will retain c. 21% ownership in the combined entity and receive a cash dividend of $65m. TALS's management has estimated the value of the 21% stake at $1.92/share which coupled with the $65m or $1.51/share cash dividend would value TALS at $3.43/share. However, I think the management's estimate of the value of 21% stake might be overly optimistic. Here's a breakdown of the combined entity's value as estimated by the management:

• $230m value of Tourmaline.
• $82.5m value of Talaris net of up to $64.8m in cash dividend.
• $75m investment coming from PIPE investors.

This leads to a total value of $387.5m, implying $82.5m ($1.92/share) attributable to current TALS shareholders. The main uncertainty lies in determining the value of Tourmaline which accounts for the majority of the combined entity's estimated value. Tourmaline's primary asset, TOUR-006, is currently in phase 2 of clinical trials for treating thyroid eye disease (TED), and phase 2b is expected to commence in Q3 2023. Additionally, Tourmaline plans to initiate a phase 2 trial for atherosclerotic cardiovascular disease (ASCVD) in 2024. Estimating TOUR-006's value is clearly not straightforward and I have limited expertise in the field to double-check the management's estimate ($230m). Worth noting that Tourmaline has recently secured $112 million in series A financing led, however, it is unclear how much of the company's ownership stake that funding represents.

I think that the combined Talaris/Tourmaline entity might very well be valued approximately at its net cash levels. A relevant example to consider is the merger of Syros Pharmaceuticals and Tyme Technologies, which was completed in September 2022. In a similar fashion to the Talaris/Tourmaline merger, the transaction involved private investment in public equity (PIPE) from well-regarded biotech investors. However, subsequent to the merger, SYRS stock experienced a significant decline and is currently trading at approximately one-third of the valuation at the time of the private placement. By valuing the combined Talaris/Tourmaline entity at its pro-forma net cash levels of $210 million, the 21% share held by TALS's shareholders would be worth approximately $45 million. This translates to roughly $1 per TALS share. Coupled with the cash dividend of $1.51/share, this sums up to $2.51/share - substantially below current share price levels.

More Details on The Merger And Tourmaline

A bit more details on the merger. The transaction will require shareholder approvals on both sides and is expected to close in Q4'23. I think the merger is highly likely to close successfully given that TALS has been controlled by several reputable PE/VC firms (own 57% of TALS, led by Blackstone) while TALS's management owns a further 17%.

The merger will expand the Tourmaline's cash runway through 2026, allowing it to continue the development of its key program TOUR006. The program has been licensed by Tourmaline from Pfizer in May'22. Interestingly, the company boasts a line-up of reputable executives and investors which suggests the company's pipeline might have high potential:

• Tourmaline's co-founder/CEO has previous experience as the COO at IMVT which is a $2.7bn market cap biotech company.
• The chairman of the merged company will be Tim Anderson, who is currently a partner and co-founder of Cowen Healthcare Investments, an indirect subsidiary of TD Bank, a major Canadian banking institution. Recently, Cowen raised $550 million for its fourth fund.

As part of the transaction, Tourmaline will raise $75m from a group of life sciences investors, including Deep Track Capital and Cowen Healthcare Investments. The investment from current Tourmaline shareholders reflects strong confidence in the company's future prospects. Another positive indicator is that Cowen has chosen to enhance its level of involvement by appointing Tim Anderson as the chairman.

Takeaway

At current share price levels, I am exiting my position in TALS. Given a somewhat similar biopharma merger where the combined company's stock price ended up significantly below management's valuation at the time of the merger, I think there is a good chance the combined TALS-Tourmaline might trade closer to the company's net cash levels. In such a scenario, the combined company would trade at c. $1/share, implying that the value TALS shareholders are receiving with the transaction is below current share price levels.

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