Zyla Life (ZCOR) – Merger Arbitrage – 26%

Current Price: $1.65

Offer Price: $2.08

Upside: 26%

Expected Closing Date: Q2 2020

Proxy

This idea was shared by Dan.

 

An all stock merger between two nano cap specialty pharma companies.

On the 16th of March Zyla Life agreed to be acquired by Assertio Pharma. Merger consideration stands at 2.5 ASRT per each ZCOR share, representing 22% upside. Trading volume is very limited with an average of $2k-$3k per day so this is suitable for small PAs only. Borrow for hedging is available and cheap. Approval is required from shareholders of both companies and 51% of ZCOR shareholders have already agreed to support the transaction. Both meetings will be held on the 19th of May. Closing is expected in Q2.

The main risk here seems to be approval by ASRT shareholders. However, its 6 major shareholders own 40% and from their profiles (index/quant funds and non-activists) it seems likely they will vote in favor of the merger.

ZCOR

In early 2020 Assertio divested its main business (two drugs - 80% of revenues) and used the proceeds to repay debt. The company is now focusing to its remaining business of anti-inflamatory drugs (as discussed by the CEO after the transaction) and aims to live up to its growth story by replacing the sold revenues. ZCOR with its complementary portfolio of anti-inflammatory drugs and revenues equal to 44% of the divested assets seems to be a reasonable move in that direction.

Current upside stands at 26%, which is the widest since the announcement. The spread shrank to zero after shareholder support agreement was signed at the end of March and then widened significantly after ZCOR announced (13th of April) cost cutting measures due to COVID-19. However, trading in ZCOR shares is very slim ($2k/day on average), so I do not think the spread or changes in it actually reflect anything about the likelihood of transaction closing successfully.

ZCOR NEW

 

Zyla Life

ZCOR is a commercial stage pharma company that currently owns 6 non-narcotic anti-inflammatory drugs (5 of them were acquired in Jan'19). On the 13th of April Zyla announced that it expects the virus to have an adverse impact on the business and started implementing cost cutting measures (salary cuts). Nonetheless, it seems that the impact from the virus should be somewhat limited as even though ZCOR drugs are prescription based, it is possible to get the prescription online, while the actual demand for them shouldn't have decreased. Zyla's products are used for various cases like rheumatoid arthritis, osteoarthritis, acute painful shoulder etc. However, among several other uses, Zyla's second most popular drug SPRIX (30% of revenues) is also used in post-surgery acute pain management. As the amount of surgeries should be significantly lower in the current environment, the cut in demand will likely come from this customer segment.

At the end of March the company also released its annual results with net sales ($81.3m) in line with the guidance ($80-$85m). Also most likely ASRT a had preview of these results during the due diligence process before signing the merger agreement, so it should not affect merger outcome in any way.

 

Assertio Pharma

ASRT currently owns just 2 anti-inflamatory drugs (for migraine and acute pain). The company previously focused primarily on the opioid market, however due to the increased public awareness of the opioid abuse issue regulators pumped up the scrutiny of the opioid companies. As a result ASRT received (and still receives) numerous subpoenas from the regulators. Moreover, multiple states and municipalities filed a number of lawsuits against the company (and its peers) alleging false and misleading marketing, while knowing the risks and issues of the drug. As a result the company has decided to shift away from opioid products and in the beginning of 2020 divested its two main drugs (80% of revenues) - its flagship product Nucynta (opioid) and Gralise (non-opioid) for about $450m + $52.5m of further royalty payment for Gralise. The company used proceeds to repay its debt and currently should have about $50m cash left on the balance sheet.

3 COMMENTS

  1. @SouthernAB_dom

    Assertio Therapeutics Announces First-Quarter 2020 Results

    First-Quarter Business Highlights:

    Merger Agreement with Zyla Life Sciences: On March 16, 2020, the Company announced it had entered into a definitive merger agreement with Zyla Life Sciences (Zyla) (OTCQX: ZCOR). The Merger will create a leading commercial pharmaceutical company with neurology, inflammation and pain products. The combined company will have a leading portfolio of branded non-steroidal anti-inflammatory drugs (NSAIDs) commonly used by neurologists, orthopedic surgeons, internists, women’s health providers, podiatrists and pain care specialists. The new company will have the platform, profitability and financial strength to both grow its existing portfolio and acquire additional complementary assets. The closing of the merger is expected to occur shortly after Assertio’s shareholders meeting on May 19, 2020. The combined synergy potential is upwards of $40 million, in addition to Assertio’s previously announced $15 million in annual accelerated cost savings initiatives, allowing for Pro-Forma 2020 Non-GAAP Adjusted EBITDA margins greater than 25% and net leverage of less than two times. The combined company Pro-Forma 2019 revenue was approximately $128 million.

    http://www.globenewswire.com/news-release/2020/05/11/2031046/0/en/Assertio-Therapeutics-Announces-First-Quarter-2020-Results.html

  2. Ilja

    Shareholder meeting will take place tomorrow (19th of May). Although the risk of the transaction falling apart is low, remaining upside stands at 2%, so one could easily think about closing positions right now and avoid further uncertainties.

    1. Ilja

      Upside has been eliminated completely. The idea is closed with 26% gain in one month.

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