Back in October, we published this piece, outlining our thoughts on Threshold Pharmaceuticals, Inc. (NASDAQ:THLD). At the time, the company has just reported the discontinuation of its lead development program, and had collapsed on the back of the announcement. Having run up to highs in and around $1.2 a share prior to the discontinuation announcement, the company lost close to 70% of its value during the eight weeks subsequent to the news, and markets pretty much wrote Threshold off entirely.

We noted, however, that there was some value in the company’s deeper pipeline, and that its potential as both a monotherapy and a combination asset painted Threshold as a buyout target.

As it turns out, we were correct.

The company just announced that it is set to merge with a private company called Molecular Templates, and that the new entity (which we will get to in a bit more detail shortly) will jointly develop the asset we referred to above and a secondary asset that serves as lead in the Molecular Templates pipeline.

Threshold has spiked on the news, and it seems market sentiment surrounding the company is reversing to the positive.

So what does this mean for shareholders now?

Well, the deal is structured in such a way that it almost resembles a type of reverse merger, in the sense that a private company (Molecular Templates) is using Threshold as a means to becoming a publicly traded entity without having to go through the rigmarole of IPO etc. The new company will trade under a new ticker (proposed as MTEM) and will be called Molecular Templates Inc. It is different from a reverse merger, however, in that the new company will be developing both of the lead assets of the two separate companies as part of a combined lead program, instead of just disregarding the program of the base company.

We looked at Threshold’s asset, evofosfamide last time, and readers wanting to get up to speed with the drug can do so here. It’s just had some bad luck in Japan, where there were hopes for an NDA submission based on some (admittedly far-fetched) data derived from the previously mentioned failed trial, but there is a phase 1 combination study set to kickoff near term, and this should bring with it some catalysts as it plays out.

Molecular Templates is bringing a drug to the table called MT-3724, which is an ETB that targets the CD20 cell surface antigen present in a variety of lymphomas and leukemias. Phase 1 data demonstrated safety and efficacy, and the company is funded through to a pivotal trial for the asset in non-Hodgkin’s lymphoma (NHL). While the official word is that both drugs will serve as leads, we expect that 3724 will end up being a primary focus.

The deal is structured in such a way that current Threshold holders will own 34% of the new company, while current Molecular Templates holders will take the remaining 66%. A US private equity firm is going to invest $20 million in the new company, subject to a proviso that rests in the receipt of additional equity financing commitments of $20 million.

Our take away on this one is that threshold shareholders, while only getting circa one third of the new company, are getting a pretty nice deal here. The combined entity allows for the continued development of evofosfamide, while also giving Threshold shareholders exposure to another (and in all honesty, a seemingly more promising) development program. It also lifts medium-term funding concerns, and in doing so, considerably de-risks evofosfamide as a potential development exposure.

It’s not all good news, of course – the 34% ownership figure is dilution in a cloaked form. That said, Threshold would have had to dilute considerably anyway if it was to fund its forward pathway from its own pocket.

There’s also still the potential for a bid from a big name, or a partnership on the evofosfamide asset, if the company can demonstrate promise as a combination therapy.

Bottom line – Threshold is not out of the woods, but it has taken a big step forward in this merger, and remains an attractive exposure at current prices.

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Disclosure: We have no position in THLD and have not been compensated for this article.