Conditions are ripe for reverse mergers
Redx makes the most of Jounce’s demise, but is the poor reputation of reverse mergers warranted?
With the IPO window barely open, investors sick of Spacs, and increasing numbers of cash-rich and pipeline-poor developers, conditions are ripe for reverse mergers. Four such transactions have emerged so far this year and, unless the public markets become more conducive to flotations, more will surely follow.
A reverse merger typically involves a private company taking over a public group’s listing, with the latter party all but wound up. In reality these transactions follow variations on a theme, as with the deal announced today that will see London-listed Redx take over Jounce’s Nasdaq listing.
The combined entity will be majority owned by the UK company’s investors and run by Redx’s chief executive, but 47 of Jounce’s R&D team, plus its biologics research base in Massachusetts, will be retained. Jounce’s clinical pipeline is abandoned – this was a casualty of the failed Icos mechanism – but some latent value is apparently seen in the immuno-oncology researcher’s early work.
|Biopharma's reverse mergers of 2023 so far|
|Acquirer (private/listing)||Target||Combined cash||Resulting ownership|
|Redx (Aim London)||Jounce (Nasdaq)||$170m* (to H2 2025)||Redx shareholders: 63.0%|
|Pherecydes (Euronext Growth)||Erytech (Nasdaq & Euronext)||€41m (to Q3 2024)||Pherecydes shareholders: 49.5%|
|Flame (private)||Leap (Nasdaq)||$115m (to mid-2025)||Flame shareholders: 47.4%|
|Elicio (private)||Angion (Nasdaq)||$25m**||Elicio shareholders: 65.5%|
|*Includes Evaluate Vantage's estimate of Redx current cash. **Minimum net cash requirement. Source: company statements.|
Another deal last week, between Erytech and Pherecydes, also involved a Europe-listed developer using the reverse merger mechanism to gain a Nasdaq foothold. This suggests that while financing conditions in the US are considered dire they are still thought more attractive than in Europe.
With the number of developers “exploring alternatives” growing longer every day, private developers and those listed outside the US will have plenty of zombie companies to choose from, if Nasdaq represents the promised land.
Only today Evofem, which had failed to make a commercial success of its spermicide product Phexxi, announced it was considering strategic alternatives, including a reverse merger. Graphite made a similar statement yesterday, as it formally discontinued its lead sickle cell project.
True, reverse mergers have something of a bad reputation as a route for companies too weak to undertake a full IPO, but financing options are pretty limited right now.
Spacs offered an alternative route to market in recent years, although these vehicles’ poor track record at finding strong target companies soured investors to the blank cheque movement. The Spac craze probably explains the dip in reverse mergers seen last year, in the Evaluate Vantage analysis below.
But is this poor reputation warranted? Of the 89 reverse merger deals identified in the graph above, 13 no longer seem to have a market listing, and 43 have a market cap of less than $50m. 10 are worth more than $250m, and the top five are listed below.
Those stats feel like a damning indictment, but it is worth remembering the abysmal state of the wider markets. Around 20% of global biotech companies are currently trading at negative enterprise values, and 77% of them are worth less than $250m, according to the investment bank Torreya’s latest analysis of S&P Capital IQ data.
|Bucking the trend?|
|Company||Current market cap||Reverse merger target (year of deal)|
|Rocket Pharmaceuticals||$1.5bn||Inotek (2018)|
|Chinook Therapeutics||$1.4bn||Aduro (2020)|
|Compass Therapeutics||$489m||Olivia Ventures (2020)|
|Disc Medicine||$431m||Gemini Therapeutics (2022)|
|Source: Evaluate Pharma & Pitchbook.|