Avenue Therapeutics (ATXI) – Merger Arbitrage with CVR – 250%+ Upside

Current price: $5.44

Offer Price: $13.92

Upside: 250%

Expiration Date: TBD (expected by April 2021)

This idea was shared by Writser.


Avenue Therapeutics is $60m biopharma startup focused on developing an intravenous formulation of Tramadol (a known and approved generic opioid pain medication). A phase 3 trial was completed in May 2018, ATXI has already started a second phase 3 trial with results expected in mid-2019.

Following favorable trial results, a large Indian pharmaceutical company InvaGen Pharmaceuticals agreed to acquire ATXI in a two stage merger. The first stage has already closed after shareholder approval in Feb 2019 - InvaGen invested $35m in exchange for a 33.3% stake (equivalent to $6/share, new issuance, pre-announcement share price was around $4). In the second stage of the merger InvaGen would acquired the remaining shares for an aggregate consideration of $180m subject to certain adjustments. Using current share-count this translates into $13.92/share. On top of $180m cash consideration ATXI shareholders would also receive a CVR that entitles the owner to receive a royalties if IV Tramadol sales reach certain milestones, but these would start paying out only after 2028.

Second part of the merger will be consummated only if IV Tramadol gets FDA approval by Dec 2020/April 2021.

As with most biotech startups ATXI financials are horrible. However, $35m financing received from the first stage of the merger might be sufficient till FDA approval - cashburn during 2018 was $20m. Also InvaGen agreed to provide additional interim financing of up to $7m (any amounts drawn would be deducted from final merger consideration).

Management and directors own ~7% of shares outstanding (pre-dilution). Also Fortress Biotech with 3 directors on the board owns another 34% (pre-dilution) . Two directors (Herskowitz, Paley) have been buying since the announcement, at prices up to $5.91, though not in size.

I'm not a medical expert (at all) but the setup looks promising. There is lots of uncertainty - which the market usually dislikes. The stock has been all over the place since the announcement, as low as $4.50 in December and as high as $6.82 in January.

Tramadol is a well-known pain medication and IV Tramadol has, as far as I understand, successfully completed a Phase 3 trial so the chances of getting FDA approval should be higher than zero. Modelling this as a 50/50 flip doesn't seem completely wrong to me. I don't know what the base rate is for FDA approval but it seems to me this should be rated slightly higher. Invagen also seems optimistic given their cash injection. Their second stage bid offers massive upside and their involvement also makes it less likely the company will run out of cash.

Has anybody looked at this? Know any of the players involved? How would you handicap the second stage approval? Trying to get a small discussion started here because I'm a bit out of my comfort zone.

If one assumes a close in two years, discounts the cashflow by 15% p.a. and models a zero for failure (all very simplistic), the market is pricing in a ~40% - 65% chance of FDA approval. I.e. roughly a coinflip. Maybe a decent bet to buy at the bottom of that range?


Tramadol and Opioid Abuse

As far as I know Tramadol is a Schedule 4 drug which is considered relatively safe as opposed to morphine, oxycodon etc, which are classified Schedule 2 (high potential for abuse). This is actually one of ATXI's selling points:

"Tramadol is a synthetic, dual-acting opioid with a unique mechanism of action that delivers opioid efficacy with less potential for abuse and a lower risk of dependence than conventional narcotics." 

Of course the FDA designation could change, I'm no expert on Tramadol but it seems to me they are relatively well-positioned. ATXI seems to market their product as a safer alternative to conventional opioids (then again, of course they would).

More details on Tramadol position relative to other pain relieve and opioid drugs can be found in this presentation.


Likelihood of Approval

The image below indicates some base rates for FDA approval. Tramadol is an non-NME (new molecular entity), i.e. Tramadol itself is already FDA approved, just the method of administering is new. The base rate for phase 3 -> approval is ~67% here (74% * 90%). Maybe in this case that rate is even higher now that the first phase 3 trial was successful. Also, Tramadol is already in use in Europe intravenously. All in all FDA approval doesn't seem like a super long shot, I'd wager chances are > 50%. Which should generate a decent IRR - if all my assumptions are correct and if ATXI / Invagen don't do something stupid.

image (2)


  1. lngtrminvestor1

    Maybe I’m thinking about this all wrong, but aren’t you really taking the same FDA risk if they hadn’t taken the InvaGen deal but now your upside is capped if things go well? Caveat, clearly good to have a vested provide of future capital if needed.

    1. dt

      I had similar thoughts – upside got capped, however:
      – Strong vote of confidence from large pharma;
      – Significantly reduced financing/dilution risk;
      – No need to figure out if IV Tramadol is really worth something to anyone;
      – Still 250% upside in base case, and potentially more if CVR pays out;
      – Potential insights/help from large pharma in running phase 3 trial and getting FDA approval (not sure how important this would actually be).

    2. Writser

      Sure, maybe buying at $2.50 before the InvaGen deal was a better proposition, but how relevant is that today? If you judge the FDA risk to be very high or hard to estimate this was a bad idea and still is a bad idea.

      And if you think (like me) that the opioid epidemic isn’t a super negative externality with regards to the chances of IV Tramadol getting approval and that the chance of approval is a coinflip or better then ATXI is an interesting idea – regardless of whether upside is capped at 250% and/or where it traded in the past.

      Also, apart from the points dt mentioned, the 250% is not only a cap but also a floor in case of FDA approval.

    3. DendriteResearch

      ATXI needed to raise money to get its trials done. By selling an option to InvaGen to purchase the rest of the company, they were able to raise more, at better terms, than if they had gone to the broader market. They sold new shares to InvaGen at $6, when ATXI was trading at $4. What would the new price have been if they’d tried to raise $35M against a $60M market cap in a standard secondary offering?

      ATXI maintains a lot of upside, and InvaGen limits its risk (vs an outright acquisition). It’s a clever trade, and I’m surprised this kind of thing doesn’t happen more often.

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