PDF - Downturn Concepts BOD Panel 2022-06-096

Peter Kolchinsky Tess Cameron Dan Lepanto
RA Capital RA Capital SVB Securities
JUNE 2022
DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
● Limited capital means ecosystem must raise the bar on our R&D. No longer
Good & Great… Now just Great.
● Small companies can find synergies: look for (3-1)+(2-1)=5 (not just 3)
● Better to pursue R&D (internal or acquired) with a mandate from majority of
like-minded shareholders (with amplified upside) than to battle activists
seeking a distribution of cash.
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This material is provided for discussion purposes only and is not intended to solicit investments in the fund, nor does it constitute an offer to sell, a solicitation to buy, or a recommendation for any security. 1
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DOWNTURN CONCEPTS AND TOOLS

FOR BIOTECH BOARDS JUNE 9 2022 2
Goals and Principles:
To ensure that our ecosystem’s current cash constraints impair as little of our
collective R&D efforts as possible.
The invisible hand of the tightening market doesn’t have to decide what R&D
survives. We have agency and can be deliberate in channeling our limited capital if
we work with the market instead of denying it.
There is merit to our every biomedical pursuit, but not equal merit.
The best of our R&D must progress and succeed so that we have the opportunity to
come back for the rest, if it’s still needed.
Just as a large company prioritizes programs when cash flow shrinks, so is rational capital
allocation possible at the level of our whole ecosystem (sometimes talking it through
requires reading some “signals”).
Boards must act quickly.

Topics we’ll fly though together:
1 Why this biotech downturn is different from all past ones and needs new tools
2 How to identify your most precious R&D
3 Finding synergies with other companies
4 Always know your "dissolution value"
5 How to recognize when management doesn't have a mandate from shareholders
6 How a self tender buyback can restore a shareholder mandate
7 How to respond to activists seeking a return of cash
8 Reverse mergers (how they can work and why they are harder to pull off than many
boards appreciate)

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
Why this biotech downturn is different

1 from all past ones and needs new tools
JUNE 9 2022 5
More transformative R&D than ever (2008 still had a lot of
reformulations and other “re stuff”) facing the deepest downturn
since at least 2008 (maybe even 2002) with more companies than
ever trading below cash, many below their dissolution values,
and with higher burn/market cap ratios than ever.
OLD WAY: VCs funded privates, mutual/hedge funds funded public.
Venture funds Mutual/hedge funds
Private companies Public companies

More attractive More attractive
FOR BIOTECH BOARDS JUNE 9 2022
OLD WAY: VCs funded privates, mutual/hedge funds funded public.

In a downturn, public funds could say “keeping private companies funded is not my problem” and
VCs didn’t have to worry about opportunity cost of missing out on attractive public investments.

Cash
exits se
c tor!
FOR BIOTECH BOARDS JUNE 9 2022
Ecosystem’s capital structure is more interlinked than ever:

NEW WAY: More capital than ever thanks to Multi-stage/Crossover model.

Multi-stage/
FOR BIOTECH BOARDS
Crossover JUNE 9 2022
Ecosystem’s capital structure is more interlinked than ever:

NEW WAY: More capital than ever thanks to Multi-stage/Crossover model.
In a downturn, this means cash more easily shifts to best risk/reward opportunities across
private-public continuum, reducing capital for private financings.

Cash
exits se
c tor!
Multi-stage/
FOR BIOTECH BOARDS
Crossover JUNE 9 2022
Cumulatively, just public development-stage companies
need to raise ~$15B by YE22 (to fund just 1 year of burn)
Cash Burning Development-Stage Companies that Need to Raise this Year
Burn/Market Cap Ratio

$Billions
87 companies 36 companies 12 companies 9 companies

many companies won’t get what they want;
FOR BIOTECH BOARDS
those
Source: that
FactSet, get what
RA Capital they
as of 5/24/22. need
Only shows will
biotech count
companies withamong
market caps the
$50M - fortunate
$10B
and negative free cash flow (i.e., burn). JUNE 9 2022 10
Navigated through Terminated R&D & laid off Been through public
a downturn? people due to cash shortage? restructuring?
NO NO NO
YES YES YES
Done a Executed a
down round? reverse merger?
This is a first for

many executives
(and board
members).
NO NO
YES YES

FOR BIOTECH BOARDS Recent poll of small company executives by RA Capital JUNE 9 2022 11
And yet…
we have to act quickly to conserve our cash for
our most precious R&D.
Cuts to spending extend runway when done early, while
company still has cash.
Investors are often drawn to a company’s most precious
program(s) so focusing spend on that means:
still keeping investors’ interest but with a lower burn rate,
therefore… a lower burn/market cap ratio,
i.e. a more financeable company.

And yet…
we have to act quickly to conserve our cash for
our most precious R&D.
Cuts to spending extend runway when done early, while
company still has cash.
Investors are often drawn to a company’s most precious
program(s) so focusing spend on that means:
still keeping investors’ interest but with a lower burn rate,
therefore… a lower burn/market cap ratio,
i.e. a more financeable company.

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
2 How to identify your most precious R&D
JUNE 9 2022 14
We asked 54 small companies (public and private) what in their
pipeline was really precious to them
We really care about 1 key program

As focused as you get.
We really care about 2 key programs
Might be focused enough. Maybe not.

We really care about 3+ key programs
Might need to make some hard choices.

5 10 15 20 25
# Companies

FOR BIOTECH BOARDS Recent poll of small company executives by RA Capital JUNE 9 2022 15
What is precious to the company?
If could do only one thing of all the things you are doing, what would it be?
Maybe not the most advanced program. Maybe the most unique?
What is precious to the company’s shareholders?

1. If private, just ask them. Many are on your board.
2. If public, ask yourself whether shelving the program would make the stock
go up or down. If not down, then not precious to shareholders.
3. Whether public or private, ask yourself if investors will fund this program
when you need them to. If no, not so precious.

What is precious to the company?
If could do only one thing of all the things you are doing, what would it be?
Maybe not the most advanced program. Maybe the most unique?
Lets dig
What is precious to the company’s shareholders?
into this:
1. If private, just ask them. Many are on your board.
2. If public, ask yourself whether shelving the program would make the stock
go up or down. If not down, then not precious to shareholders.
3. Whether public or private, ask yourself if investors will fund this program
when you need them to. If no, not so precious.

Company is developing Program X… in Phase 1 and already made all cuts it can.
$60M market cap, $90M cash, $60M burn rate (18 months of cash).
CASH
TIME

What’s your runway

if you focus on
Program X?
CASH
TIME
18 months

What’s your runway What will Program X

if you focus on look like when you
Program X? next need to raise?
Have funds to get Phase 1 data on Program X in 9 months and then need 2 years to build
manufacturing and run a Phase 2.
CASH
TIME
18 months
Phase 1 Phase 2
data data

What’s your runway What will Program X How much will you
if you focus on look like when you need to raise at that
Program X? next need to raise? time?
$200M
CASH
TIME
18 months
Phase 1 Phase 2
data data

What’s your runway What will Program X How much will you Do you think investors
if you focus on look like when you need to raise at that or partner will give
Program X? next need to raise? time? you what you need?
Is it realistic for a $60M

market cap company
trading below cash to
expect to raise $200M
with Phase 1 data to fund
a 2 year Phase 2 (after
$200M which will need to raise…
$400M)?
Maybe yes.
CASH
If no, is there a viable

TIME
alternative?
18 months
Phase 1 Phase 2 If no, market is seriously
data data questioning whether
this program is precious
enough.

What’s your runway What will Program X How much will you Do you think investors
if you focus on look like when you need to raise at that or partner will give
Program X? next need to raise? time? you what you need?
But what if…
Merge with other

company that has
manufacturing,
reducing burn and
$100M cutting raise to $100M.
CASH
TIME
18 months
Phase 1 Phase 2
data data

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
3 Finding synergies with other companies
JUNE 9 2022 24
No synergy unless companies use joint cash to fund the best of
their combined R&D… and identify other sources of value
People Manufacturing Cash R&D
Company $
A Has clinical and Needs Manufacturing

Not enough
to get to data because One key clinical
regulatory people capability manufacturing slow program
Company $
B Needs clinical and Has manufacturing

Not enough
to get to data because Platform and key
regulatory people capability long timelines program is preclinical
Might these be real synergies?

Can B make A's product? Can A's people help B? Which has the more promising R&D?

Company A Company B
Market Cap $100M $200M
Cash $150M $250M
Burn $75M $200M
Runway 2y (Data in 2.2) 1.25y (Data in 2)

Company A Company B Combined
Market Cap $100M $200M $300M
Cash $150M $250M $390M (fees!)
Burn $75M $200M $260M (-$15M)
Runway 2y (Data in 2.2) 1.25y (Data in 2) 1.5y (Data in 2.2/2)
Cut minor G&A

redundancies like
(some positions,
public filing fees,
maybe rent if
sublease one
company’s space).

Cash $150M $250M $390M (fees!)
Burn $75M $200M $260M (-$15M)
No real synergy

Cash $150M $250M $390M (fees!)
Burn $75M $200M $260M (-$15M)
A and B each cut spend over 6 months, then merge, but stick to own programs.
Cash $150M $250M $390M
Burn $50M in 6m $150M in 6m $190M in 6m
Runway 2.75y (Data in 2.5) 1.5y (Data in 2) ~2y (Data 2.5/2)
DOWNTURN CONCEPTS AND TOOLS A’s cuts extend runway but slower manufacturing delay data.
Cash $150M $250M $390M (fees!)
Burn $75M $200M $260M (-$10M)
A and B each cut spend over 6 months, then merge, but stick to own programs.
Cash $150M $250M $390M
Runway 2.75y (Data in 2.5) 1.5y (Data in 2) ~2y (Data 2.5/2)
DOWNTURN CONCEPTS AND TOOLS Still no synergy

A and B can make deep cuts because each counts on
what the other can provide:
B shelves a key program because too similar to A’s more advanced one and
A foregoes building manufacturing because B has it…
…and together can advance A’s program faster, generating data sooner
with runway to spare.
Cash $150M $250M $390M
Runway 2.75y (Data never) 1.5y (Data never) 2.4y (Data 1.5)

Cash $150M $250M $390M
DOWNTURN CONCEPTS AND TOOLS THIS is synergy.

Cash $150M $250M $390M
Each company makes cuts AND together are more than their parts.
FOR BIOTECH BOARDS (3-1)+(2-1)=5 (not just 3) THIS is synergy.
JUNE 9 2022 33
Executives
exchanged
and lined up COMPANY A’s ETS
Elephant Tango
Slides.
During 1x1,
line up ETSs
& explore synergies
Might these be
real synergies?
Can B make A's product?
Can B's people help A?
Which has the more
promising R&D?
Elephant = overview
Takes two to Tango COMPANY B’s ETS How far could joint cash fund
the best of their R&D?
Slide cause Slide

Link to Elephant Tango Template
Cuts ≠ Unemployment
Making cuts means employees get jobs elsewhere, often quickly.
Many unfilled positions out there.
Big biopharma is cash (flow) rich and hiring.
We had more money then people so focusing means people will

concentrate on the best R&D.
End result may be that R&D our ecosystem prioritizes

is accelerated thanks to better staffing.

Cuts ≠ Unemployment?
If downturn continues… cuts may lead to unemployment
So those who act first are more likely to help their employees find
new jobs.
Same applies to office space… there is still a shortage.

Those who sublease first likely to lock in best rates.

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
4 Always know your dissolution value
JUNE 9 2022 37
Company C’s lead program yields disappointing results
• Mixed efficacy profile in competitive class

• Dose limited by tox profile
• After extensive review, company
recommends terminating the program
• Company cannot identify a new indication
in which product profile will be
competitive
Is Company C trading below dissolution value?

Why should I know
my dissolution
value?
Don’t let this guy be

your only friend.

Larry the Liquidator could make money simply by having
the company shut down and return capital
How Company C gets to dissolution value:
$ Cash of $100M ($4/share with 25M shares) And… if there are assets to
sell (e.g. royalties), add
Minus: current liabilities those.
Minus: severance costs
Minus: contract termination fees
Minus: non-cancellable commitments (incl. lease)
Minus: D&O tail
Equals:
Equals:dissolution
dissolutionvalue
valueof
of$60M
$60M($2.40/share)
($2.40/share)

Company C is trading below dissolution value
Company C has 25M shares outstanding
Today
Cash of $100M, or $4/share

$
Dissolution value of $60M, or $2.4/share

DV
↔ Trading at $40M, or $1.6/share

How does a company even get to the point of trading
below its dissolution value?
Most investors assume they can’t get at the cash and that management will just
burn it down.
Some have plenty to gain from harvesting a tax loss.
Let’s say stock was at $20 and trial fails. Company has a dissolution value of $2/share,
so you would think it would drop by 90% to $2/share.
If investors are not inspired by what’s left of the business plan, who would buy at $2?
Only those willing to do the work of accessing the company’s cash, so they may not buy
until stock is far enough below $2 to make activism worthwhile… e.g. $1/share.
That’s a 95% loss for sellers (hardly feels different than a 90% loss) but offers 100%
upside to dissolution for buyers.

Conventional wisdom is wrong
Common view on dissolution or Actually:

return of capital in our industry: return of capital can be fast (20 business
long process, expensive, days for self-tender, ~2-3 months total
won’t get money back including prep and payout), followed by
orderly wind-down, delisting (going dark),
or reverse merger as true shell.
Torreya slides have examples

Conventional wisdom is wrong
Boards can rely on a vast array of experienced

professionals to support them in an orderly return of
capital and wind-down
● The Board's main concern will be a distribution that

leaves the company without enough money to fund
liabilities.
Actually:
return of capital can be fast (20 business
● The Board can minimize this risk by following a careful days for self-tender, ~2-3 months total
process and hiring professionals to advise them.
including prep and payout), followed by
● Professional finance experts will do an assessment of orderly wind-down, delisting (going dark),
spend required to wind down as well as expected or reverse merger as true shell.
proceeds from any asset sales prior to any distribution.
● Most dissolution activities will happen within the first 30

days. Finalization may take 6 months to over a year,
depending on the company’s operations.
● Once most obligations are dealt with, the company can

reduce the board to one - typically a professional with
experience managing wind-downs. Torreya slides have examples

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
How to recognize when management doesn't

5 have a mandate from shareholders
JUNE 9 2022 45
How to recognize when management doesn't have a mandate from
shareholders to continue to run the business
Are majority of your

shareholders
directly represented
on your board?

Are they in agreement with

If YES
how company is operating? ( just ask)
Are majority of your If yes, management If no, then no mandate.

has a mandate. Get aligned.
shareholders
on your board?

Are they in agreement with

If YES
how company is operating? ( just ask)
Are majority of your If yes, management If no, then no mandate.

has a mandate. Get aligned.
shareholders
on your board?
Is your stock trading above

If NO
dissolution value?
If yes, then you have a If no, then you probably

mandate… for now. don’t have a mandate
and activists have
motive and opportunity
DOWNTURN CONCEPTS AND TOOLS to push for return of
capital.
If trading below dissolution value, buyers can profit
simply from a return of capital.
Maybe that’s not their reason for buying, but

assuming it’s not is dangerous.

If management’s business plan were more
compelling than ceasing operations, wouldn’t
investors bid the price of the stock up above
dissolution value?
And yet, the only buyers are those who show

up when stock is below dissolution value.
Why is that?

Maybe your major investors are on your board or
are restricted in the stock and
wish they could buy but can’t, in which case
hopefully they convey their support to management.
Passive investors may be “reluctavists”

who go along unenthusiastically.
May turn into “re-activists” who support
a return of capital…
once an activist publicly calls for it.
How to get a mandate back:
Concentrate down to your most precious R&D; park the rest
Look for true synergies with other companies and consider consolidating (can’t just be
sticking two burning candles together)
Buy back shares (self tender) from non-believers until believers (those who don’t tender
their shares) are in the majority.
● Buyback is not all about appeasing activists/non-believers.
● A buyback is about preserving and maximizing reward for remaining shareholders

to whom R&D goal is precious.
Discuss all this right now as a board. Don’t wait for the next board meeting.
If you have more questions on exactly how to do any of this, talk to your attorneys. Reach out to Dan.

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
How a self tender buyback can restore a

6 shareholder mandate
JUNE 9 2022 53
Company C is trading below dissolution value; they started pre-clinical studies for a
follow-on compound that looks much more potent than their recently-failed lead
Today
Cash of $100M, or $4/share

$
DV Dissolution value of $60M, or $2.4/share
↔ Trading at $40M, or $1.6/share
Status of follow-on compound Preclinical

What should Company C do?
Timing Complexity/Friction
FAST MID
Distribute cash → go dark or

dissolve FAST: MID:
initial cash distribution is speedy; amounts reserved for hire third party to manage the process and determine
contingent liabilities may be paid out several years later distributable cash and cash reserves
FAST LOW
Keep enough cash for preclinical
program that some of your
investors are really excited about; FAST:
2-3 months for tender (incl. prep); depending on LOW:
use the rest to buy back shares outcome of discovery programs company may dissolve requires least disruption to
via self-tender or raise additional funds ongoing activities
VERY SLOW VERY HIGH
In-license programs that

VERY SLOW:
complement preclinical asset 9 months +?
VERY HIGH:
need to find assets, see if they can be extracted,
negotiate terms
SLOW HIGH
Find an RM partner who is worth

HIGH:
more with C’s program and SLOW: need to search for PrivCo with synergies and an
6 months +?
capabilities advanced enough asset that your investors will be
excited

FAST MID

dissolve FAST: MID:
initial cash distribution is speedy; amounts reserved for hire third party to manage the process and determine
contingent liabilities may be paid out several years later distributable cash and cash reserves
FAST LOW
investors are really excited about; FAST:
2-3 months for tender (incl. prep); depending on LOW:
use the rest to buy back shares outcome of discovery programs company may dissolve requires least disruption to
via self-tender or raise additional funds ongoing activities
VERY SLOW VERY HIGH
In-license programs that If you are trading below dissolution

complement preclinical asset VERY SLOW: value, time is VERY not HIGH:
on your side. You
9 months +?
probably only
need to find assets, have
see if theyacan
negotiate terms
shareholder
be extracted,
SLOW mandate to do these things if youHIGH have

a concentrated shareholder base that
is represented on your board.
HIGH:
more with C’s program and SLOW: need to search for PrivCo with synergies and an
6 months +?
capabilities advanced enough asset that your investors will be
excited


dissolve
Company A has a few investors who are

really excited about their follow-on
investors are really excited about; compound and would be excited to
use the rest to buy back shares
via self-tender invest if it gets through tox.
In-license programs that Will take Company C about $20M,

complement preclinical asset
including some buffer, to complete
preclinical studies.
more with A’s program and
capabilities

JUNE 9 2022
FOR BIOTECH BOARDS
Company C forecasts they can return $40M and still have enough
cash to complete preclinical studies
Today PC data
Cash of $100M,
or $4/share
$ Cash of $80M,
or $3.2/share
$
Dissolution value of $60M,
or $2.4/share
DV Dissolution value of $45M,
or $1.8/share
↔ Trading at $40M, DV
or $1.6/share
Status of follow-on
compound Preclinical Phase 1

Company C does a Dutch Auction Self-Tender (DAST)
to buy back shares for $40M
Board sets range of 2.25-2.6 (vs. dissolution value of $2.4) The company collects bids in 5 cent increments
RESULTS:
Bid Shares Cumulative Cumulative value bid

price Bid (M) shares bid (M) at each bid price ($M)
If 15M shares were filled at $2.30, that
2.25 10 10 22.50 would be $34.5M of proceeds to investors;
that is below $40M, so proceed to the
2.30 5 15 34.50 next price
2.35 2 17 39.95
2.40 1 18 43.20
2.45
2.50 1 19 47.50
2.55 1 20 51.00
2.60
Total 20 20 51.00

RESULTS:

2.30 5 15 34.50 next price
2.35 2 17 39.95 Still below $40M, proceed to the next price
2.40 1 18 43.20
2.45
2.50 1 19 47.50
2.55 1 20 51.00
2.60
Total 20 20 51.00

RESULTS:

2.30 5 15 34.50 next price
2.35 2 17 39.95 Still below $40M, proceed to the next price
2.40 1 18 43.20 If 18M shares were filled at $2.40, that

would be $43.2M of proceeds to investors;
2.45 that is >$40M offered; stop at this price!
2.50 1 19 47.50
2.55 1 20 51.00
2.60
Total 20 20 51.00

RESULTS:

2.25 10 10 22.50
2.30 5 15 34.50
Bid within the range; price is set at 2.4
2.35 2 17 39.95 C can buy back 16.7M shares (40/2.4)
2.40 1 18 43.20
2.45
2.50 1 19 47.50
Bid too high, not filled
2.55 1 20 51.00
2.60
Total 20 20 51.00

Company C buys back 16.7M shares, or 67% of their 25M shares
Or…
Bid Shares Proceeds Shares bought
price Bid (M) ($M) back at $2.4/share (M) Skip the Dutch Auction and
2.25 10 22.2 9.3 just self tender at one price.
2.30 5 11.1 4.6 Price needs to be close
2.35 2 4.4 1.9
enough to dissolution value
so that activists have no
2.40 1 2.2 0.9 incentive to opt out of the
tender to fight for
Total 18 40 16.7
dissolution.
Going Dutch has benefit of
giving shareholders more
agency even if outcome
similar.

Special dividend
PRO: Distribute excess cash to shareholders quickly
10b5-1
OFFRAMP CON:
● Does not remove shareholders who lack conviction, PRO: Can repurchase during closed windows
who may then dump your stock to generate
offsetting tax losses.
CONS:
● Does not reduce shares outstanding
● No modifications once you set parameters - market changes may render Plan
undesirable
● Need to wait out at least 2 month cooling off period before Plan triggers
● Enhanced SEC scrutiny of such plans
Contractual OFFRAMP Seek Contractual Waivers
Issues?
Contractual restrictions on buyback
Accelerated Share Repurchase Plan
(e.g. Credit Agmts)? PROS:
● Handled by forward contract with i-bank;
Also consider whether CoC
provisions may be triggered. Open Market ● can be tailored to include collars, caps, etc. so as to limit exposure to future stock price
increases
CARE act loan recipients also may
have limitations Repurchase
CONS: Discretionary Open Market Repurchases
Determine ● Less control and certainty than a tender offer
● Daily repurchases <25% of ADTV (w/exception of one
amount of block trade/week)
● Announcing plan may elevate stock to price at
“surplus”* cash which repurchase is no longer attractive
to allocate to
share repurchase
*Consult w/ both legal
Tender Offer
counsel, and 3rd party
financial experts
PROS:
● Speed: can execute start to finish in ~2-3 months
Fixed Price
● No volume limitations (other than need to maintain
>300 record holders to stay on NASDAQ
● Can set max and min
MNPI? ● Expert proxy solicitor will do the legwork Dutch Action
Can’t do share buyback
while in possession of MNPI PROS: Enable price discovery
Cleanse with an 8-k or updated

OFFRAMP
earnings guidance
Our lawyer friends offered this
Private Repurchase
PRO: Seller can give “big boy letter” acknowledging
“choose your own adventure”
OFFRAMP that Company may have MNPI, but Seller still willing to
sell guide for reference.
CON: limit to only a few sellers, to avoid becoming an
DOWNTURN CONCEPTS AND TOOLS illegal tender offer

Now Company C is concentrated in the hands of investors who
are excited about the preclinical program (the believers)
Did not bid Did not bid
Before After
buyback buyback
Bid but not

tendered
(mostly at higher prices)
Happy to be out
of the stock for
Believers represent majority of shareholders,
$2.4/share!
so management has a mandate again!
Now Company C is concentrated in the hands of investors who
are excited about the preclinical program (the believers)
Did not bid Did not bid

BEFORE BUYBACK AFTER BUYBACK
25M shares @ 8.3M shares
$1.60/share = @ $2.4/share =
$40MBefore
market cap …but now… $20M After
market cap
with $100M cash
buyback buyback
with $60M
($4/share) cash($7.20/share)
and threat of and no pressure to
activists Bid but not dissolve
tendered
(mostly at higher prices)
Happy to be out
of the stock for Some lawyers will say “don’t worry about activists - you
$2.4/share! have lots of tools to keep them at bay”.
But do you want to be dragged through that?
The believers will fund the preclinical program if it works
Company C has 8.3M shares outstanding
PC data
If investors are excited $

about the preclinical
data and ready to act Cash of $45M,
fast, C will get funded $ or $5.4/share
and keep going.

or $0.6/share
DV
Status of follow-on

The believers will fund the preclinical program if it works
Company C has 8.3M shares outstanding
PC data
Otherwise, C will
have retained
enough cash to
$40M buyback
manage an orderly
wind-down or maybe
reverse merge.
Cash of $45M,
or $5.4/share
$

or $0.6/share
DV
Status of follow-on

Consider:
1. Returns to shareholders are based on share price, not market cap.
2. Let’s say a Believer owns 1M shares of Company D, which is:
a. 4% ownership before buyback (25M shares outstanding)
b. 12% after buyback (8.3M shares outstanding), but company has less cash and needs to
raise more.
3. Let’s say that, after the buyback, good data propel D to a $100M market cap ($12/share) and it
has to raise $70M (5.8M more shares) for the next leg of development.
4. Thanks to buyback, after the raise, the Believer’s 1M shares represent 7% of a $170M market
cap company at $12/share (14.2M shares outstanding).
5. Without buyback, company would have $40M more cash so even if pre-money were $140M
($5.60/share) and company raised only $30M (5.4M more shares), the Believer’s 1M shares would
be 3.3% of a $170M market cap company at $5.60/share (29.4M shares outstanding).
6. Therefore, the buyback shifted the risk/reward and amplified the upside of success for the
Believer by 2.1x in this hypothetical case.

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
How to respond to activists seeking a

7 return of cash
JUNE 9 2022 70
What do activists want
and how should you respond to them?
Activists typically seek one or more of the following:
• Board representation and corporate governance changes, usually to affect:
• Asset divestitures, program prioritization and cost-cutting
• Capital re-allocation through special distributions or self-tenders
• Sale of company
It is typically best practice to engage with an activist as you would any other major shareholder
• Respond quickly to requests to speak or meet
• Consider the merits of any concerns and proposals
• Be prepared to discuss the range of alternatives management and the board have considered and why those alternatives
were rejected
Ultimately, activists seek to generate shareholder value by pushing for changes they believe a
management team and board are reluctant to consider on their own
• Know thy shareholders – Do your shareholders quietly support change?
• With the humble is wisdom – Reassess current long-range plan in light of any recent changes
• Trust but verify – Assume good intentions but prepare a “defense team”

What do activists want
and how should you respond to them?
Before you fight, consider:
How compelling will your arguments be to shareholders who have been

uninspired enough so far to let your stock trade at levels that attracted the
activists in the first place?
Activists will publicly shred your arguments and leave an eternal record
that reflects on every board member and executive.
Will your arguments for how you plan to create shareholder value stand up?

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
Reverse mergers (how they can work and why they

8 are harder to pull off than many boards appreciate)
JUNE 9 2022 73
When do Reverse Mergers work?
When you have a mandate from investors
How can you tell? The stock likely goes up above dissolution value before vote.
Potential indicators before announce:

• Owners of shell are on the board and making decision about what to invest in
• Owners of both shell and PrivCo are participating in PIPE
• Positive reception in roadshow to shell holders

When do Reverse Mergers work?
Case study: Synageva / Trimeris
Stock price, indexed to RM announcement
Jun 13: Nov 3:

RM announced RM complete
Volume (thousands of shares)

Investors bid the stock
up prior to close

FOR BIOTECH BOARDS Source: Factset JUNE 9 2022 75
TORREYA PARTNERS ANALYSIS:
82% of reverse mergers from Jan-17 to May-20
underperformed the XBI and IPOs
Two-year Returns After Reverse Mergers and IPOs
Reverse Mergers Dramatically Underperform their IPO Counterparts
Two-Year Market Adjusted Returns Associated with IPOs and Reverse Mergers in the Period
from Jan 2017 to May 2020
Average 2-Year
Average 2-Year
Reverse Merger
Post-IPO Return:
Return:
-59.9% 30.6%
T-statistic:
2.76
(p=value = 0.0064)
DOWNTURN CONCEPTS AND TOOLS * Sourced from analysis published by Torreya Capital LLC on May 31, 2022, entitled, “Do Reverse Mergers Create Value?
FOR BIOTECH BOARDS A Study of Biotech Reverse Mergers and Associated Alternatives”.
JUNE 9 2022 76
PrivCo incentives in a Reverse Merger
Why might PrivCo’s investors want to do a reverse merger instead of an IPO?

Maybe because own shareholders don’t want to invest the capital in an IPO…
So to minimize dilution, they want to maximize the valuation and need someone less
price sensitive… like a PubCo board without much skin in the game.
COMMON RESULT:
PubCo overpays for PrivCo. Everyone tries to get out. Stock drops.
Consider: If PrivCo shareholders aren’t eager to invest, why would others want to?
Bankers often won’t IPO a company without strong insider demand. Same rules apply to
Reverse Mergers.

PubCo incentives in a Reverse Merger
Why might PubCo board want to do a reverse merger instead of dissolve?
Stated reason: board fiduciary duty to maximize shareholder value
Potential unstated reasons:

• One more roll of the dice (especially for closed-end funds on PubCo board)
• Fastest way for board members to move on
• It’s what public shells in our industry have typically done… why do something
different?
COMMON RESULT:
PubCo overpays for PrivCo. Everyone tries to get out. Stock drops.

TORREYA PARTNERS ANALYSIS:
Do PIPEs help?
Not the small ones of the old days

(PIPE or “exit tax”?)
Maybe big ones of

recent years $91M
DOWNTURN CONCEPTS AND TOOLS * Sourced from analysis published by Torreya Capital LLC on May 31, 2022, entitled, “Do Reverse Mergers Create Value?
FOR BIOTECH BOARDS A Study of Biotech Reverse Mergers and Associated Alternatives”.
JUNE 9 2022 79
A better way to do a reverse merger: distribute PubCo
excess cash to investors and use PubCo as a true shell
Yumanity starts off with:
$12M market cap
$0 net cash (dissolution value)
And a drug candidate
News:
Sells candidate to JNJ for $26M
Commits to issuing dividend of all excess
cash from deal.
But wait!
What to do with the shell?
Yumanity will reverse merge with Kineta.
How will Kineta get cash?
Yumanity will do a concurrent PIPE.

JUNE 9 2022
FOR BIOTECH BOARDS This deal has not completed. We cannot be sure of the actual outcome.
Financials are estimates. This is not a recommendation to invest in Yumanity.
A better way to do a reverse merger: distribute PubCo
excess cash to investors and use PubCo as a true shell
Yumanity starts off with:
$12M market cap
$0 net cash (dissolution value)
And a drug candidate
This is truly using the News:

PubCo as a shell (like a Sells candidate to JNJ for $26M
Commits to issuing dividend of all excess
form 10 merger) while cash from deal.
giving Yumanity’s cash to
Yumanity’s shareholders
to do with as they please But wait!
What to do with the shell?
(e.g. invest in Kineta). Yumanity will reverse merge with Kineta.
How will Kineta get cash?
Yumanity will do a concurrent PIPE.

JUNE 9 2022
FOR BIOTECH BOARDS This deal has not completed. We cannot be sure of the actual outcome.
Financials are estimates. This is not a recommendation to invest in Yumanity.
This downturn is different.
Our adaptation to it can be different, too…. faster… more creative.
We can’t just be quick to expand R&D when capital is abundant… we

must be quick to reallocate capital to our best R&D (within
companies and among them) when it becomes scarce.
There is no invisible hand.
It’s just us!

DOWNTURN
CONCEPTS AND TOOLS
FOR BIOTECH BOARDS
THANK YOU.
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DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

2 How to identify your most precious R&D

3 Finding synergies with other companies

4 Always know your "dissolution value"

5 How to recognize when management doesn't have a mandate from shareholders

6 How a self tender buyback can restore a shareholder mandate

7 How to respond to activists seeking a return of cash

DOWNTURN CONCEPTS AND TOOLS

Why this biotech downturn is different

OLD WAY: VCs funded privates, mutual/hedge funds funded public.

Venture funds Mutual/hedge funds

Private companies Public companies

OLD WAY: VCs funded privates, mutual/hedge funds funded public.

Venture funds Mutual/hedge funds

Ecosystem’s capital structure is more interlinked than ever:

Venture funds Mutual/hedge funds

Private companies Public companies

Ecosystem’s capital structure is more interlinked than ever:

Venture funds Mutual/hedge funds

Burn/Market Cap Ratio

87 companies 36 companies 12 companies 9 companies

YES YES YES

This is a ﬁrst for

DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

2 How to identify your most precious R&D

We really care about 1 key program

Might be focused enough. Maybe not.

Might need to make some hard choices.

DOWNTURN CONCEPTS AND TOOLS

What is precious to the company’s shareholders?

DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

What’s your runway

DOWNTURN CONCEPTS AND TOOLS

What’s your runway What will Program X

DOWNTURN CONCEPTS AND TOOLS

DOWNTURN CONCEPTS AND TOOLS

Is it realistic for a $60M

If no, is there a viable

DOWNTURN CONCEPTS AND TOOLS

But what if…

Merge with other

DOWNTURN CONCEPTS AND TOOLS

3 Finding synergies with other companies

People Manufacturing Cash R&D

A Has clinical and Needs Manufacturing

B Needs clinical and Has manufacturing

Might these be real synergies?

DOWNTURN CONCEPTS AND TOOLS

Market Cap $100M $200M

Cash $150M $250M

Burn $75M $200M