Special Situation

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.