JNCE - Jounce Acquisition: Exploring Whether It Is Worth It To Pay Up For CVR Value

2023-04-18 16:26:35 ET

Summary

• Jounce Therapeutics, Inc. is being acquired by Concentra, a subsidiary of Tang Capital Partners, at $1.85 per share in cash, plus a non-tradeable CVR.
• Concentra's offer was deemed better than a merger with Redx Pharma or liquidation overseen by current management.
• CVR represents the right to receive certain contingent cash payments from any license or disposition of Jounce's programs and specified potential cost savings.
• Tang Capital, owning ~20% of the company's shares, has an incentive to make the deal work and resell Jounce's assets.
• Although it is difficult to determine the value of the CVR, the current $0.08 premium above the merger cash consideration appears to be an advantageous bet.

Jounce Therapeutics, Inc. ( JNCE ) will be acquired by Concentra , a subsidiary of Tang Capital Partners, LP, at $1.85 per share in cash, plus a non-tradeable CVR. Jounce's Board approves the deal of Directors and it is supposed to close early in the second quarter of 2023.

Jounce previously had a reverse merger agreement to bring a private biotech (Redx Pharma) to the markets. Concentra's offer in the end was considered better than either a merger with Redx or a liquidation overseen by current management.

The stock currently trades at a premium to the takeout price. So it is important to look into the CVR. The CVR is described as follows :

Each CVR represents the contractual right to receive certain contingent cash payments equal to "CVR Proceeds." These proceeds would be 80% of the net proceeds payable for a period of ten years post-closing from any license or disposition of Jounce's programs effected within two years of closing and 100% of the potential aggregate value of certain specified potential cost savings.

While the Concentra offer was coming together, the company revealed good news about one of its assets. It wasn't a game changer but made Concentra up its offer a bit, included upside based on potential lease termination/discount (a lot easier to achieve than a successful clinical trial) and extended the CVR timeline.

Jounce used to have a much higher market cap, but that's before Gilead Sciences, Inc. (GILD) took over one of its important assets.

The market is likely not just down on the assets but has also been punishing the stock, as it was burning $30 million/quarter. A capital raise was expected at some point in 2023. Companies like to do this after announcing favorable results, but if the company doesn't get a chance to issue shares into an exciting data point, prospects to raise capital favorably quickly deteriorate.

Gilead bought out an asset referred to as GS-1811. As I mentioned before, the JTX 8064 asset showed some positive results, and in the tender offer it says:

Jounce published a press release announcing the results from a pre-planned data review of the INNATE phase 2 trial of JTX-8064 and pimivalimab demonstrating deep and durable responses in platinum resistant ovarian cancer. Subsequent to this announcement, the Company and, in accordance with the directives of the Company, TD Cowen reengaged with certain potential counterparties with pre-existing confidentiality arrangements with the Company to gauge interest in a potential transaction with respect to these programs.

It never became clear whether counterparties were now more interested in JTX-8064. However, the structure with Tang Capital is such that there isn't necessarily a rush to get something done. By having the assets go to Tang Capital in the short term, the company/Tang Capital is in a better negotiating position because the pressure of the cash burn is alleviated.

Tang Capital owns a sizeable number of shares (~20% of the company) and holds on to 20% of proceeds in case of a resale of any of these assets. That means the firm is still incentivized to make that happen.

In any case, it should be an ok deal for Tang Capital because the deal is contingent on the company maintaining a high-enough cash balance. If there isn't ~$110 million in cash, the deal can be called off. According to Seeking Alpha, the cash & short-term investments were at nearly $190 million at last report. The current market cap is around $100 million. Meaning this is quite a sweet proposition for Tang Capital as long as it can liquidate the company reasonably fast and at reasonable cost. The firm would benefit tremendously if it can make something happen with the assets, but it is not a prerequisite to make a good return here. Meanwhile, we have to lay out $0.08 to get at the CVR. The tender is supposed to close on May 3. I expect it will be successful and I would get $1.85 back a few days after that (it could get extended into June).

Unfortunately, the assets have been shopped around by the company. One asset got previously picked off by Gilead for $67 million. A similar result with the other assets could theoretically result in another $1 per share through the CVR. It is very hard to say what the CVR should be worth. Intuitively, I think this is still an advantageous bet on $0.08 per CVR (the premium above the merger cash consideration). Especially because early lease termination could result in a few cents per share being returned through the CVR. If the Jounce Therapeutics, Inc. share price returned to $1.85, it would be a much more evident proposition.

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