Achilion Pharmaceuticals (ACHN) – Merger Arbitrage – 35% Upside With CVR

Current price: $6.13

Consideration: $6.30 in cash + $2 in CVR

Upside: 35% (with CVR)

Expected Closing Date: April'20

Proxy statement

 

This transaction is covered in more detail on Corner of Berkshire & Fairfax forum. Below I am summarizing the essential points of the merger.

Achilion Pharmaceuticals, a clinical stage biopharma company, is being acquired by Alexion Pharmaceuticals ($24bn market cap) for $6.30/share in cash (3% upside) + 2$/share in two separate CVRs (additional 32% upside). CVRs pay out:

  • $1/share if danicopan, main candidate that's currently in Phase 2, is approved by FDA in 4.5 years after the merger. 
  • $1/share if ACH-5228 (Phase 1) reaches Phase 3 within 4 years after the merger. 

Both these candidates are orally administered small molecules that target complement (part of the immune system) factor D, an essential protein of the alternative pathway (one of the three pathways of the complement system). ACHN believes it can be used in several therapeutic areas of nephrology, hematology, ophthalmology and neurology.

According to the base rates of clinical development success (source) the chance of a new molecular entity that's currently in Phase 2  to get an FDA's approval is 38%, while chances of Phase 1 trial proceeding to Phase 3 is 16%. Nonetheless, from the perspective of the therapeutic areas, the rates are higher - hematology (63%), ophthalmology (45%) and neurology (48%). Phase 3 for danicopan is planned to be started in 2020.

The main issue is antitrust approval - apparently Alexion holds a monopoly in the treatment of PNH (paroxysmal nocturnal hemoglobinuria - very rare genetic blood disorder) and already has two drugs that are approved by FDA (Soliris and Ultomiris). Both candidates of ACHN (danicopan and ACH-5228) are also being tested for the same treatment.

So far Alexion looks confident about the eventual  regulatory blessing. Merger termination date is set for the 15th of April'20. If the approval is not received by this target date, the buyer can extend it for another 3 moths for up to 3 times. In case regulators block the merger, the reverse termination fee is also weighty - up to $30m if blocked within 6 months, $40m within 6-9 months and $50m within 9-12 months.

There is at least several other similar drugs in development so it looks like the competition shouldn't be harmed much: Ra Pharmaceuticals (currently being acquired by UBS) is developing a treatment for PNH and currently is in Phase 2. Moreover, Amyndas , Apellis  and Roche are also working on the same disease.

The buyer is unlikely to walk away from this transaction as the patents for its main drug are expiring soon (2022) and it needs to keep the franchise.

  • Alexion has 4 currently marketed drugs. Two of them are used for PNH (85% of net revenues).
  • The company has several other drugs in development, but the ones that might be potentially used for PNH are still in a very early stage (Phase 1).
  • Two years ago it tried to diversify its portfolio through acquisitions (not PNH focused): Syntimmune ($400m upfront + $800m in milestones) and Wilson Therapeutics.

Downside to pre-announcement price ($3.65/share) is 40%. In case merger fails, this will be somewhat offset by $0.21-$0.36/share from the reverse termination fee.

3 COMMENTS

  1. Writser

    Still looks reasonably attractive. Agree with the ~63% base rate for Danicopan. Let’s call it roughly a coinflip. ACH-5228: a phase I trial is already completed successfully, company plans a phase II trial in 2020. Relevant base rate: phase 2 -> phase 3 for hematology: 56.6% (ok, perhaps there’s still a chance of regulatory intervention. Modelling both as a coinflip seems about right. So you pay $6.90, get $6.30 back in a few weeks and pay $0.60 for $1 in expected value in 2-4 years.

    Not spectacular by any stretch but seems like a market-neutral low double-digit IRR. Not too bad if you have some spare cash and don’t mind a little risk. I bought a few shares.

  2. Writser

    Added a lot on the close. <$6.80 it seemed a great opportunity. Massive volume yesterday (last day of trading), looked like some people had to get out before receiving the CVR.

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