Vectura (VEC.L) – Bidding War – Upside TBD

Current Price: £1.514

Offer Price: £1.50 (expected to be increased)

Upside: TBD

Expiration Date: TBD

A short note on a potential bidding war situation for a UK drug developer/manufacturer. Our knowledge on pharma CDMO industry is limited, however, the credibility of the bidders, the successful operational restructuring of the target company, and protected downside have set this up as a heads I win, tails I don’t lose much situation.

UK’s drug development and manufacturing company (inhale therapy) Vectura has received two bids from financial and strategic buyers. The board has initially agreed with Carlyle’s £1.36/share cash offer at the end of May. Scheme document had already been dispatched and court/shareholder meetings were supposed to take place on the 12th of July, however, these were adjourned as on the 9th of July Phillip Morris International upped the bid to £1.50/share (around £1bn+ equity value, 13.4x adj. EBITDA’20, 7.5x PE’20). On the same date July 9th Carlyle responded that it is currently considering its options and will make an announcement in due course. Apparently, the market expects Carlyle to raise the price – shares jumped 3% above PMI offer and now trade slightly above the bid. The situation offers a low-risk option play on an increased bid from Carlyle or even a subsequent bidding war.

Both buyers are highly credible and have deep pockets. Since 2016 PMI is expanding into products beyond tobacco and nicotine and in Feb’21 announced an ambition to generate $1bn net revenue from Beyond Nicotine products by 2025 with respiratory drug delivery as a key focus. This month, the company has also announced an $820m acquisition of Fertin Pharma (gums, tablets, and solid oral systems for pharma applications). PMI expects Vecture to become the backbone of PMI’s inhaled therapeutics business. Overall, PMI intentions look very firm, and even if a competing bid doesn’t materialize, the downside stands protected at 1%.

Vectura is a provider of inhaled drug solutions. Until a few years ago, it was focusing on developing its own treatments for asthma and chronic obstructive pulmonary disease. However,  after a few setbacks and failures with its own candidates, the company began changing its business model to contract development and manufacturing company (CDMO) in 2019. So the company now focuses not on developing its own drugs, but on providing development and manufacturing services for its partners (includes some major pharma players) and receiving IP royalties on the product sales. In essence, CDMO is a much more stable but lower-margin business. This business model shift is still ongoing, but so far the results seem great – VEC signed 18 new CDMO contracts in 2020 (including for 2 Phase 1/2 and a few late-stage drugs), royalty revenues increased 32% YoY after a few partners candidates received approvals and adj. EBITDA increased 41.7% (partly due to lower R&D investments). The company expects CDMO revenues to triple in 2021 (I guess it refers to development services revenue, which constituted 6% of total revenues in 2020). The positive changes didn’t go unnoticed by the major players and the company became a takeover target earlier this year.

Worth noting that in 2018 there were rumors that GSK is in talks to buy VEC at £1.75/share price, however, this was before its asthma candidate failure later on in November that year.