Neon Therapeutics (NTGN) – Merger Arbitrage – 31% Upside

Current Price: $1.76

Merger Consideration: $2.30

Upside: 31%

Closing: Q2 2020

Agreement document

 

German oncology biotech specialist BioNTech ($8bn market cap) aims to expand its cancer treatment pipeline by acquiring US biotech company Neon Therapeutics. This is an all stock $67m nano cap transaction with merger consideration of 0.063 BTNX per each NTGN share. The companies estimate that the deal will close Q2 this year. Currently spread stands at 31%, however the borrow is quite expensive (45% annually), so depending on the eventual closing time the upside will vary: 19.75% if it gets finalized in 3 months, 16% in 4 months and 12% in 5 months. The merger is conditioned on the majority approval of NTGN shareholders, however 36% already support the transaction.

Downside to pre-announcement price is about 30%.

Worth noting that BNTX stock is quite volatile as of recently.

 

Background and shareholder approval

Neon Therapeutics is a clinical stage cancer treatment developer. The company has two major candidates - neoantigen cancer vaccine NEO-PV-01 (the main one) and T-cell program NEO-PTC-01. It seems that the company was struggling with raising further funds for drug development and recently (Nov'19) restructured the business - limited resources for the development of its previous main drug candidate neoantigen cancer vaccine NEO-PV-01, switched focus to its T-cell program NEO-PTC-01 and laid-off 24% of its workforce. The clinical trial authorization application for NEO-PTC-01  was submitted  last month (Phase 1 intended to start in H1'20).

So the company seems to be in a tough spot. It has sufficient cash to continue the operations only till Q3'20 and the prospects of additional funding are not clear. Moreover, the largest (and oldest) shareholder (April'18 proxy table below) healthcare venture capital firm Third Rock Venture is supporting the transaction despite the offer coming only at a fraction of its $100m IPO price ($16/share) less than two years ago. So taking these points into account, it seems that other shareholders are likely to accept the proposal as well.

NTGN shareholders

 

Timing

So the biggest uncertainty comes from the timing of this deal. Here are a few examples of cross-border pharma deals:

It seems that 5 months is enough to close even far larger transactions. Given the minuscule size ($67m) of BTNX/NTGN  merger closing by the end of Q2 or earlier seems very likely.

Worth noting that the borrow fee provided in this article is taken from Interactive Brokers and other brokers might have cheaper borrow available. (the acquirer BioNTec is a $8bn market cap company)

6 COMMENTS

  1. Writser

    IB has 9k shares available @ 49%. BNTX is a newly listed ‘hype’ stock that is up ~150% in a few months, with a very small free float. Shorting BNTX seems extremely risky.

    On the other hand, BNTX is something that I’m absolutely not comfortable with in my portfolio, even at a big discount. Lockup agreement will expire in a few months, stock can easily drop 40% or whatever (as we speak it is down 8% today ..)

    I agree that the discount here is ridiculous, but it seems to me like a case of the market being ‘just efficient enough’, i.e. there is an inefficiency but it is impossible / risky / very hard to exploit.

    Shorting BNTX seems very dangerous in practical terms (i.e. buy-in risk, borrow rate increasing, short squeeze) . But being long BNTX, even at a ~30% discount, does not seem very appealing to me either. I guess I’ll stay on the sidelines for now.

    1. nostradamus

      If there were, they’d be priced to reflect the borrow cost as well.

  2. Ilja

    The company has issued a small update on the transaction. Closing is still estimated in Q2, while shareholder meeting date is not set yet. Borrow fee has increased to 74%.

  3. Ilja

    Proxy is out. Voting will be held on the 4th of May.
    Borrow fee (currently 106%/year) has continued to increase to the point, when the idea is no longer profitable (at the write-up prices). Looking at the current prices, current borrow cost will eliminate half of the potential upside, while further increases could erase it completely. Therefore, the idea is closed with -25% in 4 months (including the hedging costs).
    https://www.sec.gov/Archives/edgar/data/1694187/000119312520096119/d908963ddefm14a.htm

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