Quick Pitch: Paratek Pharmaceuticals (PRTK)

Merger Arbitrage + CVR – 36% Upside

 

Paratek Pharmaceuticals is a $126m market cap commercial-stage biopharma focused on antibiotics. The company is getting acquired by two very credible buyers – Novo Holdings, which is a prominent life sciences investor and also a parent company of Danish pharma giant Novo Nodisk (US$358bn market cap), and a PE firm Gurnet Point Capital. Consideration stands at $2.15/share + a CVR that will pay out $0.85/share if Paratek’s sole commercialized drug Nuzyra reaches $320m in annual sales in the US before the year-end of 2026. PRTK currently trades at $2.20/share, so investors are paying $0.05/share for the CVR. The merger seems highly likely to close successfully in Q3. Therefore, investors have a chance to promptly get back 98% of the investment in several months and retain cheap optionality on the CVR.

How likely is the CVR to pay out? PRTK’s lead commercial product Nuzyra is a once-daily oral and intravenous antibiotic used for the treatment of community-acquired bacterial pneumonia and acute bacterial skin infections. The product, used in both community and hospital settings, is employed in cases where patients develop resistance against existing and more widely available antibiotics. The CVR payout threshold of $320m is set for only the drug’s core commercial US revenues, excluding revenues from government contracts and certain royalties. So far, core commercial US revenues stood at $12m in 2019, $39m in 2020, $68m in 2021, and $99m in 2022. In 2023, management guides for $125m-$135m in core commercial US sales, implying a 26-36% annual growth. In order to reach the CVR threshold the company would have to ramp up the annual growth to at least 35% for the next 3 years. Therefore, based on the historical figures so far, it seems that reaching the CVR threshold would be a pretty tough feat if PRTK just continued with the status quo. However, a game changing factor here could be the involvement of the Danish pharma giant. While, Novo Nordisk is not directly involved in antibiotics, it has a very strong presence in the US diabetes, obesity, and rare disease markets generating around $13bn annual revenues in the region. Hence, the company sale will give PRTK access to significantly higher funding levels as well as the access to Novo’s distribution network and connections, which could give a material push to Nuzyra’s revenue growth. Also worth noting that the Danish parent company Novo Holdings has been frequently investing in the antibiotics space over the last several years (here, here and here), so this market is not entirely new to the buyer. Besides that, a small additional catalyst for sales growth here could be Nuzyra’s approval for another indication – non-tuberculous mycobacteria (NTM), which is currently in phase 2 trial. However, it seems unlikely that commercialization for NTM could start before 2026, so the impact on revenues here will probably be limited. More information on how the buyer consortium expects to drive Nuzyra’s sales growth might be unveiled in the merger proxy that should be filed in the next month or so.

I do not expect any pushback from the target’s equity holders. Despite the rapid sales growth of Nuzyra since its commercialization in 2019, the company has so far failed to reach the required scale to turn profitable. PRTK’s operating losses stood at $46m in 2022 ($41m in 2021) compared to $45m in gross cash as of Mar’23. The management has hinted that PRTK will not reach profitability in 2023, indicating that the company will need significant dilutive financing to continue as a going concern. On top of that, PRTK has an overhang of a $165m convertible debt that matures in May’24 and, if exercised, would also dilute the current market cap by 18%. The cash portion of the current buyout offer comes at a 41% premium to where the stock was trading before buyout rumors in early June. Coupled with the fact that the management owns a sizable 8% stake, I think shareholder approval here is likely.

Reputation of the parties involved suggests the risk of transaction termination is extremely low. Gurnet Point is a healthcare investment firm with a number of biopharma investments and has previously done much larger acquisitions in the space, e.g. $890m buyout of Radius Health completed in Aug’22. The firm was founded by the Swiss billionaire Ernesto Bertarelli who had previously led the sale of his family’s biotech company Serono to Merck for $13bn. Worth noting that debt financing for the merger will be provided by Oaktree Capital Management which had already partnered with Gurnet Point in the past.

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