Unlocking Shareholder Value at Keros Therapeutics: A Battle for Governance and Capital Allocation

In the high-stakes world of biotechnology, where innovation and capital efficiency are paramount, the clash between ADAR1 Capital Management and Keros Therapeutics (Nasdaq: KROS) has become a case study in governance reform and capital allocation. ADAR1, a 13.3% stakeholder, has launched a sustained campaign to force Keros' board to address what it deems a systemic failure to steward capital and engage with shareholders. This conflict underscores broader tensions in the sector: How should boards balance long-term R&D risks with short-term shareholder returns? And what role should activist investors play in reshaping corporate governance?

Governance Flaws and Shareholder Disengagement

Keros' governance structure, while technically compliant with standard voting rights, has drawn sharp criticism for its opacity and resistance to shareholder input. ADAR1's open letter to the board, issued in August 2025, highlights a pattern of disengagement. Despite repeated attempts to initiate dialogue since July, the board has allegedly declined direct meetings, instead deflecting to the company's financial advisor. This lack of transparency is compounded by the board's delayed action on a pledged $375 million capital return, announced in June. Two directors, Mary Ann Gray and Alpna Seth, faced over 60% opposition at the 2025 Annual Meeting, a clear signal of eroding trust.

The board's defense—that it is conducting a “comprehensive” strategic review—rings hollow to critics. While strategic reviews are common in biotech, Keros' failure to communicate a timeline or specifics has fueled skepticism. ADAR1 argues that the board's inaction reflects a broader misalignment with shareholder interests, particularly given the company's $690 million cash reserves and the potential value locked in its Takeda partnership for elritercept.

Capital Allocation: A Missed Opportunity?

Biotech firms are often judged by their ability to allocate capital efficiently, especially in an era of declining venture funding and rising R&D costs. Keros' cash position, bolstered by a $200 million upfront payment from Takeda, presents a unique opportunity. Yet the board's reluctance to distribute a special dividend or implement a contingent value right (CVR) to capture Takeda partnership upside has drawn ire. ADAR1's proposal—a CVR tied to elritercept's commercial success—could allow shareholders to directly benefit from the asset's potential without diluting equity.

The board's alternative—retaining cash for “continued investment in the pipeline”—is risky. Keros' lead asset, KER-065, is still in pre-Phase 2 development for Duchenne muscular dystrophy, a market with limited near-term revenue potential. Meanwhile, the company's cash runway extends through 2028, a period during which biotech valuations remain volatile. By holding onto cash, the board may be prioritizing operational flexibility over immediate returns, but this strategy risks alienating shareholders who see clearer value in a capital return.

The Path Forward: Board Refreshment and Strategic Clarity

ADAR1's threat to nominate new directors at the next Annual Meeting reflects a growing trend in biotech governance: shareholder-led board refreshment. This approach, seen in companies like Valneva SE (which operates under a standard voting structure and emphasizes transparency), can inject fresh perspectives and align board priorities with market realities. For Keros, a board refreshment could address the lack of independent oversight and accelerate the capital return plan.

However, the success of such a move hinges on the board's willingness to compromise. If ADAR1's nominees gain a seat, the company could see a shift toward more shareholder-centric policies, including a special dividend or a CVR. Conversely, if the board resists, the standoff could escalate into a proxy battle, further eroding investor confidence.

Investment Implications

For investors, the Keros saga highlights the importance of governance in biotech valuation. A board that fails to communicate a clear capital allocation strategy—especially when cash reserves are substantial—risks undervaluing its own assets. ADAR1's push for a CVR is particularly compelling, as it could unlock value from the Takeda partnership without requiring immediate clinical success.

In the short term, Keros' stock may remain range-bound until the board clarifies its capital return timeline. However, a resolution—whether through a special dividend or board refreshment—could catalyze a re-rating. Investors should monitor the board's strategic review updates and ADAR1's engagement efforts closely.

Conclusion

The battle at Keros Therapeutics is emblematic of a broader debate in biotech: Should boards prioritize long-term innovation at the expense of short-term returns, or should they act as stewards of capital in a sector where cash is king? ADAR1's campaign argues for the latter, emphasizing the need for governance reform and strategic clarity. For investors, the outcome will serve as a litmus test for how corporate governance shapes value in an industry defined by uncertainty.

In the end, the board's ability to balance these competing priorities will determine whether Keros becomes a cautionary tale of governance failure or a model for shareholder-centric biotech leadership.