Sesen Bio: Plan A Reverse Merger w/ Carisma, CVR; Plan B Liquidation

Sesen Bio (SESN) (~$130MM market cap) is another failed biotech themed investment idea.  Sesen Bio has one late-stage product candidate, Vicineum, a treatment for a type of bladder cancer, where a biologics license application (BLA) was filed with the FDA, but Sesen was sent back to the drawing board when the FDA issued a CRL (not a denial, but a "needs work") in August 2021 citing deficiencies in the original application that would require Sesen to complete a new (and long/expensive) Phase 3 trial before refiling.  Sesen believes that Vicineum still has a path to approval, but the stock traded well below net current asset value on the news, limiting Sesen's capital raising ability to move forward alone with a revised Phase 3 trial.  The company then announced they were pursuing strategic alternatives, which in failed biotech language usually means a reverse merger, if that doesn't work out, a liquidation.

In September 2022, Sesen's board went with Plan A, by announcing a reverse merger with Carisma Therapeutics, another cancer focused biotech with a supposedly promising platform ("CAR-M") but very much early/clinical stage.  The original deal was for 34.4% net ownership of Carisma and a CVR that would pay $30MM or ~$0.15/CVR out if Roche initiates a Phase 3 trial on EBI-031 (Sesen was f/k/a Eleven Biotherapeutics); Roche currently has Phase 2 trials ongoing with an estimated completion date of September 2024.  Importantly, none of the cash was to be return to shareholders and the combined Carisma would receive any proceeds from other asset sales.  Later it was first adjusted to include a special dividend of up to $25MM, based on the excess cash over $125MM delivered to the new merger entity from Sesen.

Shareholders disliked the deal, the stock promptly dropped on the news.  As an heathcare/biotech outsider, it can be difficult to tell which reverse mergers will pop and which will fail, often it seems to be timing, where the market's risk appetite is at any given moment.  But here, going from a liquidation candidate (similar to the situation over at ADES) to the board approving investing shareholder cash into a clinical stage company was a poor read of the room.  An investor in Sesen could sell their shares and invest in countless other similar science experiments, didn't need Sesen's board to do that for them.  What makes things worse here, management and the board own very little stock themselves.

Two investors came forward (dubbed "Investor Group", they own 8.5% of SESN) against the deal, instead pushing for Plan B, a liquidation.  Some back and forth went on behind the scenes, thanks to the activists, Sesen and Carisma recut the deal but it still is insufficient according to the Investor Group, who are still planning on voting against the reverse merger on the upcoming 3/2 shareholder meeting (if approved, deal will close shortly after).

Here's the new recut deal, for context, shares trade for $0.62/share today:

1. $75MM or $0.34/share special dividend
2. CVR that would receive the sale proceeds from Vicineum and other pipeline assets (no good guess here, but possibly a meaningful amount), plus the $30MM ($0.14/share) milestone payment from Roche if Roche initiates a Phase 3 trial for EBI-031 prior to 12/31/26
3. 25% ownership in Carisma Therapeutics (CARM will be the new ticker), at the stated deal value of $357MM, that's $0.41/share of value to SESN shareholders.  This is the value pre-closing financing partners (which includes a few blue chips names like AbbVie and Merck) are purchasing shares in Carisma ($30MM at $15.60 per share, 37.7924 exchange ratio into pre-reverse split SESN shares) which should have some haircut applied

Investor Group is still pursuing a liquidation, claiming that Sesen could return $140MM in the near term, or $0.70/share with the remaining legacy assets monetized over the three years it would take to wind up the entity in Delaware.  Sesen struck back, saying they could only make an initial distribution of $0.40-$0.60/share.  I'm sort of indifferent to the outcome, could make arguments for both sides, a liquidation would provide a low floor/low ceiling return and the reverse merger also seems pretty protected on the downside here (assuming Vicineum does indeed have some value) with the immediate $0.34/share cash return but with upside of the CARM stub as the market begins to heat back up.  Luckily for me, I don't have to make a voting decision as the record date has already been set as 1/17, before I purchased shares.  I bought some shares this week to follow along with the drama, welcome others thoughts on this situation.

Disclosure: I own shares of SESN