Pfenex (PFNX) – CVR – 11% Upside (or 200% on CVR Investment)

Current Price: $12.65

Offer Price: $12.00 in cash + $2.00 CVR

Upside: 11% full investment or 200% on CVR investment

Expected Closing: Q4 2020

Merger Agreement

This idea was shared by Ilja.


This is a recently announced merger between two biopharma companies with upside depending on potential CVR payout.

Ligand Pharmaceuticals intends to commence tender offer at $12 in cash + $2 CVR per each Pfenex share. Total consideration amount sums up to $438m in cash + $78m in CVR payout. Conditions include the majority of Pfenex shareholders participating in the tender offer. Pfenex management (own 6%) have already agreed to tender their shares. The transaction is not subject to financing and will be funded by LGND cash on hand ($810m as of Q2).

The CVR is conditioned on getting therapeutic equivalence (TE) approval for Pfenex’s Teriparatide Injection drug (PF708) – supposedly equivalent to the market leader Forteo in treating osteoporosis. NDA for PF708 has already been approved back in Oct’19. The TE must be granted by the end of 2021 for the CVR to payout. Based on the research data so far and comments from the management, it seems like that TE will eventually be granted.

The offer is priced at a 5-year-high PFNX price and also comes at a 21% premium (inc. CVR) to Feb’20 pre-COVID prices when the stock was still riding a positive sentiment in anticipation of FDA approval. A subsequent request for additional information by FDA pushed the stock lower.

The rationale for the merger seems sound and I expect the merger to close as intended by Q4 2020. Therefore, this situation is mostly binary play on the CVR payout in 2021 – investing $0.65 with a potential payoff of $2.

My knowledge in the field of biopharma and FDA approvals is very limited, so take everything with a grain of salt.


CVR – Background and Payout Likelihood

Drugs can generally be divided into two categories: brand-name and generics (copies). When a drug is first developed, usually only a brand-name version exists and that drug dominates the niche for which it was developed. However, when the patents expire (20 years) and the formula is already known, other competitors may jump with their versions of the drug. There are actually two ways of replacing a brand name drug: generic substitution, which is equivalent to the brand-name drug on a molecular level, and therapeutic interchange – related on a molecular level (same clinical effect and safety profile), but not exactly the same. The cost between the brand-name and generic drugs can be very meaningful (up to 80%-85%), as the brand-name drug price is elevated by the higher cost of inventing the product (R&D, marketing), market exclusivity, brand awareness, loyalty, etc. 9 out of 10 prescriptions in the US include generic drugs.

Forteo is a brand-name drug of Eli Lilly (LLY), which for many years has dominated the market for osteoporosis (a disease in which bone-weakening increases the risk of a broken bone) for patients with high fracture risk. However, its formulation patents expired in 2018, and use patents ended in Aug’19. Efforts to stop competitors from copying have failed, so its sales have already started declining ($1.75bn in ’17 vs $1.6bn in ’18 vs $1.4bn in ’19) and LLY expects further declines due to entry of generic and biosimilar products. Amgen and Radius Health already launched their biosimilar products (similar, but not interchangeable), while Teva and Apotex have filed with the FDA for the generic substitute to Forteo.

Pfenex also aims to enter this market and has developed a PF708 with a goal of receiving therapeutic equivalence to Forteo. PF708 NDA was approved in Oct’19 and in the same month, Pfenex has made a submission for the Therapeutic Equivalence (TE). The company expects that TE will significantly boost PF708 commercial success:

We do believe and continue to believe, that the impact will be significant. It’s — it will as we all know, at that very moment lead to automatic substitution (…) which makes that any patient in most of the states that would come to the pharmacy with a Forteo script gets substituted to our product, just like you see any other generic do

In order to receive TE, the drug must comply with these requirements:

  1. Be safe and effective
  2. Pharmaceutical equivalence – same active ingredient, same route of administration, same dosage, and standards for strength, quality, purity, and identity.
  3. Biological equivalence – the body is able to process it in the same way as the original drug was processed.
  4. Be correctly labeled.
  5. Be manufactured in accordance with the FDA’s Current Good Manufacturing Practice regulations.
  6. Additionally, the company has to run a comparative use of human factor study (their drug vs reference drug).

Given that PF708 was already approved by the FDA and PF708 is labeled exactly as Forteo, 1-5 points are already complied with:

Both pharmaceutical and bioequivalence were part of our NDA, and we believe that its approval suggests that the FDA supports our equivalence to Forteo for these first two elements.

The remaining requirement is the human factor study (CUHF). The company carried it out during 2019 and submitted the results to FDA in Oct’19. However, in April’20 FDA asked for more data. PFNX discussions with FDA led to “a July 2020 General Advice Letter, which further clarified the methodology the agency expects to see in a new comparative use human factor study”. It is important to note, that the only request from the regulator is to include more experienced Forteo users in the study, while the research data itself was not an issue to FDA (conf. call).

And again even though, we feel that the data that we already have was supportive, we acknowledge the need for the FDA that they indicated early, that they would like to see similar data, but just in a slightly larger group of experienced users and caregivers.

The company has now submitted a new research plan and after it gets approved, PFNX will start a new study. The original study included 102 subjects out of which only 13 were experienced Forteo users. It took 6 months from plan submission (April’19) to actual research results submission (October’19) + additional 6 months for the response from FDA (April’20). The new study will include 55 subjects (not clear how many will be the experienced users), and will likely get completed faster (FDA review should also be quicker as only the additional information is required). Q2 conf. call:

We’ve definitely come up with ways to execute it even faster which is part of the protocol and questions that we’ve provided to the FDA. As you know and as I’ve shared, we are looking at roughly 55 patients or users I should say compared to about 105 in the previous study. So that will also help us to move fast.

I haven’t been able to find any statistics on TE applications, however, it seems that TE reviews are not subject to a clear timeline. Q3 conf. call:

As I’ve shared previously there is no set timeline for the FDA to review therapeutic equivalence. However, they are acutely aware of the importance of reviewing our data quickly.

Q4 call:

We have no indication from the FDA on any dates, and there is not being a PDUFA regulated timing or doesn’t have a figure regulated time to it. We really just continue to dialogue and wait with the FDA.

So it seems that their previous study should be a decent reference point for the upcoming CUHF study duration and overall, given that the new study should be completed and reviewed faster, the CVR payment condition deadline (end’21) should be easily met.

Most importantly – the actual data from studies indicate that PF708 is equivalent to Forteo, so PFNX only needs to expand its study to include more experienced Forteo users, which shouldn’t be a problem.

Phase 3 results also showed high equivalence to Forteo:

Like Forteo, the FDA approved PF708 product is indicated for the treatment of osteoporosis in certain patients at high risk of fracture. This approval was in part supported by our Phase 1 study by equivalence findings in healthy subjects and data from our successful Phase 3 study which compared the effect of PF708 and Forteo in 181 osteoporosis patients, including our endpoints such as anti-drug antibody incidents, bone mineral density, and bone turnover markers.

pfnx q1

The original CUHF study submitted in Oct’19 also showed non-inferiority to Forteo. In the majority of cases, PF708 had equal or lower user errors, while:

Importantly, in each of the instances where PF708 had marginally higher user error rates (33% and 17 % of critical tasks among patients and caregivers, respectively), the magnitude of the differences was such that no error difference in either user group exceeded the predetermined maximum allowable difference. For these reasons, Pfenex believes the study data demonstrate that the user interface of the FDA-approved PF708 product is non-inferior to that of Forteo.

Patients’ results:

PFNX patents

Caregivers’ results:

pfnx caregivers

Therefore it seems, that running an additional study with extra experienced Forteo users is a small hurdle for the eventual CVR payment in 2021.


Merger Rationale

With this acquisition, LGND gains access to Pfenex’s protein expression technology, access to licensing and royalty revenue from partners as well as certain remaining milestone payments ($20m from PF708 and $162.5m in total from collaboration with Jazz Pharma for PF743 and PF745). Ligand also receives other major collaborations and even more potential for licensure in the future (it intends to leverage PFNX technology to secure numerous additional licenses in the next few years).

The buyer expects Pfenex’s expertise in the expression of complex proteins to complement its antibody and drug enabling technologies and intends to grow PFNX business/technology it as it did with its other two acquisitions (PR):

Pfenex is an ideal strategic, business and cultural fit with Ligand. The acquisition holds potential to have a significantly positive scientific and financial impact on our business in the short and long term, similar to how our Captisol and OmniAb acquisitions have played out ( more info on these below). We are confident we will be able to quickly and efficiently grow the Pfenex business, along with our core existing technologies.

The buyer expects the merger to be accretive to 2021 EPS.



Pfenex is a development and licensing biotechnology company. The has developed its Pfenex Expression Technology for protein therapeutics and uses it to develop a pipeline of therapies targeted on critical diseases. This technology is ideal for complex, large-scale protein production which is not manageable to traditional production techniques. Currently, the technology is out-licensed for various commercial and development-stage programs.

PFNX has 8 products currently, 2 of them (PF708 and CRM197) have already reached the commercial stage. Additionally, the company expects to file 3 BLAs (NDA equivalent for biologics) during Q4’20.

PF708 was intended to be launched right after TE, however, after the additional information request from FDA, it was decided to launch the product in June without TE status. PF708 is licensed to Alvogen, which is responsible for the manufacturing and marketing of the product (and regulatory approval processes as well). According to the agreement, if PF708 gets the TE, PFNX will be eligible to receive from Alvogen $20m in cash + 50% from the gross sales of the product.

PFNX other commercial-stage product CRM197 (carrier protein) is licensed to Merck and Serum Institute of India and generated $3.5m in revenue in 2019.


Ligand Pharmaceuticals

Ligand is a biopharmaceutical company and is focused on developing or acquiring technologies that aid pharmaceutical companies in developing their products. It mainly collaborates with other pharma companies for leveraging the processes and drawing synergies.

LGND employs research technologies such as antibody discovery technologies, structure-based drug design, formulation science, and liver targeted pro-drug technologies to assist companies in their work toward securing prescription drug and biologic approvals.

It currently has partnerships and license agreements with over 120 pharmaceutical and biotechnology companies. Over 200 different programs (including 2 for osteoporosis) are in various stages of commercialization and development and fully funded by our collaboration partners and licensees.


  • Captisol – drug reformulation technology acquired for $35m in 2011. Over the last 3 years, Captisol generated $82.5m in licensing revenues.
  • OmniAB – animal platforms for use in discovering fully human antibodies. Acquired in 2015 for $178m. Licensed to multiple parties and the exact revenue is not stated, however, since 2018 the largest licensee Wuxi has been paying $47m in license fees per annum.


14 thoughts on “Pfenex (PFNX) – CVR – 11% Upside (or 200% on CVR Investment)”

  1. Is anyone aware of a study that has looked at the payout of CVR’s vs their expected payout? Anecdotally it seems that most CVRs don’t payout, but that view is completely unsubstantiated. One thing that concerns me in general with CVRs (after losing out a couple) is that the entity that is liable for the CVR is also responsible for the work needed for the CVR to payout. In this transaction, Ligand can avoid making the CVR payment by dragging the study and approval out past the end of 2021. It’s unlikely that the profits lost by delaying the completion of the approval a few months is as great as the CVR payout of $78mm.

    • That is definitely a risk here.

      This article from 2016 says that 2/3rds of CVRs have not paid out – however, not necessarily due to bad intentions by the buyer:

      Majority of payments associated with CVRs in pharma and biotech deals haven’t been paid out to investors because the catalysts have not occurred, according to a report published by equity analysts of Jefferies LLC earlier this summer. In fact, 14 of 21 negotiated payments in pharma/biotech CVR deals to date have not been made because the catalyst either did not take place at all or didn’t occur within the required time frame

      I have not seen any up to date statistical info.

  2. So the bet is essentially is POS >66% and am I willing to tie up money for up to 16 months to find out?

  3. Although there’s a risk that Ligand will delay the whole thing on purpose, the previous timeline of the human factor study made last year kind of puts certain limits to how much they can stretch it. Especially when the CEO has already stated several times that the new study should be done faster. So the bigger risk seems to be that the FDA might reject the study once again (Ligand can submit slightly deficient information, etc.).

    • So we have:
      – Clear time limits set by the previous study (6 months to submit the final version to FDA + another 6 months for FDA review), which gives 4+ months of additional margin for possible delays, etc.
      – CEO comments saying that they’ve already come up with ways to execute it faster (and it makes sense as the number of test subjects will be 2 times lower).
      – The fact that this is not a traditional/common pharma CVR conditioned on NDA receival, but rather a much simpler additional study where FDA has only asked to run more tests on a certain group of subjects, while the data itself seems to be fine.

      Obviously, things can still go wrong or be made to wrong, however, it seems to me that given the points above the risk/reward ratio is quite compelling here.

      One more thing to back it up – Adage Capital Partners (large diversified hedge fund) has recently acquired 8.75% stake in PFNX. All of their purchases have been done after the merger announcement/at above $12.70/share level, so they are clearly betting on the CVR payment as well.

  4. Since options holders would be receiving $ 12. 00-strike +CVR, could the less capital intense play be buying options instead?

    • Or does “Company Options” only refer to their employee stock plans?

  5. What are the chances that the deal doesn’t go through? Are there any conditions except for the majority participation in the tender offer? I assume the biggest downside could be coming from the deal breaking somehow…

  6. Still no news so far regarding the acceptance of the new study plan, however, an interesting note in the recent filing – apparently in August independent evaluator put at least 85% probability on the successful CVR payment. Of course, this probably doesn’t mean much as the judgement of the valuator is likely biased, but still:

    “the probability of achievement of the CVR Payment Milestone on March 31, 2021, as projected by senior management of the Company and provided to William Blair on August 4, 2020, assumed an 85%-95% probability of achievement”.

    Additionally, antitrust approval has been received on the 8th of September.

    The offer will expire on the 29th of September. Currently, PFNX trades at $12.75/share (10% remaining upside and 166% for the CVR).

  7. From the latest Ligand report:
    Other operating income was $34.1 million for the second quarter of 2021, which represented a non-cash valuation adjustment recorded during the quarter to reduce the Pfenex CVR liability due to an expected lower probability of achieving the required milestone under the Pfenex CVR Agreement. There was no other operating income for the same period in 2020.

    Given that the total cvr payout was supposed to be 78 mln they have slashed the odds by 50 percent. Looks really bad for CVR holders.

  8. From the latest report:

    Other operating income was $37.6 million for the nine months ended September 30, 2021, which represented a non-cash valuation adjustment related to eliminating the Pfenex CVR liability. There was no other operating income for the same period in 2020

    – does it mean that cvr expires worthless? Is there any more color on this? Thought it was a straightforward process with 90 percent chance of completion.
    – are there any more owners of this cvr? What would be the next steps?

  9. Yes, the CVR is more or less worthless. From the Ligand conference call this summer ( ):

    “We now believe the teriparatide TE approval is unlikely to happen in 2021, and therefore, we’ll not be obligated to pay the contingent payment tied to that regulatory event. Accordingly, we have reduced the expected liability associated with the CVR event given that the payment is triggered by a TE approval happening prior to December 31 in 2021.”

    And from the 10-Q:

    “Based on feedback from the FDA, our commercial partner, Alvogen, will perform and submit to the FDA the results from an assessment to address concerns relating to potential innate immunogenicity, reducing the probability of achieving the milestone by December 31, 2021”

    So, the FDA had some questions, approval is delayed (if they get it at all), Ligand will in all likelyhood not reach the milestone and the CVR will expire worthless. Unless you have a large position there is not much you can do, apart from hoping somebody else will start a lawsuit.

    “Thought it was a straightforward process with 90 percent chance of completion.”

    These medical CVR’s are seldom straightforward .. Buy at your own peril.

    • Thanks, seems like incentives in these CVRs are really wrong: a person who needs something done is not incentivized at all 🙁


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