Tyme Technologies (TYME) – Merger Arbitrage – 33% Upside

Current Price: $0.265

Offer Price: $0.353 (in stock)

Upside: 33%

Expected Closing Date: H2 2022

Press release

A very positive update to TYME – a situation was previously highlighted in our 1st Weekly newsletter. The assumption of the upcoming company sale turned out to be correct and TYME has just announced a merger with its peer. The current 33% spread seems overblown and I get a feeling that I might be missing an important piece of the puzzle here. Sharing my research below – any pushback is welcome.

Tyme Technologies is getting acquired by cancer-focused clinical-stage biopharma Syros Pharmaceuticals (SYRS). The transaction is basically an equity raise for the buyer – SYRS is getting TYME’s net cash (estimated to be $60m at closing) by issuing around 74m new shares (also worth $60m at current prices). Even the press release is clear about this: “to TYME stockholders to acquire TYME’s expected net cash”. The existing TYME drug development program will be put on hold and all exec positions in the combined company will be retained by the existing SYRS leadership. Together with the merger, SYRS has announced an oversubscribed $130m PIPE financing (vs $55m market cap), mostly from the existing major shareholders. After both transactions, SYRS share count will multiply by a factor of four, all of it being backed by cash injections at higher than the current price levels.

The exchange ratio is 0.4312, implying a 33% upside on TYME’s current price. The ratio is subject to certain adjustments but these are unlikely to be material. Plenty of shortable shares for hedging are available at a 2% fee.

Given the extent of the upcoming dilution, there’s a risk that the availability of borrow will get depleted and fees might spike up. However, even without hedging, there seems to be a sufficient margin of safety:

• Both the PIPE and equity raise through the TYME merger are getting done at $0.94/share SYRS valuation vs the current price of $0.865/share. PIPE participants are mostly SYRS current major shareholders, who also happen to be reputable PE firms: Bain Capital Life Sciences (owns 10% of SYRS), Invus Public Equities (5.6%), Ally Bridge MedAlpha (6%). Aside from several other PE firms, another participant is Flagship Pioneering – US life sciences-focused VC fund, which is also SYRS’ co-founder and founding investor. These firms have significantly more information about the SYRS treatment development projects and have just made a high confidence vote on it at $0.94/share (+warrants exercisable at $1.034). In contrast, by buying TYME now, one is setting up SYRS shares at just $0.63.
• Pro forma SYRS will have $0.71/share of net cash. Before the PIPE/merger announcement, SYRS traded at an 8%-10% discount to net cash. Assuming the same discount, results in $0.64/share post-merger/PIPE, in line with the look-through price from TYME stock position. Looking even earlier (2019-2021) SYRS used to trade at 2x – 4.5x premium to net cash.
• There are also reasons to believe the discount will not be as wide as before the merger announcement. After the transactions, the company will now be in much better shape with enough cash to fund operations till 2025-2026, enabling it to significantly advance its current late-stage gene-based cancer treatments towards commercialization. One candidate, Temibarotene, is currently in Phase 3 with potential NDA filing expected in 2024. Another, SY-2101, is expected to enter Phase 3 in H2 2023. SYRS has also just recently amended the terms of its debt facility, postponing the maturity from Feb’25 to Feb’26. So overall, given the eliminated financing risk and vote of confidence from major shareholders, it’s possible that SYRS shares will trade higher than historical levels relative to net cash.

Closing is expected in H2 2022 and all conditions are likely to be satisfied easily:

• SYRS shareholder approval – 28% are already in support. SYRS management together with the 5 largest shareholders owns 56% of the shares outstanding. 3 of these 5 shareholders are participating in SYRS PIPE financing, which is happening concurrently with the merger, and are likely to support the merger as well. Adding PIPE shareholders’ stakes + management’s shares I arrive close to 35% combined ownership. Getting over the 50% threshold for shareholder approval is unlikely to be a problem.
• TYME shareholder approval – 30% are already in support. TYME’s main development compound is SM-88, for which the company was running trials for metastatic cancer and breast cancer treatment. The metastatic cancer treatment trials were canceled this January due to unsatisfactory results. Ever since then, TYME has been trading at a wide 40% discount to net cash. The merger will allow the shareholders to eliminate the discount and avoid future uncertainty regarding the development of breast cancer treatment (still in Phase 2).
• Another condition – the completion of SYRS PIPE with gross proceeds of at least $100m (expected to be at $130m). I don’t think there’s any substantial risk here as PIPE is indicated as being oversubscribed and participants are mostly SYRS current major shareholders, who know the company quite well and have already agreed with this financing, despite the current market turmoil.

Both TYME and SYRS are trading at pre-announcements levels and at discounts to net cash. If merger/PIPE fails, capital losses for both hedged and unhedged positions should be minimal.

Syros Pharmaceuticals

Syros develops treatments for cancer and monogenic diseases. After the merger TYME’s SM-88 development will be put on hold and the company will focus solely on its own pipeline. SYRT seems to be literally interested only in TYME’s cash position.

I do not have much insight into SYRS drug program and, with no near-term pending trial or FDA application results, I do not think this is important for the merger arb play. The willingness by the existing shareholders to put an additional $130m at risk here, tells me the company is not likely to blow over the next half a year while the merger is proceeding.

SYRS projects/timeline:

The sell-off in SYRS over the last 1.5 years (from $10/shr to $1/shr) does not seem to be driven by any specific news on the drug development programs, but rather correlates with:

• Very well-timed $165m equity issues in Dec’20 and Jan’21 at $8/share and $14/share respectively. The Jan’21 dump on the markets at peak prices was quite likely unexpected as just a few days earlier the company issued the ‘Strategic Priorities and Expected Milestones‘ press release, where it clarified that: “Syros ended the year with approximately $174 million in cash, cash equivalents and marketable securities¹, which the company believes is sufficient to fund its anticipated operating expenses and capital expenditure requirements into the second half of 2022.”
• H1’21 full sell-down of SYRS position by ARK Investment Management. It was at 25% shareholder back in Oct’20.
• 50% sell-off in biotechnology stocks over the last year (see IBB and XBI ETFs).

Pro-forma for the transactions, SYRS expects outstanding shares at 280m and total cash at $240m. Net cash will be $200m or $0.71 per SYRS share. The $56m cash-burn figure is a plug to get the cash figure to balance with management’s expectations, but seems to be directionally correct given c. $25m quarterly cash burn over the last 1.5 years. From $130m PIPE gross proceeds I have deducted 5% transaction expenses.

No material changes are expected for the exchange ratio

The merger stock exchange ratio will be calculated by dividing ‘Tyme Per Share Value’ by $0.94 – in line with the pricing of SYRS shares to be issued in PIPE financing, except with no additional warrants attached.

TYME Per Share Value = (TYME net cash (cash + marketable securities less total liabilities) + $7.5m) divided by TYME shares outstanding.

Merger announcement documents indicate the expected net cash position at closing to be “around $60m”. As of Mar’22, the net cash stood at $75.5m. I think estimating $60m at close might even be slightly too conservative as the average cash burn per quarter last year was $5.3m, whereas in Jan’22 TYME canceled one of the main development projects (metastatic cancer). Moreover, as TYME’s SM-88 development will likely be put away after the merger and SYRS’ priority is raising as much cash as possible, it’s quite unlikely that the current trials will be going on at full power during the merger process. The merger is tiny and has chances of getting closed early (a fair guess would be October-November), further limiting any ongoing cash burn till closing.

As of May, TYME shares outstanding were 172m and are unlikely to change much till the merger closes. Options and warrants are way out of money and will be converted automatically into Syros’ options/warrants on the same terms and conditions as common stock.

Even assuming some deviations from the $60m cash balance, the margin of safety at 33% spread more than compensates for it.