Summary
- Timber Pharmaceuticals is the subject of a merger offer by Danish LEO Pharma.
- In two previous shareholder meetings, not enough shareholders voted to approve the offer.
- If the merger with LEO Pharma is not consummated, Timber Pharmaceuticals will likely need to file for bankruptcy within days.
- The offer is in cash and Contingent Value Rights, which I believe represents significant value.
- The next shareholders meeting is on Friday. I urge every shareholder to vote your shares now.
Source: Keystone/Hulton Archive via Getty Images
Introduction
Timber Pharmaceuticals (NASDAQ:TMBR) is a small clinical-stage biotech company that develops treatments for rare and orphan dermatologic diseases.
It’s also completely out of money. And the subject of an unusual merger offer by a much larger competitor, LEO Pharma.
The merger offer is unusual because LEO Pharma, which is based in Denmark, isn’t offering shareholders a fixed price per share. Instead, it’s offering a total sum (14 million dollars) which shareholders then have to split with holders of certain outstanding warrants according to a complex formula. It’s impossible for shareholders to know exactly what they’re getting in cash until the merger actually closes.
Also, shareholders will receive two Contingent Value Rights which could eventually add very significantly to the value of this offer, but which are complicated to understand, and, therefore, to value.
Perhaps because of this complexity, or perhaps because shareholders are simply not paying attention, Timber had to adjourn two subsequent shareholder meetings to approve this deal because there were simply not enough votes cast. Not so much because not enough votes were voted in favor of the proposal, but because not enough votes were cast at all.
Next Friday Timber will organize another shareholder meeting, and this could very well be the last opportunity for shareholders to accept LEO Pharma’s offer before the merger is finally terminated. I believe if the merger is not consummated, it will be a matter of days before Timber will be forced to declare bankruptcy.
In this article, I’ll delve deeper into this merger proposal from LEO Pharma. Also, I’ll go into what will likely happen to Timber Pharma if shareholders decide not to accept this deal (or, more accurately in this case: if they decide not to bother to vote at all).
Finally, I’ll take a quick look at the bigger picture: why are so many small US biotechs currently having so much trouble getting their shareholders to vote, even though in some cases voting in favor is without any shadow of a doubt clearly in that shareholder’s best interest?
The merger deal part 1: the cash consideration
LEO Pharma is offering Timber Pharma’s shareholders an upfront payment of 14 million dollars less payment that needs to be made to certain warrant holders. The exact payment to warrant holders is dependent on certain variables, including the VWAP and volatility of the common stock prior to the closing of the merger.
Derived from Timber Pharma SEC filings
On Friday the 10th of November TMBR stock closed at $2.55. It has been hovering around that same price for about two weeks now. It’s impossible to know what exact cash consideration this works out to, but if the merger were to close at similar prices, a shareholder should expect to receive approximately $2.75 per share.
As a rule of thumb, if TMBR stock were to decline before/if the merger closes, the cash consideration would go up. If TMBR stock were to increase before/if the merger closes, the cash consideration would go down.
The merger deal part 2: the Contingent Value Rights
On top of the cash consideration, Timber Pharma’s shareholders are also offered Contingent Value Rights (CVRs). These rights will be converted into cash if the following milestones are met (if not, shareholders get nothing):
- Up to 10.3 million dollars if the FDA approves Timber’s lead product (TMB-001) for the treatment of two distinct subtypes of ichthyosis subtypes before October 1st, 2025. This works out to about $2.90 per share.
- Up to 8.3 million dollars if sales of TMB-001 exceed 100 million dollars in the United States in any four consecutive calendar quarters before December 31st, 2028. This works out to about $2.30 per share.
Please note: the exact dollar amounts shown above might be somewhat lower or higher. In an attempt to not complicate this complex deal structure (and therefore this article) any further, I had to make some assumptions to arrive at the amounts shown above.
TMB-001
In other words, the CVR component could potentially represent significant value in this deal, as the potential payout of the CVRs could actually exceed the cash component.
To be able to determine the true odds of the Contingent Value Rights having any value we first need to know about the drug TMB-001. TMB-001 is a topical isotretinoin. Isotretinoin has been around for a while and is a well-known substance; sold, among others, under the brand name Accutane. It is usually taken in oral form.
It’s prescribed to, for example, people with severe acne who don’t respond well to other treatment options. Oral isotretinoin is a treatment of last resort as it’s not friendly on the body: it comes with quite a bit of side effects, like itching, cracked lips, dry mouth, rashes, and joint pain, and more serious: it might affect the body’s lipids and liver enzymes. For this reason, regular blood work is recommended for anyone using it.
Timber Pharma’s TMB-001, however, comes in a topical form and so far promises to have similar (if not better) beneficial effects but with a much better safety profile, as the isotretinoin level concentration in the blood of the patient is up 40-80 times lower.
TMB-001 is currently being tested in a Phase 3 trial which specifically targets a population of patients who suffer from two subtypes of ichthyosis, a rare genetic disorder that leads to dry, thickened, and scaling skin.
Recessive X-linked ichthyosis (Photo courtesy of Waikato District Health Board via DermNetnz.org)
There’s currently no FDA-approved treatment for this condition. Topical isotretinoin isn’t a viable option for many of these patients because of the toxicity of the high dose of the drug and the chronic use that is required for treatment.
After TMB-001 successfully completed its Phase 2b trial, where it demonstrated effectiveness and safety, the FDA granted Fast Track designation as well as Breakthrough Therapy designation. Both designations help in getting a drug approved faster.
X-Linked Ichthyosis, Phase 2b study, 0.05% treatment arm (responder) before and after treatment (Source: Timber Pharma investor presentation, June 2023)
Timber Pharma started its Phase 3 trial for TMB-001 in 2022 and says it’s on track to complete the study in May 2024. In July 2024 it hopes to submit its final New Drug Application to the FDA. This should give the FDA more than enough time to decide on approval before the CVR, which is decided by the FDA decision, expires in October of 2025.
To get approval for TMB-001 Timber should prove the topical solution works, but also, very importantly, that it has a much better safety profile than oral isotretinoin. In June of this year, Timber Pharma presented its first interim data from its ongoing Phase 3 trial. The presentation, which includes the results of the first nine patients in the study, showed minimal systemic absorption of the isotretinoin. This is good news, as it’s the systemic absorption that is causing much of the side effects oral isotretinoin is known for.
All in all, you never know, it’s a clinical trial and therefore impossible to fully handicap if you’re not an MD – like me – or even if you are an MD. But I believe the odds for TMB-001 to get FDA approval are looking quite encouraging at the moment.
Timber estimates the U.S. market for TMB-001, if approved, is at $250 million at its peak. I have not been able to find any further documentation on how Timber arrived at this estimate, as TMB-001 could potentially in the future be prescribed for a wider range of dermatological indications. However, in this context, it’s important to note the second CVR which pays if sales exceed $100 million is well below the company’s own estimate of peak sales.
Flat broke
So, if Timber’s lead product, TMB-001, is less than two years away from possible FDA approval and the future of the drug is looking bright, why sell to a competitor now? The reason is simple: Timber is flat broke. To continue its Phase 3 trial it needs money and it needs money fast.
The ongoing bear market in biotech has left the market capitalization of Timber Pharma at a level where issuing more shares, like to company did in the past while continuously diluting existing shareholders in the process, is no longer an option. Also, the merger prospectus for the planned merger with LEO Pharma shows Timber Pharma’s management had discussions with other parties about out-licensing TMB-001, but these talks eventually went nowhere. LEO Pharma’s offer was basically the best Timber Pharmaceuticals had, even though the deal is complex and difficult to explain to shareholders.
Actually, Timber’s immediate need for cash was so great it required LEO Pharma to provide the company with a short-term secured bridge loan of 3 million dollars until the merger deal had been completed. This is important information as this bridge loan needs to be paid back if the merger is not eventually consummated.
Unfortunately, the problems didn’t end there. Timber Pharma needs a simple majority of its shareholders to vote in favor of the merger proposal to consummate the merger. But at the first shareholders meeting on October 16th, only 1.16 million shares were voted at all. This translates to 34% of the total number of shares outstanding. Timber had no choice but to adjourn the meeting. On the second attempt, on October 30th, virtually nothing changed. Now 1.19 million shares were voted. Again, the meeting was adjourned. This time until the 17th of November, which is next Friday.
In the meantime, Timber Pharma still desperately needs money. LEO Pharma again came through with providing bridge loan financing, this time another 3.5 million dollars. This has kept Timber’s Phase 3 trial going for now but also comes at a big cost. Timber is essentially locked in now. If Timber’s shareholders do not approve the merger, Timber immediately owes LEO Pharma an amount of money from the loan it will not be able to pay back and will likely have to declare bankruptcy.
If we cannot consummate the Merger, we will continue to lack sufficient capital to operate our business and to repay the secured Bridge Loan entered in connection with the Merger. As a result, we will likely be required to seek the protection of the bankruptcy courts (…)
(Timber’s CEO in a letter to shareholders on the 31st of October)
Considering LEO Pharma will be Timber’s biggest creditor by far in bankruptcy proceedings it will, in such a scenario, most likely end up with Timber’s assets anyway. The only difference: in this case, it seems likely Timber’s shareholders will end up with (next to) nothing.
All in all, in a rational world Timber’s shareholders have no choice but to accept LEO Pharma’s merger proposal. So if the situation is this dire, why aren’t Timber’s shareholders voting yes to this merger proposal? Why aren’t they voting at all?
The voting issue
Timber Pharma’s issue with getting their shareholders to actually vote is not without precedent. Outside of the US, in many jurisdictions, shareholders need to approve mergers through complicated schemes which sometimes include a head-count test (which gives any shareholder, big or small the same weight in voting) or requires very large majorities (up to 90%). There are quite a few famous examples of take-overs that eventually failed not because of outright shareholder opposition, but because small shareholders just weren’t picking up the phone. Or – it’s 2023 after all – picking up their smartphone.
A textbook example of this is how in 2018 attempts to privatize Hong Kong-based Harbin Electric (1133) took seven months before the acquiring party eventually gave up. The takeover bid, which came at an attractive 80% premium to the share price at the time, required 90% of Harbin shares to be tendered. After endless extensions and the Hong Kong Stock Exchange allowing an unprecedented additional extension, “only” 88.32% of shares were tendered. No matter Harbin’s efforts, it just could not get in touch with that last 12%. The privatization failed despite over 99% of shareholders that did cast a vote, voting in favor of the merger in a separate vote.
After Harbin’s privatization proposal was eventually withdrawn, the share price dropped over 50% and every shareholder was financially off much worse than they otherwise would have been. Even until this date, five years later, the share price of Harbin Electric never recovered to match the offer that was on the table in 2018.
In the United States issues with getting enough people to show up to vote are rare. Most US mergers require a simple majority in either shares tendered or a simple majority of shareholder votes in favor. Obviously, getting only a simple majority (>50%) of shareholders behind your proposal is a much easier task.
Over the last couple of years, and especially this year, this all seems to have changed in one particular corner of the stock market. A streak of beaten-down biotechs with relatively small market caps and a relatively fragmented (retail) shareholder base find themselves in serious problems when it turns out their shareholders just can’t be bothered to vote for whatever takeover or liquidation plan they have lined up. Even if it’s crystal clear to anyone involved the plan on the table is essentially the only way for shareholders to recoup any of their investment. And that without the plan being approved they’d get less or even nothing at all.
A few quick recent examples:
- Biotech Vyant Bio (PINK: VYNT) struggled in September of 2023 to get a simple majority to vote in favor of its plan to liquidate. At shareholder meetings on September 20th, September 29th, October 11th, and October 19th a majority was not present to approve the plans. Finally, after actively soliciting votes for over a month, on their fifth try on the 1st of November, 53.1% of its shareholders voted their shares in favor of the plan.
- Failed biotech Calithera Biosciences (PINK: CALA) decided to liquidate in January of this year and initially did not expect to make any distribution to its common shareholders at all. However, as part of a deal with a company called Takeda Ventures, Takeda allowed Calithera to throw a 40 cent per share bone to its shareholders, on the condition that a simple majority of shareholders approved the deal structure. Alas, on the 29th of June, no majority was present at the shareholder meeting where the deal was up for a vote. Calithera decided not to call a new meeting. Getting that majority, the company had determined, was just not attainable. Calithera shareholders by not voting essentially left 40 cents per share on the table. Shares are currently still (barely) trading at 3 cents per share in the ‘expert market’, and most likely end up being completely worthless.
- Biotech Zynerba (NASDAQ: ZYNE) was taken out earlier this year at a dazzling 225% premium to its share price at the time. Despite this impressive buyout premium, only 32% of its shares were initially tendered by shareholders when the offer closed. After an extension and active solicitation of votes, the offer just scraped through at 52% tendered.
It’s difficult to pinpoint exactly why getting (small) shareholders to vote (or tender) has lately become such an issue. After all, the process of voting shares has never been easier than it is today and can often be done online in a matter of minutes, if not seconds.
However, companies running into problems with getting their shareholders to vote usually have something in common: their share prices have had catastrophic performances in the years leading up to that particular vote. Case in point, CALA shares were down over 99% in just two years time when management went looking for shareholder support. VYNT was down 98%, and ZYNE was down 90%. TMBR shares are also down about 90% over that same two-year time period.
It’s important to realize especially clinical-stage biopharmaceuticals with no approved product are constantly hemorrhaging money and constantly need more investor money to get their drugs through all stages of testing.
In a biotech bear market as we have been experiencing for over two years now new investor money usually comes in only at big discounts, and very much to the expense of existing shareholders. In most cases, this means a seemingly endless spiral of share offerings, shareholder dilution, and dropping share prices.
Many retail investors who invested in biotech are sitting on huge losses, and it’s clear money lost will never be recovered, even if the company’s drugs are eventually a big hit. It then becomes easier to understand why someone would prefer to stick their head in the sand and lose it all, rather than having to vote in favor of having to settle for only a fraction of their investment. Even if that is the rational thing to do.
This behavior basically describes ‘the ostrich effect’, which has been first described in economics in an article by Galai and Sade (2006). It describes the tendency of the human brain to ignore negative information at times of risk or danger. In line with this Karlsson, Loewenstein, and Seppi (2009) found stock market investors tend to check financial indicators regularly when things are going well, yet simply stop checking in (as often) when things go bad. Nobody wants to be reminded of failure.
One last try
Anyway, enough with the theory. Back to Timber Pharmaceuticals. It seems the upcoming shareholder vote on Friday the 17th of November might be the last opportunity for Timber shareholders to approve the deal with Leo Pharma.
When signing the merger agreement, Timber and LEO Pharma agreed to an ‘outside date’ of November 15th, 2023. This means either party may terminate the merger deal if the transaction has not been consummated before that time. If the merger is terminated because stockholder approval is not obtained by Timber, Timber would owe LEO Pharma $840.000 in termination fees, apart from the Bridge Loan, which would also need to be returned.
One never knows but my best guess is LEO Pharma will wait for what Timber Pharma’s shareholders decide on Friday. If the merger is approved, I expect the deal to be consummated within days. If the merger is not approved, I expect LEO Pharma to terminate the merger within days and Timber to declare bankruptcy shortly thereafter.
Meanwhile, Timber management assured me they are doing whatever they can to secure the necessary amount of votes on Friday. This includes hiring a proxy solicitor and personally reaching out to individual shareholders. Whether or not their efforts will prove sufficient, we will soon find out.
Conclusion:
A few weeks ago, well before Timber Pharma’s first shareholder meeting but after LEO Pharma’s takeover bid, I bought a long position in Timber stock. Although every merger arbitrageur knows in the back of his mind a shareholder vote can pose issues, I (naively) did not give that possibility too much thought at the time.
I was mostly excited about the stock because I didn’t think that due to the complexity of this deal, the overall market truly realized that at current stock prices, investors were basically getting their money back in cash in a matter of weeks, and then two CVRs for free. I believe those CVRs, especially the first CVR, have a very realistic shot of more than doubling the initial investment within two years.
This was before the trouble with the non-voting shareholders started. I no longer think Timber shares are attractive at this point and would not recommend buying. Anyone buying now won’t be allowed to vote (the cut-off date for who gets to vote has long passed) and, apart from a lot of upside from the CVRs, there’s now also catastrophic downside to the share price if the vote does not pass.
So my main reason for writing this article is not to highlight a great buying opportunity, but more a desperate attempt to get through to Timber Pharma’s shareholders. This is a small company. Less than a million shares being voted in favor of this merger proposal before Friday would get this past the finishing line. This would prevent every shareholder of Timber from being wiped out. Every single share counts here. If you have the right to vote, vote!
Analyst’s Disclosure: I/we have a beneficial long position in the shares of TMBR either through stock ownership, options, or other derivatives.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.