Prevail Therapeutics (PRVL) – Merger Arbitrage & CVR – 15% Upside

Current Price: $23.08

Offer Price: $22.50 + $4.00 in CVR

Upside: 15% (589% on CVR investment)

Expected Closing: Q1 2021

Merger agreement

 

This is a short note on a potential pharma CVR play. The timeline is extended and at these early stages it's difficult (especially without a background in gene therapy) to judge the probability of the CVR payout. However, the acquisition looks like a done deal, offering a potential high multiples return on the CVR itself.

On the 15th of Dec, Prevail Therapeutics signed a definitive merger agreement with pharma giant Eli Lilly. Each PRVL shareholder will receive $22.50/share in cash + potential for a further $4.00/share nontransferrable CVR payout, which is conditioned on commercial use approval of any of PRVL products (has 11 candidates) in any of the given markets (US, Japan, UK, Germany, Italy, or Spain) till the 31st of December'24. Each month after this date, the CVR would decrease b about 8.3% in residual value until its expiration in Dec'28.

Assuming zero/minimal risk of transaction closing successfully, market values CVR at $0.58 vs. $4.00 potential payout, which is almost 7x return.

Investors start losing money in this trade only if none of PRVL products are approved till the end of 2026.

The downside to pre-announcement price in case the deal breaks is very high ($10/share), however, this scenario seems unlikely.

I think the odds of this deal falling apart are very low. Eli Lilly is $164bn pharma giant that makes multiple acquisitions each year. All of them seem to close successfully - I found no cases where the buyer walked away. The chance of PRVL becoming an exception is extremely low here. PRVL shareholders owning 51% of shares have already agreed to support the merger.

Regarding the eventual CVR payout, the timeline is extended and CVR is non-transferable which naturally limits the shareholder base that might be interested in these types of situations. So the price is likely to be depressed just due to these factors. I am not in a position to attach any probabilities to PRVL product approvals.

The company is engaged in gene therapies and is currently developing 11 products for various diseases (Parkinson's disease with certain mutations, Gaucher disease, etc.). 3 of its most advanced products are currently in early stages of testing (phase 1-2). PRVL states that the initial signs of PR001 and PR006 candidates are promising and the interest from LLY confirm these statements.

From Dec'20 presentation:

Besides the merger closing and the product approval risks, there is another issue with the CVRs in general. It lies in the conflict of interests of the buyer company as it is also incentivized to save costs and after the acquisition is already done, would gladly refrain from making the CVR payment (in this case additional $160m vs $880m cash portion). So there's always a risk that in some way the buyer could mess with the whole process leaving the CVR holders with zero. However, in the current case, this risk seems much lower as the timeline is already prolonged, while the hard threshold (CVR expiration) is set by Dec'28. If Eli Lilly tried to avoid the payout, it would have to delay the approval process by a substantially longer amount of time (not just a few months). Therefore, the overall structure of the CVR, in this case, seems quite positive for shareholders.

6 COMMENTS

  1. g4734g

    I didn’t see it in the write up, will the CCR be tradeable? Regarding the 21st of January, I am assuming shareholders need take no action that this is a mandatory buyout? Or are you saying that shareholders actually need to tender? Thanks much

    1. Ilja

      Thanks for raising these questions, g4734g. It is noted in the write-up that CVRs will be nontransferable (which is non-tradeable). 51% of the shareholders have already given the support, so there is no need to take any action at this point.

  2. Ilja

    As was expected, the merger was completed on the 22nd of January. CVR was worth $0.58/share at the time of the write-up with the potential to pay out $4 till 2024 if the targets are met.

  3. Robert

    Most CVRs are on-transferrable i.e.e, non-tradeable. They are used as a bridge between what the acquirer is willing to pay and what the target company can accept and convince its shareholders that it has extracted value from the buyer.

    1. nostradamus

      But they’re also quite often very cheap. I don’t mind a poor record if I’m paying very little for it.

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