Shutting down Silverback — a Q&A with Laura Shawver
a RApport Q&A
featuring Peter Kolchinsky & Laura Shawver
Peter Kolchinsky is founder and Managing Partner at RA Capital Management. Laura Shawver is President and CEO of Capstan Therapeutics.
August 24, 2023
At Silverback Therapeutics, “we were really going for something transformative for people battling cancer, not something incremental,” says former CEO Laura Shawver, PhD. “We were hoping for cures, not just extending people’s lives a few months. And the preclinical hypothesis was that we would see single-agent activity. But it’s a humbling business we’re in. Sometimes things don’t work out as anticipated.”
After a setback with its lead program in September 2021, Shawver (now Capstan Therapeutics president and CEO) and her team quickly and efficiently turned Silverback into a shell holding about $300 million cash and evaluated their remaining opportunities for delivering value to shareholders. Silverback eventually reverse-merged with ARS Pharmaceuticals (announced in July 2022), with Silverback shareholders receiving 37% of the combined company. ARS is developing an intranasal epinephrine spray, neffy, for Type 1 allergic reactions including anaphylaxis.
The Silverback story is on one hand a typical one (most drug programs either fail to reach the clinic or stumble once they get there), and on the other, an atypical one (making a quick pivot to shutting down a company and retaining as much of its cash as possible is rare).
RA Capital Managing Partner Peter Kolchinsky talked with Shawver about Silverback’s wind-down and reverse merger process that can serve as a template for other companies when trials fail. The pair also discuss key lessons for scenario planning, the importance of moving quickly when a key program doesn’t deliver hoped-for data, and looking ahead to a biotech ecosystem that anticipates the consequences of – and opportunities stemming from – its inevitable clinical setbacks. Their conversation has been edited for length and clarity.
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Peter: I’m an investor in ARS and on that company’s board but I never really heard the story from the Silverback side. What happened and how did you wind down so efficiently when so many other companies struggle to be decisive?
Laura: When we reported our data [for lead program SBT6050, a toll-like receptor 8 (TLR8) agonist conjugated to a HER2-directed mAb] in the fall of 2021, the data weren't horrible. We were able to demonstrate safety and tolerability, and we had waterfalling (meaning we were shrinking some people’s tumors), but we only had one RECIST response, and the Street reacted very negatively. We had believed that we would see meaningful responses once we got to a sufficient dose and we were able to observe payload in the tumor measured from patient biopsies so we thought it would turn out differently. When we enrolled additional patients at higher doses, we were surprised that we did not see any additional responses.
Around the board table, we had to admit that it didn't work [as a monotherapy]. We had enough activity, however, to argue that we would see something in combination. There was always a combination component to what we were doing in our development plan, and we debated whether to just switch from a single-agent investment thesis to a combo investment thesis. We had the cash to play that out. But we also knew that moving to a combo development plan would take so much longer. It would cost so much more money. It meant we'd have to strip out much of the company on the research side and the early discovery side to get to those endpoints with the cash we had.
And fortunately, we had good independent directors around the table who didn't have what I'll call escalating commitment. As a management team and as founders and as founding investors, we all desperately want things to work. And it really takes courage for somebody to say, “Hey guys, this didn't play out.” Maria Koehler, one of our independent directors [and CMO of Repare Therapeutics] was the first to say ‘This isn't working.’ And once she said it out loud, then we all took a breath and had to agree.
So we knew we had to do something different. And we ran many different scenarios. One was to continue as a company with our other programs. We looked at combining with several public companies. And at the end of the day we focused on reverse merging.
Peter: To what extent were plans in place for what to do with Silverback for different trial outcomes?
Laura: We had been running scenarios in the background, so as a management team, it's not like we weren't prepared for a scenario where we were going to stop. And I think it's our responsibility as management teams to always run scenarios. Every CEO should know, for example, how much money it costs to shut the company down, even in good times. And so we had been running scenarios about if we stop, how would we do it? What would it look like? And therefore we were able to very quickly, within a matter of a couple of weeks, come back to the board and explain how we were going to ramp operations down as fast as possible while we're ramping things up on a potential reverse merger.
We were already working on a reverse merger in parallel with having board discussions around our pipeline and timing to reach value inflection points, because again, I think that's part of our responsibility as a team to always be thinking about the other scenarios. And then of course I got multiple phone calls as the months went on from our data release, and our stock kept going down and down and down, and we reported third-quarter earnings with $300 million in cash. There were a lot of private companies out there that could no longer go public. A lot of them called me up and said, “Do you want to reverse merge?”
Peter: Can you walk through step by step the process of shutting down the company? I think it's probably one of the most stressful experiences that any director can go through. Can you give us a roadmap for how a company like yours did it?
Laura: Yes, and I'll agree with you. It's not a fun time to be CEO, because our job then becomes to save our investors’ capital to apply it someplace else. And so we shut the company down in waves. The day after the board meeting where we had laid out the plans, we took action. We laid off the first wave, about 30% of the company.
Before we announced we were stopping, we had 100 people. Initially, we had to keep the people that would move the earlier programs forward in case we could not identify a reverse merger target. But everybody that essentially worked on the clinical programs and the CMC work that supported it was in the first wave of layoffs, except for people needed to shut down the trials – we had multiple sites going in the US and Australia. We had a second IND that had been filed. So from a regulatory standpoint, we had to make sure things were cleaned up in the appropriate way. And we took the decision that patients who wanted to could remain on our drug for as long as possible, because the reverse merger was going to take a while. We had drug being manufactured in different parts of the world, and drug supply, starting materials, and things like that all over the place. That all had to be stopped.
Once we identified the reverse merger target, we laid everyone off except for the people that could tidy up, could sell equipment, could make sure things were disposed of properly. That’s when we went down to 12 people.
Peter: How soon after the decision to shut down did you select which company you would reverse merge with and how long did it take before that actually consummated? How did you decide on ARS?
Laura: We announced in July 2022 that we were reverse merging with ARS. And we had been working on that since January 2022, and intensively starting in March. Because there were so many different types of companies that were interested we had to create some criteria for those we’d entertain. For example, there were a number of cell therapy companies that approached us about reverse merging. We had no way as a team to appreciate that competitive landscape and the right way to diligence them within the timeframe we had.
So we took the decision that we weren't going to talk with cell therapy companies. Same with gene therapy and gene editing companies. Not that these aren't very valid approaches; they are. We just couldn't evaluate the competitive environment in a way that we thought we could do justice to our shareholders to put the money in the right hands.
We created a short list of about a half a dozen companies and one of them put a term sheet on the table. At that time we brought Leerink on as our advisor to run a formal process. And of all the companies that we had been talking to, there were an additional eight or so that we reached out to and said “Here's the formal process that we're going through. You need to give us a proposal by X date if you have interest. We will reply by Y date.”
Peter: Was ARS the first one that gave you a term sheet?
Laura: No. We did diligence on a handful of companies, and then the board created a Transactions Committee that oversaw the formal process. We brought forward proposals with recommendations to the Transaction Committee who requested that we conduct deep diligence on three of these companies to better understand their value creation and because we needed to be able to negotiate the best outcome for our shareholders. So for those three companies, the committee asked us not only for technical diligence, but they wanted analysis based on NPVs and an analysis based on public company comparators. We felt it was a crazy amount of work but it turned out to be valuable in making what we thought was the best choice. The analyses were presented it to the Transaction Committee and the committee recommended one company to the board.
We were down to about 8 people as the deal closed, keeping Finance and Legal and those on the team that ARS expressed interest in keeping.
Peter: You guys had about $300 million of net cash in Silverback. What was the plan if you couldn't find a good reverse merger candidate?
Laura: The backup plan was to develop our HBV drug, which was a TLR8 agonist conjugated to a ASGR1 antibody and continue development of our discovery pipeline. But our HBV asset was a preclinical program. We had scaled up the CMC and we had an IND date, but it would've been a long time to reach the clinical value inflection points. In parallel with doing the reverse merger, the Transactions Committee looked at an analysis to give cash back to the shareholders. And of course, the fairness opinion that Leerink provided to us also included their separate analysis of liquidating the company and giving cash back to shareholders.
Peter: And there’s also an alternative where you distribute back the vast majority of your cash, say 90%. The company would still be an operating shell. The remaining 10% of the cash could still be used for reverse merger later but you'd have to do a concomitant PIPE to get the total cash you might want from the transaction. But that happens with some regularity anyway. Did you consider more rapidly returning most of the cash quickly rather than actually go through the very tedious, true liquidation of the company before getting it?
Laura: We considered that. We ran multiple scenarios of giving different amounts of capital back such that the company would be left with the amount that would get to this place, or the amount that would get to that place. Given that our new lead asset had not yet reached the clinic and therefore a ways off to a value inflection point, our opinion was that it was best for the shareholders to do a reverse merger with a company that could drive value in the near term rather than to give part of the capital back.
Peter: You had at least one smart, active investor on your board in [Silverback founding CEO and chairman, Orbimed’s] Peter Thompson, maybe others as well. I'm sure investors that own a fair bit of the company, they view that cash as their firm’s. So, how active were the investor-directors in ultimately helping to vet and bless the reverse merger?
Laura: Well, as you can imagine they wanted a lot of detail about this, and we provided them as much detail as they wanted. Both in terms of what their cash back would look like as well as what the opportunity was for each of the reverse merger candidates. At the end, the Transactions Committee was small and did not include investors with significant capital in the company. The Transactions Committee did a lot of the heavy lifting around the comparison of the three companies, around the NPVs and the public company comparators and the competitive landscape. The committee got all the diligence that we did, including talking to KOLs, regulatory diligence, and commercial diligence in the case of ARS. The investors did not get that level of detail.
Peter: If the investor-directors did not like the private company into which their cash was going, do you feel like that deal still would've happened? Could it have happened against their wishes?
Laura: No, it couldn't have happened because we needed a shareholder vote. So it wasn't just the investors around the table – there was not enough insider capital to make that deal go through. But the final vote was overwhelmingly positive.
Peter: Reverse mergers are often said to be value destructive. A company’s sitting on $100 million cash, management picks some company to merge with, it goes from trading below cash to now having a positive enterprise value because they reverse merge with some private company that couldn't IPO, which is adverse selection, right? It's probably not the best of the best if it's struggling to IPO. So who said that the management team has a mandate to go picking investments on behalf of its shareholders? That's the conventional notion.
And yet when you look at how things played out for Silverback and ARS, the stock dipped and then climbed back up, showing that people were buying after the deal was announced and saying, “I want exposure to that company on a pro forma merged basis.” So is it because management and the independent board members are really astute investors? Or was it because you had smart investors and when the deal was ultimately blessed by them, there was a better chance that other investors would say, “Oh yeah, that’s a pretty good pick.”
Laura: I agree that a lot of reverse mergers don't work. But there are plenty of examples where they do work. Chinook was the product of a reverse merger and they were just acquired in June by Novartis, for example. And so I think it is a matter of thinking like an investor, not thinking like a scientist. And yes, it really helps to have seasoned investors around the table who say “Wait, would I invest in that if it wasn't a reverse merger?” and their answer being “Yes.” And it was unusual that we reverse-merged with a near-commercial opportunity in a specialty pharma space that I believe is going to make such a huge difference.
Peter: ARS has an intranasal epinephrine product. I have a child with food allergies. I would love for her to carry around intranasal epinephrine because I know she won't hesitate to use it if she starts to feel symptoms. Whereas an EpiPen, with that needle, we've only deployed it once in her life. And I don't think I would trust her to deploy it quickly on herself.
Laura: We all know people that carry an EpiPen. We all can see the incredible value of nasal delivery of epinephrine. But nevertheless, it was unusual for a company like Silverback to choose ARS for a reverse merger. But we had the right investors and advisors that said “Look at this opportunity.” You need to have the right group of people around the table. I think Leerink did a great job of calling out other companies that we hadn't looked at to bring them into the picture.
Peter: I would point out it's also pretty unusual that you and Peter Thompson stayed on as directors of the merged entity. People think of a shell as “I need a listing and I need your cash, and otherwise get outta here.” But ARS enjoyed the synergies of keeping some of your finance team and getting a couple of the Silverback directors. That speaks to the fact that one of the founders of ARS was a former board member of Synthorx [which was acquired by Sanofi in January of 2020] and was on that company’s board with you, with me, and with Peter Thompson. It was a company that was being grown up not that far away in the ecosystem. We knew we could work together. I would love for our community to be a lot more efficient and for us to recognize when one of our experiments isn’t working out. For us to be able to get together and say “Where are these people and this money best deployed? What are the other experiments going on?” And leverage some of the common connections – your peers on other boards – to accelerate the diligence and say, “I trust these people. I've worked with them before. Let's direct our people and our cash to this other project.”
I wonder if every company might not recognize when it's tracking to a “hero/zero moment.” And if it turns into a zero, then a reverse merger should be something we think about while executing on a really efficient wind-down in order to preserve cash. Maybe some of that reverse merger discussion could be happening while a trial is still running. If it fails, you're that much closer to the reverse merger. Do you think that people could psychologically engage in that, or is it just too hard to contemplate the downside scenario while you're still working on making that trial run as efficiently as possible?
Laura: I don't think it's too difficult to contemplate the downside scenario because we contemplate scenarios all the time. There could be bandwidth issues, though, because there's a lot of intensity, as you appreciate, about running a biotech company. The experiment’s still going on, but I think the other thing that was unusual about Silverback that allowed for what we hope is a successful reverse merger is that we had a lot of capital.
Most companies do not have a lot of capital when they decide to reverse merge. And most companies take too long to take the decision that their capital is better placed with somebody else when clearly the preclinical hypothesis didn’t play out. There are lessons here about how we can be more critical of our own data, how we can be more conscious of preserving our cash when things are going sideways, and how we can take decisions quickly.
But thinking about a reverse merger as your clinical trial is going on… Well, I don't know. It's a good thought experiment.
Peter: I know we're thinking about it for our companies where six months from now we're going to get a readout and the company’s still got a bunch of cash. If that readout fails, shutting down is probably the most prudent thing. How will that conversation come up? How long will it take for everyone to align? If we hesitate, if we don't address the elephant in the room, then cash is wasted.
People worry about how to break that news to the employees that they might be laid off. But a lot of them, if not all of them, are aware of the risk. And they can find new jobs really quickly in most cases. And if they were to plan in advance, and if we talked about it a little bit more openly, as if to say “You’re employees of the ecosystem, not just of one company; we hope we succeed, but just know you'll be okay if we don’t,” maybe it wouldn’t be such a worry.
One of the things we do at RA Capital is what we call a “talent briefing” when one of our companies is going through either M&A or a reduction in force. We will put together a presentation and we'll show them all the other companies in our portfolio that we think might be a fit, given their skills, and make those connections quickly in order to help them possibly not lose a beat, not go a single day without insurance or a paycheck.
Laura: We're in a mature industry now, so it's not like biotech in 2000, when a lot of people lost their jobs and couldn’t find new ones. Our industry was very different back then. There were fewer companies. There wasn't the capital deployed like there is now. Fast forward 20-plus years and all of the Silverbackers that wanted to find new employment all did very quickly. As did all the Synthoricians that dissipated after the Sanofi acquisition. It's a mature industry and we keep going.
Peter: The best thing about this entire interview with you, Laura, may be that I just discovered that people at Synthorx called themselves Synthoricians.
Laura: You know why? Because it rhymes with magicians.
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