Description

I will make this one short and to the point, since it is probably only a PA idea…

MTCR a clinical-stage biopharmaceutical company developing differentiated therapies for patients with gastrointestinal diseases.

But who cares?

Metacrine (ticker: MTCR)  is liquidating.

Unlike most liquidations where you have to take a leap of faith on what the assets will be sold for, there appears to be enough cash here to result in a good outcome if the Company gets next to nothing at all for the assets that remain.

The expectation of value here is $0.59c or more, which is ~28% up from the current price of $0.46 over a time frame of ~ 90-100 days.

************

Timeline

Sept 2022

Equillium (ticker: EQ) announced that it would acquire MTCR in an all-stock transaction at an exchange ratio of 0.282x.

EQ’s pipeline consists of several first-in-class immunomodulatory assets targeting immuno-inflammatory pathways.

EQ was to absorb MTCR’s clinical programs at a premium to MTCR’s cash at the time. They were going to let go of all MTCR employees.

From the deal announcement:

“After paying off its existing debt facility, Equillium expects to add an estimated $33 million of cash to its balance sheet at closing. Equillium is not planning to retain any current Metacrine employees and expects to assume minimal operating expenses while maintaining sole discretion over the timing and extent of advancing development of the Metacrine programs.”

EQ’s shares started to fall following the announcement.

December 8, 2022

Activist Braden Leonard of BML Capital Management raised his stake in MTCR and filed a 13-D on stating that BML would block the merger.

From the 13-D:

The Reporting Persons plan to vote AGAINST the proposed merger with Equillium,Inc, unless the collar is adjusted to reflect the current Equillium share price.

Even figuring in the EQ share price since the announcement, the offer valued MTCR at a 45% discount to net cash.

December 23, 2022

MTCR failed to gain any shareholder support for the Merger.

Just before Christmas, Equillium and Metacrine jointly called off the Merger Agreement and parted ways.

************ 

The last time MTCR reported it’s earnings in Nov 2022, the balance sheet looked like this:

On Jan 24, 2023 the Company filed a Proxy Statement for a Special Meeting to be held on March 23, 2023 to approve the liquidation and dissolution of the company.

The filing states the following:

• Cash as of Dec 31, 2022 was $48.6m
• That the Company will pay off their debt, in full, in Feb 2023
• $207m NOL (important in case they sell any assets between now and the ultimate liquidation).

After the debt gets paid off (round to $14m), the Company will have $34.6m of cash remaining not including any burn between now and liquidation.

So what is the burn?

Well the company burned $4.1m over the course of the last three months (Oct, Nov, Dec 2022).

This equates to $1.36m per month, however this could be elevated because of the professional fees surrounding the termination of the merger.

To be conservative, however, let’s say $1.5m per month is actually the right number.

Jan, Feb and March could equate to another $4.5m of burn leaving us with the following:

$34.6m cash after debt paydown

($4.5m of additional burn)

($4.0m of “other” liabilities – from Sept 2022 balance sheet)

-----

$26.1m cash

There are 44.346 shares outstanding

$26.1 / 44.346m =  $0.59c/share of liquidation value versus $0.46c today.

************

 It is worth noting that back in November 2022, when MTCR was still looking to potentially merge with EQ, a bank by the name of MTS performed a liquidation analysis for MTCR.

Liquidation Analysis from Nov 10, 2022 DEFM14A

At the direction of Metacrine, MTS assumed that the only material assets of Metacrine were its cash, that no other assets of Metacrine have any material value, and that Metacrine does not currently, and does not intend in the future to, conduct any activity that may result in the generation of revenue. Metacrine instructed MTS to assign meaningful value only to Metacrine’s Net Cash. In connection therewith, MTS was advised by Metacrine that Metacrine’s Net Cash alone is not sufficient to support Metacrine as a standalone entity going forward, and based on such direction from Metacrine and with the consent of the Metacrine Board, MTS analyzed the relevant intrinsic valuation of Metacrine solely using a liquidation analysis, which includes the monetization of the foregoing assets to estimate a sum-of-the-parts value in a potential liquidation. Correspondingly, MTS reviewed and relied upon Metacrine management’s assumptions on liquidation costs for purposes of a liquidation analysis to value Metacrine.

MTS computed the total equity value of Metacrine in a liquidation to be approximately $27.3 million, calculated as approximately $55.5 million of cash as of June 30, 2022, less wind-down costs of approximately $29.5 million, plus an assumed upfront cash value from Metacrine’s licensing deal relating to the HSD program of $1.25 million, as compared to the then-current market capitalization of Metacrine of approximately $20.6 million. The analysis assumed a liquidation date of November 30, 2022, that all wind-down costs were paid in full, employees were severed by November 30, 2022, all employee-related restructuring and severance costs are paid in full, and, to be conservative, that no funds were retained in reserve for unknown or contingent liabilities. MTS estimated a liquidation value of approximately $27.3 million to Metacrine stockholders in a potential liquidation, or $0.58 per share.

Is There Further Upside if they Sell Assets?

One could make the case that as recently as Sept 2022, EQ (now a $36m market cap), was willing to pay $4m for the MTCR assets calculated as $30m in stock for MTCR, a 25% premium over cash delivered at closing, which was $26m).  $30m - $26m = $4m. Could the MTCR assets be worth $4m?  Unlikely.  Could they be worth $1m or even $500k? Every $1m = 2.3c of upside, or 4.3% up from the current price.

In Good Company

In early December, Kevin Tang reported owing over 7% of MTCR

https://www.sec.gov/Archives/edgar/data/1191935/000121465922015098/p1214224sc13g.htm

Tang is considered a strong life sciences investor – perhaps he thought this deal would never go through yet the liquidation value would be worth a punt.

Catalyst

- liquidation by the end of March 2023

- asset sales generate some extra proceeds