Cerulean Pharma Inc (NASDAQ:CERU): Here's What Just Happened

Cerulean Pharma Inc (NASDAQ:CERU) just hit markets with news of a reverse merger, and the company has taken a huge hit on the back of the release. As things stand, at Tuesday market open, Cerulean is trading for a little over $1.25 a share. The company closed out last week at around $3.30 a share, and has lost in excess of 60% of its market capitalization in response to the development.This is one that we looked at last week, when management put out a notice announcing that it was conducting a strategic review of potential alternatives, and highlighting the fact that one of these alternatives was the sale of the company or some of its assets. There is some credence to the suggestion that management should probably have been a little more specific with shareholders at that point – it's unreasonable to assume that this deal was devised of and closed over the weekend – but that's history now. In the wake of the announcement, and with the subsequent market response in place, the question becomes, what's next?Let's try to figure that out.As far as the terms of the deal are concerned, only a couple of things really matter. First, Cerulean is selling off all its assets for what looks to be around $7.5 million, and it's going to pay off a debt facility on which it owes about $12.5 million. It's then going to slash its workforce, and – at the core of the transaction – hand its ticker over to Daré Bioscience.In other words, this is a reverse merger in one of the truest senses of the concept. No more Cerulean, and no more cancer platform or oncology pipeline.So what are Cerulean shareholders left with? Well, from the information that has been made available, somewhere between 30% and 49% of the combined company. In turn, then, in order to figure out what this proportion represents, we’ve got to look at Daré Bioscience.The new company will focus on the development of what's called Ovaprene. There's not too much information available on this product (other than the press release content stating that it is a non-hormonal contraceptive ring), and Daré's website is relatively sparse. That said, we did a little digging, and it looks as though the product was initially developed by an entity called Poly-Med – a South Carolina based medical grade materials company. There's another name involved, but exactly how is unclear, a company called Ovatech. The latter conducted a phase II back in 2010, which completed successfully.At some point between 2010 and 2016, it looks as though Daré has taken over the product (although with it being a private transaction, there's no record of it that we can find) and the company is now looking to carry it through to commercialization. There's a chance Daré is Ovatech renamed (as the Ovatech site is no longer live), but that's how things stand right now.For those wanting to know a bit about the science behind the product, this is well worth a read. By way of a brief summary, it's a contraceptive ring that uses a combination of an impenetrable (to sperm) mesh and a spermicidal solution to provide contraceptive protection, as opposed to using hormonal drugs (as is the case with the currently widely used ring product). This overcomes most if not all of the contraindications and issues surrounding hormonal rings, and therein lies the justification (and the market) for the product.The next steps for the new entity are to (and we're quoting this direct from the press release) advance Ovaprene through the completion of a postcoital proof of concept study. Exactly what this will provide that is different from the study we've linked to above, we're not sure, but we're guessing Daré will be a little more specific once the deal closes and the RM completes.So what's the bottom line here?Well, Cerulean shareholders are about to own 30% or more of a product that has a large potential market and a successful phase II study under its belt. It's not a game changing cancer treatment, as said shareholders once believed they had an exposure to, but for us, this isn’t too bad an outcome for those that have seen Cerulean's lead assets fail and – in turn – it's market cap deteriorate. We're going to watch this one closely for any fresh information as to exactly who Daré is, and what the upcoming so-called proof of concept will bring to the table above and beyond that which has already been carried out. That's the key focus point for us near term.We will be updating our subscribers as soon as we know more. For the latest updates on CERU, sign up below!EDIT 03-22-17: This article has been edited at the request of Cerulean management to reflect the fact that the company did not note specifically that it was in discussions with a potential buyer in last week's press release dated March 14, 2017.Disclosure: We have no position in CERU and have not been compensated for this article.