Lawsuit: Arca Biopharma investor cries foul on merger proposal

WESTMINSTER — A shareholder of Westminster-based drug developer Arca Biopharma Inc. (Nasdaq: ABIO) is asking a judge to block the company’s attempt to merge with Oruka Therapeutics Inc., a private dermatology-centered biotechnology firm headquartered in Massachusetts.

In a lawsuit filed this week in U.S. District Court in Colorado, attorneys representing plaintiff Dianah Wynter, a California resident, argue that “an unfair process” during the consummation of the merger deal resulted in violations of the Securities and Exchange Act of 1934.

Oruka said last month that it would absorb Arca, representatives of which did not respond to requests for comment Tuesday, in a reverse-merger deal in which the struggling Westminster-based cardiovascular therapies developer will serve as vessel for taking Oruka public. 

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The combined company, which will operate under the Oruka Therapeutics banner and trade on the Nasdaq exchange under the ticker symbol “ORKA,” will focus its efforts on Oruka’s existing pipeline of drug candidates for the treatment of chronic skin diseases such as plaque psoriasis and psoriatic arthritis, the companies said in early April. 

Oruka said last month that it has secured commitments for a $275 million private investment to support the merger, as well as pledges from a long line of investors to buy Oruka shares when the deal closes, likely in the third quarter of 2024.

Upon closing of the merger, investors who held shares of Arca Biopharma stock before the deal will own 2.38% of the combined company, with the remainder held by Oruka’s owners. 

Arca, which will kick $5 million of its money into the combined company’s coffers, “expects to pay a dividend to pre-merger Arca stockholders of approximately $20 million immediately prior to the close of the merger,” the company said. 

Wynter’s lawsuit — which names individual Arca board members as defendants, but notably does not name Oruka or its individual leaders — accuses Arca management of orchestrating a deal that provides them with “significant and immediate benefits” such as stock options and “‘golden parachute’ packages,” potentially at the expense of maximizing shareholder value. 

Because Arca and Oruka’s registration statement to the U.S. Securities and Exchange Commission regarding the proposed merger is “materially deficient,” the lawsuit alleges, shareholders like Wynter are deprived “of the information necessary to make an intelligent, informed and rational decision of whether to vote in favor of the proposed transaction and is thus in violation of the Exchange Act.”

Specifically, disclosures about the deal fail to highlight “certain conflicts of interest for management” and misrepresent “financial projections for Arca,” the complaint claims. 

The registration statement also “fails to disclose adequate reasoning as to why the board would agree to a deal in which stockholders’ interests would be diluted.”

Wynter is represented in the case by Pennsylvania-based law firm Brodsky & Smith LLC, which in an early April news release, said it was launching an investigation of the Arca-Oruka merger and solicited outreach from shareholders. Wynter’s lawyer with Brodsky & Smith did not respond to a request for comment.

Arca, which spent the past two years searching for an M&A partner, told regulators in late April that if the Oruka deal fails, Arca may pursue “a dissolution and liquidation.”

A pre-revenue company, Arca posted a $2 million loss in the first quarter of 2024 — up from a $1.2 million loss in the same period last year — and ended the most-recent period with $35.9 million in cash and equivalents on hand. 

“Arca believes that its cash and cash equivalents, consisting primarily of money market funds, will be sufficient to fund its operations through the middle of 2025. Our future viability beyond that point is dependent on the results of the strategic review process and our ability to raise additional capital to fund our operations,” the company said. “We expect to continue to incur costs and expenditures in connection with the process of evaluating strategic alternatives. There can be no assurance, however, that we will be able to successfully consummate any particular strategic transaction, including the merger” with Oruka.

“The process of continuing to evaluate these strategic options may be very costly, time-consuming and complex, and we have incurred, and may in the future incur, significant costs related to this continued evaluation, such as legal, accounting and advisory fees and expenses and other related charges,” Arca said. 

After nearly doubling its year-over-year losses in 2021, Arca Biopharma’s board of directors established a special committee and hired a consultant tasked with weighing the company’s strategic options for righting the ship.

The company then retained Ladenburg Thalmann & Co. Inc. in May 2022 to “evaluate strategic options, including transactions involving a merger, sale of all or part of the company’s assets, or other alternatives with the goal of maximizing stockholder value,” Arca said at the time. 

Arca’s stock has spiked since the merger was announced, surging from less than $2 per share in April to $4 per share in mid-May. The stock opened trading Tuesday at $3.25.

Oruka is the third pharmaceutical company to be spun out of Paragon Therapeutics Inc., following Spyre Therapeutics and Apogee Therapeutics. 

The company has two drug candidates that are set to enter clinical trials in 2025, and Oruka leaders expect the new $275 million investment to fund company operations through 2027.

The lawsuit is Wynter v. ARCA Biopharma, Inc. et al, case 1:24-cv-01418-STV, filed May 20 in Colorado District Court.