Description

OVERVIEW

Tang Capital owns 10% of Jounce Therapeutics (“JNCE” or the “Company”) and has offered to buy the company for $1.80 cash plus a CVR (representing the right to receive 80% of the net proceeds payable from any license or disposition of certain of JNCE’s legacy programs) which is likely a better deal for shareholders than a merger with another company JNCE had previously announced.  The Tang deal offers a return of at least 12% for shareholders in a deal that would close in May.  This 12% return ascribes no value to the CVR.  Also Tang could likely increase its offer since it appears to buying the company at/below cash and will get 20% of the CVR.  Another possible outcome is that JNCE recuts the REDX merger to make it more favorable to JNCE shareholders.

THE SITUATION

On February 22 JNCE announced a restructuring that will result in it ceasing to develop its main drugs, leaving the company with a lot of cash and some employees (but no product to develop or sell).

On February 23 the Company announced a stock for stock merger with Redx Pharma (AIM: REDX) another biotech company that is developing RXC007.  REDX essentially gets JNCE’s cash, its US Nasdaq listing and its remaining r&d people.  REDX will own 63% of the combined company and JNSE 37%.  As part of the merger JNCE shareholders will also get a CVR (described above).  21% of JNSE shareholders have already agreed to support the deal.  The merger is expected to be completed during q2 2023 and needs shareholder approval for both parties.  At the time of the completion of the merger JNCE is expected to have around $155m of cash and cash equivalents, which net of any tail and closing costs results in at least $130m in cash and cash equivalents available to the combined company. 

On March 14^th via a 13D Tang Capital disclosed it had submitted a non-binding buyout offer to buy JNCE for $1.80 cash plus a CVR (which is identical to the one set forth in the REDX merger).  Tang stated it expected to complete due diligence and negotiate a definitive merger agreement by March 31, 2023 and would be able to close the cash tender by early May 2023.  Tang made the offer thru Concentra Biosciences LLC, a company Tang controls.  Tang claims Concentra has funds immediately available to execute this transaction through an arrangement with Tang Capital Partners, LP, and that the management of Concentra has the expertise and resources to maximize the value of the CVR for the benefit of legacy Jounce stockholders.

Tang’s offer was originally to expire at 5pm EST on March 17, 2023…only 3 days after it was made.

On Friday March 17, 2023 in a 13D filed at 4pm (there was no press release) Tang disclosed that

1. It had entered into a confidentiality agreement with JNCE on March 15, 2023
2. It was extending the expiration of its buyout offer to midnight EST on March 26, 2023

Clearly JNCE’s board moved quickly to engage Tang.

JNCE’s largest shareholders are Tang (10%), Gilead (10%), RTW (10%), Deep Track (8%), Cowen (7%), BOFA (6%).  Management doesn’t own much stock.  JNCE’s CEO, Richard Murray, will not be a member of senior management of the combined JNCE/REDX company (although he will be on the Board).  I think most of JNCE’s shareholders are motivated to maximize shareholder value and thus will favor the Tang bid.

There does not appear to be a break up fee on the REDX merger.

A presentation by REDX/JNCE on the merger can be viewed at:

https://webcast.openbriefing.com/redx-jounce/player/?player_id=50921

I believe Tang could raise its offer because:

1. I doubt that in this situation he would make his first offer his last offer.
2. Tang’s offer appears to be at/below what JNCE’s net cash balance should be at closing plus Tang will get 20% of the CVR proceeds.  As per the REDX merger and Tang offer, at closing of either deal, JNCE will have at least $130mm in cash and cash equivalents, net of any tail and closing costs.  JMCE has 52 million shares so $130 mm of cash equates to $2.50 of net cash.  Its unclear s if there are any liabilities that are excluded from tail and closing costs that would reduce the $2.50 figure.

OTHER [PERHAPS IRRELEVANT] OBSERVATIONS

1. Tang owns 5.3 million shares at a cost of $6.5 million or $1.23/share.  All shares were purchased after JNCE announced its Feb 22 restructuring.  This is a tiny position for Tang so I assume they must see significant upside to warrant the time and money they are investing.
2. Tang’s original offer letter was addressed to The Board of Directors.  The March 17^th letter (extending the offer’s deadline) letter was addressed Dear Richard…(which I view as a cordial way of addressing the CEO, Richard Murray….aka they didn’t say Mr. Murray, they called him by his first name).

Catalyst

takeover offer from Tang