OCRX - Ocera Therapeutics

[writser]

Over the past few days I have been accumulating a decent position in OCRX. Another forum member just wrote a blog post about it, read that for the thesis: link (edit: and part two: link). I'm not going to rehash the whole story here. An old SeekingAlpha article on their promising drug that I appreciated: link.

 

Cliff notes: deal is a tender offer, expiring in 2017, for $1.52 and a CVR that pays out up to $2.58. At the current market price of $1.70 you pay $0.18 for the CVR. Payouts:

 

$0.34/CVR if the first patient is enrolled in a Phase 3 trial for an intravenous formulation of OCR-002 (before 2029).

$0.52/CVR if the first patient is enrolled in a Phase 3 trial for an oral formulation of OCR-002 (also before 2029)

$1.72/CVR if cumulatieve sales of OCR-002 worldwide exceed $500 million before 2029

 

In the SC-14D9 OCRX management offers their estimates of getting to phase 3 on page 39 (link). 75% for IV treatment, 36% for oral treatment. Based on these numbers alone (i.e. completely ignoring the huge sales milestone) the CVR should be worth $0.44. Of course management is probably too optimistic but even if you discount all their estimates by 50% the CVR is still on the cheap side (and the prospects of the pipeline were apparently good enough to attract a buyer in the first place). Your IRR should be ok as you should get most of your cash back in ~2 months. Decent place to park some cash. Mallinckrodt doesn't seem to be the most rock-solid buyer but this is a relatively small deal for them and as long as they don't collapse within two months the credit risk is not a deal blocker imo.

 

I'm no biotech expert but I think CVR deals like this one are a good place to find value. There is considerable uncertainty surrounding the payouts, the CVR's are untradable / transferrable (i.e. a headache for lots of funds) and and you need to invest a significant amount of cash in the merger for a relatively small exposure to the CVR. All reasons why the market doesn't like them. Also, for me personally, parking money in some CVR's creates a tax advantage.

[writser]

Deal closed quickly, I received the $1.52 cash component today. Paid $0.17 on average for the CVR's. Last traded price was $0.27. Now the waiting begins ..

[hillfronter83]

Deal closed quickly, I received the $1.52 cash component today. Paid $0.17 on average for the CVR's. Last traded price was $0.27. Now the waiting begins ..

 

Does anybody know how tax is handled in this situation? My cost basis is about $1.64/share. IB marks a $0.15/share short term gain based on the closing price of last trading day ($1.79/share). Then the CVR cost basis should be $0.12/share (1.64-1.52). This seems to be the worst case scenario tax treatment. Is it ok to treat the tender as short term loss of $0.12 and then mark CVR cost basis as 0?

[misterkrusty]

writser-  how does parking money in CVR's create a tax advantage for you?

[writser]

Some tidbits from recent Mallinckrodt filings:

 

10K:

As part of the Ocera Acquisition, the Company provided contingent consideration to the prior shareholders of Ocera in the form of both patient enrollment clinical study milestones for intravenous ("IV") and oral formulations of MNK-6105 and MNK-6106, which represent the IV and oral formulations, respectively, and sales-based milestones associated with MNK-6105 and MNK-6106. The Company determined the fair value of the contingent consideration based on an option pricing model to be $21.5 million and $22.0 million as of December 28, 2018 and December 29, 2017, respectively.

 

With ~27.5m fully diluted shares outstanding as of the time of the merger that would value the CVR at ~ $0.80.

 

 

Q4 earnings call transcript:

Similarly, we recently completed a productive Type A meeting, where we discuss issues related to the Phase III program for MNK-6105, the IV formulation of our ammonia scavenger drug for the treatment of patients with acute hepatic encephalopathy. Here, we also plan to reach an agreed pivotal protocol design and a potential Phase III start as early as late this year.

 

MNK-6105 is the IV formulation, so a potential $0.34 payout this year already.

 

[lathinker]

Update on MNK-6105 and MNK-6106:

 

https://seekingalpha.com/pr/17600218-first-patient-enrolled-mallinckrodts-phase-2a-study-investigational-drug-mnkminus-6106

 

News on MNK-6106:

Mallinckrodt plc (MNK) (NYSE: MNK), a global biopharmaceutical company, today confirmed enrollment of the first patient in the company's Phase 2a study assessing the pharmacokinetics, pharmacodynamics and safety of the oral investigational drug MNK-6106 (L-ornithine phenylacetate) versus rifaximin in patients with hepatic (liver) cirrhosis and hepatic encephalopathy (HE). Study completion is expected by first quarter 2020.

 

On MNK-6105, statement is in line with writser's post below:

The company expects to begin recruiting by the end of 2019 for a Phase 3 clinical trial investigating MNK-6105 in patients being treated for acute HE in the hospital.

 

On a side note, given MNK's stock price performance, I am wondering if they will still be alive by 2020. Does anybody have any views here? Heavily levered company  with opioid litigation risk trading at <1 P/E... other companies in the sector also got hammered badly. Not sure if it is dead body in the water or deep value opportunity...

 

Full disclosure: Long Ocera CVR, no position in MNK

 

[writser]

As pointed out in the Mallinckrodt thread the company is exploring a restructuring. Given their huge debt load I'd say the CVR at least deserves a big haircut. I'm not sure how the milestone payments are legally structured and what leeway there is. How was the Ocera merger structured exactly? What is the seniority of the CVR liabilities? Can the company restructure the milestone payments in bankruptcy court? What happens if MNK 6105 / 6106 are sold in bankruptcy proceedings? In that case, could the milestone payments be diverted, for example to make whole senior debt holders? Or to settle a class-action lawsuit? Interesting questions.

 

Given that the CVR is not tradable anyway I'm not going to spend hours figuring this out. Worth following though.

[Maple Fun]

Any updates? I decided to mark it as zero for now....

[Hielko]

MNK filing for Chapter 11 restructuring: https://advancingmnk.com/

 

Not sure what the impact is on the CVRs, guess they classify as general unsecured claims?

[writser]

Yeah, either that and they fall under the category "will receive up to $150m in cash", or nothing. Probably the latter I would think, but I asked IR for clarification. Bit strange that the company doesn't explicitly mention the CVR anywhere, as far as I can see.

[minten]

I got a quick reply informing me the CVR's were not altered as part of the Restructuring, but IR can't speculate on what will happen to them in the bankruptcy process.