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)

27 COMMENTS

  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.

    1. Austin

      The author clearly did lots of work on this, but I disagree with much of his writeup.

      1) Obfuscates the fact that tramadol itself is an opiod. Here’s a quote from the box warning for Ultram, a oral tramadol mediacation: “ULTRAM exposes patients and other users to the risks of opioid addiction, abuse and misuse, which can lead to overdose and death.” I think it’s fairly clear that tramadol has the same risks as other opiod drugs — it’s only “safer” because it is somewhat less powerful.

      2) I disagree that tramadol “has a low risk of addiction.” Prior to 2014 tramadol wasn’t a scheduled drug at all. It was moved to Schedule IV because people were people were becoming addicted to oral tramadol.

      3) I think the whole “onset of analgesic effect ” issue is a red herring. The fact that IV Meloxicam, a NASID, has a relatively slow onset of pain relief is irrelevant to tramadol as their pharmacologies are different. IV opiods are known to start providing pain relief very quickly. I don’t see any obvious reason to think tramadol would be an exception.

      I am going to post this same comment on the blog.

      1. dt

        See below. The author is actually skeptical on IV Tramadol getting the approval:

        “My rationale for a current position is that Avenue’s 2nd Phase III results are likely to be released within the next couple of months.

        I’m expecting the Phase III study to meet all it’s end goals, and the relevant data would then support the NDA.

        Correspondingly, I’m expecting a bump in the share price upon the successful conclusion of the 2nd Phase III, and a resulting FDA submission.

        As for whether Avenue can go all the way to get approval, that, I’m a lot more skeptical.”

        1. Austin

          Don’t you think there’s a bit of “galaxy brain” going on? I mean he’s really trying to thread the needle, right?

          After re-reading the blog post I continue to find it unconvincing. He fixates on issues I think are nearly irrelevant, while skipping past more important issues — like whether or not the FDA will stop approving new opiods altogether.

          https://www.theguardian.com/us-news/2019/mar/21/fda-opioid-approvals-halt

        2. DendriteResearch

          Yeah, I think the onset-of-effect concern is a total non-issue.

          You’re correct that tramadol stimulates opioid receptors, and can in some cases be addictive. However it’s much less so than conventional opioids. Having been prescribed both tramadol and vicodin (on separate occasions), I can say tramadol gave me a woozy, dizzy, out-of-it feeling, which was somewhat unpleasant. Vicodin felt like angels were gently massaging my temples. ATXI has a good story that tramadol can substitute for stronger drugs and net-net reduce addiction.

        3. Austin

          That’s very interesting, thanks.

          While I am very open to being convinced otherwise, I think the odds the FDA approves IV tramadol are low. My understanding is that Dsuvia was probably only approved because it was “a priority medical product for the Pentagon.”

          https://www.ajmc.com/newsroom/fda-approves-painkiller-dsuvia-amid-criticism

          Olinvo (oliceridine), an IV opiod, was not approved. I think it is a good “comp” to IV tramadol.

          https://www.fiercebiotech.com/biotech/fda-rejects-trevena-s-painkiller-oliceridine

        4. DendriteResearch

          I’m not sure Olinvo is a great comp. The idea there was, let’s make a drug that is as good as morphine at pain relief, but doesn’t have as bad of side effects. The clinical data showed it wasn’t as good at pain relief and had some novel side effects, including heart rhythm disturbances. The FDA wanted more info about those side effects, especially at the higher doses that would be needed to match morphine’s pain relief, and in more vulnerable populations. Honestly, given those results, I’m surprised Olinvo got as close as it did to approval.

          Reading the FDA comments, it seemed like the concern for abuse and dependence was at best a minor issue.

          Re: Dsuvia, that’s a sublingual variant of fentanyl — super high potency and abuse potential. I agree that the FDA is going to be extremely skeptical in approving any new drugs like that for outpatient use.

  2. dt

    From Q1 earnings release:

    “We recently completed the safety study for IV tramadol and expect to report data by the end of this quarter from our pivotal Phase 3 trial of IV tramadol for the management of postoperative pain in patients following abdominoplasty surgery,” said Lucy Lu, M.D., Avenue’s President and Chief Executive Officer. “We look forward to the results from this important study, as it not only compares IV tramadol to placebo, but also includes an active-comparator arm of IV morphine.”

    https://www.sec.gov/Archives/edgar/data/1644963/000114420419025468/tv521087_ex99-1.htm

  3. brodiespam

    Anyone know if this is the trial in question (see link below)?

    The timing looks right and It includes the morphin arm as noted above, but is both an *efficacy* and safety study not purely safety.

    With a primary endpoint of pain score, an evaluation of efficacy vs morphin would see like a high bar.

    Perhaps there looking for non inferiority vs morphin but still seems to add risk vs prior study which appeared to be vs placebo only.

    I haven’t dug into this yet, so I could be missing something. Has anyone looked at this more closely?

    https://clinicaltrials.gov/ct2/show/NCT03774836?spons=Avenue&rank=1

    1. brodiespam

      http://s22.q4cdn.com/219586407/files/doc_presentations/2019/05/Avenue-Slides-MAY-2019.pdf

      The above IR presentation states the morphin arm is solely to test tolerability and show reduction in respiratory events. It’s unclear if this means they will not measure Pain Score (seems unlikely they could have separate PEs) or just acknowledge it wont be as good as a true opiate. The later would be aligned to their value prop of moderate pain management, with opiates still available for severe pain.

      There is a separate safety study (n=250) which is not described in detail.

      Both of the above studies are listed as mid-2019 results.

  4. Writser

    I sold most of my shares in the spike after the opening. Bit of a split-second decision but in my view the question isn’t really ‘is Tramadol effective’ – because we know that already, it is being used all over the world, but ‘will the FDA approve it’. So the huge spike (at some point shares were up over 50%) seemed a bit overdone to me.

    I’m not a medical expert so take this with a grain of salt. Maybe the results were in fact spectacular.

    1. Writser

      So far it looks good. Have to think a bit about if/when to buy back.

      1. Writser

        Shares have been trading down the past few weeks on no news afaik. Today’s price implies a ~20% IRR if you treat FDA approval as a coin flip and assign zero value to the CVR. Not that that necessarily is a relevant fact but I use it to roughly measure what the stock market is assuming. In June you could sell the coinflip at a negative IRR.

        I still think that 50% is a relatively conservative estimate for FDA approval and that this is an opportunity to profit from the ‘opioid panic’. But not a high confidence idea. I’ve been scooping up a very small position again. Also, it’s a volatile stock, I don’t mind both buying and selling opportunistically.

  5. brodiespam

    Closed at 6, feels like it still has room to run in the coming months as their submission goes in and is accepted by FDA prior to any actual decision on approval.
    With a post approval price target of ~14, there is a pretty low POS built in currently.

  6. DendriteResearch

    I sold yesterday. This is a miss. Their #1 emphasis was on showing less respiratory depression than morphine (see page 16 of their May presentation http://s22.q4cdn.com/219586407/files/doc_presentations/2019/05/Avenue-Slides-MAY-2019.pdf). The press release yesterday has no mention whatsoever of respiratory depression as a secondary endpoint. They say pain relief was “similar” to morphine, but no actual numbers, let alone a formal noninferiority test.

    Plus I just got a slimy feeling from the conference call, the way they limited it so strictly to the data in the press release. Feels like they’re hiding things.

    I don’t know whether this will ultimately be approved. Tramadol is very well characterized, and it’s surprising it hasn’t been approved as an IV drug yet. But the next news for this stock will be negative, when they release the full details of this study. That might be a buying opportunity.

    1. Writser

      It is a bit strange indeed that respiratory impairment was listed as the first adverse event, before vomiting and nausea, in that deck but that the subsequent press release only shows comparisons with morphine for vomiting and nausea but not for respiratory issues. Not sure how relevant it is bit strange nonetheless.

      Strange price action today; shares dropped up to 12% during the session on news and no significant volume before bouncing back a bit. Seemed like there was an enthusiastic seller. Couldn’t help myself and bought back a few more shares.

  7. Writser

    Sold most of my position today. Shares are up significantly the past few days. The company announced that is has submitted an NDA for IV Tramadol. Nice, but that was the plan from the start – not exactly a positive surprise. The key question is whether the FDA will accept the application. I wouldn’t be surprised if I can get back my shares later, much cheaper. Price action past few days seems strange.

    1. DendriteResearch

      This seems like a good exit point. There won’t be any substantive news for a while. In a couple months, they might announce that the FDA has accepted (not approved, just agreed to review) the application, and that might give a date when the FDA review committee will formally meet and decide. But it will probably by 6+ months to an actual decision.

      I maintain there’s a decent chance when we see the actual data from the second P3 trial that there could be a large negative surprise.

      1. Writser

        Hah. In hindsight it was obviously a horrible exit point :) Shares are up an additional ~30% in a few days, on hardly any significant news (as far as I can see – would love to be proven wrong). I’m not that excited anymore at current prices.

  8. TTI

    I am the author of the post link which was pasted here, which has since generated a lot of discussion.
    Its been almost exactly 1 yr.
    Today the share price has risen way past any of the comments here have envisioned.
    I’ve just sold the bulk of my 16,000 shares, leaving only 1,000 shares at prices above $11.
    That’s an ROI of approximately 150% or so within 1yr.

    1. ActOfWill

      Well done TTI. Anywhere else to put that cash at work?

  9. Writser

    I’m not sure if I missed anything (haven’t been following this name very closely since the huge run) but I really don’t understand why it is trading ~100% higher than last year. Is the big ‘narcotics’ risk that the market was super worried about last year completely off the table? Did I miss anything?

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