ONCE - Spark Therapeutics

[hillfronter83]

ONCE is a gene therapy biotech that is being acquired by Roche for about $4b ($114.5/share). The deal was originally scheduled to close on 5/3/2019. Now it seems FTC need more time to finish their review. According to the company, they still expect to close the deal in first half 2019 and this delay is "normal". But the price dropped promptly and IRR stands over 30% if the deal closes as expected. FAQ from companyhttps://www.sec.gov/Archives/edgar/data/904566/000095010319005160/dp105565_exa5xviii.htm

 

I have no insights but the spread seems rich. thoughts?

[Guest roark33]

Hmm, seems interesting.  Those nickels look shiny, heck they even seem like quarters...

[Guest roark33]

This one does seem really interesting.  Pulling review for the FTC usually just means they pre-empt the FTC asking for more time with a second review, which would delay the process since the second review period is longer.  So, you pull the initial submission and re-submit, then the filing counts as an "initial filing", where the review period is shorter.  I am not sure why they would object to this one.  The one issue with more time is the potential for some sort of Material Adverse Event clause (MAC) to be triggered.  Maybe they are expecting the results from a drug trial in the month of May? 

 

Tender Offer are usually done fairly quick, so once the FTC approves this, it should be done within 20 business days or shorter. 

 

Hmmm....any thoughts.

 

 

[writser]

Looks like a decent bet, I don't see why this wouldn't close. Small/midcap biotech company with interesting intellectual property and a promising pipeline. Roche being a Swiss buyer shouldn't really pose a security risk and given the size of the acquisition I don't see any competitive issues either. Caveat: of course handicapping regulatory issues is tricky and I have no special insights here. At first glance I wouldn't mind a ~1% / 2% position but my cash position is around 0.2% at the moment due to some other corporate actions :o . So no position for now. Might buy later.

[given2invest]

I own this and it's sized big for me but I've been wrong and under water.  This article explains what the problems might be:

 

https://www.biopharmadive.com/news/roches-takeout-of-spark-not-working-like-a-swiss-watch/553566/

 

That said, I would be super surprised to see this deal get blocked.  The spread is a result of the massive downside if it is blocked and/or if something bad happens in a clinical trial in the meantime.  Arbs are terrified of biotech tenders.

[writser]

Thanks for the link.

[Guest roark33]

Funny, the article cites AVXS as a deal that went smoothly for NVS, but, it looks like we were all involved in that arb deal last year and that spread was pretty nice.

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/avxs-avexis/20/

 

People have short memories. 

[hillfronter83]

I own this and it's sized big for me but I've been wrong and under water.  This article explains what the problems might be:

 

https://www.biopharmadive.com/news/roches-takeout-of-spark-not-working-like-a-swiss-watch/553566/

 

That said, I would be super surprised to see this deal get blocked.  The spread is a result of the massive downside if it is blocked and/or if something bad happens in a clinical trial in the meantime.  Arbs are terrified of biotech tenders.

 

Thanks for the link as well. I was wondering why their FAQ mentioned hemophilia. I'll also be super surprised if they block the deal on the basis of antitrust for a phase 1/2 drug. If the anti trust risk is real, it then implies that SPK-8011 has high potential, which should reduce downside.

[Guest roark33]

If you read the background of the merger, there was another fairly serious bidder, maybe Pfizer?  I don't think the break-price would be that low actually.  Roche approached them in December when the market was crashing and biotechs were taking a beating. 

[given2invest]

I own this and it's sized big for me but I've been wrong and under water.  This article explains what the problems might be:

 

https://www.biopharmadive.com/news/roches-takeout-of-spark-not-working-like-a-swiss-watch/553566/

 

That said, I would be super surprised to see this deal get blocked.  The spread is a result of the massive downside if it is blocked and/or if something bad happens in a clinical trial in the meantime.  Arbs are terrified of biotech tenders.

 

Thanks for the link as well. I was wondering why their FAQ mentioned hemophilia. I'll also be super surprised if they block the deal on the basis of antitrust for a phase 1/2 drug. If the anti trust risk is real, it then implies that SPK-8011 has high potential, which should reduce downside.

 

Yes, you're correct.  Two important things to note:

 

1) . Most think BMRN is ahead in Hemo A and has the superior Gene Therapy drug!  But who knows.  I believe QURE is indeed ahead in Hemo B.

 

2)  There was a bidding war for ONCE w/ 2nd bidder topping off at 105.  Now this 2nd bidder might also have anti-trust problems if Roche does but it shows how in demand the company was.  I do not think it would go back to pre deal prices but probably in the 70-80 range, especially as people speculate they just sell to 2nd bidder in a break.

[Castanza]

Pfizer is partnered with Sangamo wouldn't they have anti-trust issues if they were the 2nd bidder?

 

Relationship Sangamo and Pfizer

https://www.pfizer.com/news/press-release/press-release-detail/sangamo_and_pfizer_announce_phase_1_2_interim_data_for_investigational_hemophilia_a_gene_therapy

 

SB-525 Sangamo

https://clinicaltrials.gov/ct2/show/NCT03061201?term=sangamo

 

SPK-8011(SPARK)

https://clinicaltrials.gov/ct2/show/NCT03432520?intr=SPK-8011&titles=SPK-8011&rank=1

 

 

Also (I can only read the summary  :P) Roche could have 50% market share by 2023

 

https://ctfn.news/essentials/four-essentials-from-ctfn-this-week-3

[Foreign Tuffett]

Given the $4B+ market cap and 10s of millions of $s of daily trading volume, in the absence of a compelling reason to believe otherwise, shouldn't the default belief here be that the market is pricing this more-or-less efficiently?

 

At the very least I would think that someone would have to have an informed opinion on the hemophilia space before thinking about buying this.

[given2invest]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

[Foreign Tuffett]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

 

That's not what I wrote, or even implied.

[Hielko]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

 

That's not what I wrote, or even implied.

Are you sure, because that's also what I'm reading in it.

[Foreign Tuffett]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

 

That's not what I wrote, or even implied.

Are you sure, because that's also what I'm reading in it.

 

Let me try and be more specific about what I meant. This is what we know:

 

1) Straightforward all cash deal (no stock component, no CVR, no other non-standard deal terms)

2) ~$4B market cap

3) Stock is very liquid

 

Given this info, I think the default position of a generalist value investor should be that the market is pricing this more-or-less efficiently. I emphasize "default" because if someone does work on the hemophilia space and/or the relevant antitrust concerns, then they very well may have the "right" to hold an opinion that is quite different than what is currently being priced in by the market.

 

In sum, buying this solely based on the spread, without having an informed view of the dynamics at work, probably isn't very smart.

 

 

 

 

 

[Foreign Tuffett]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

 

That's not what I wrote, or even implied.

Are you sure, because that's also what I'm reading in it.

 

Let me try and be more specific about what I meant. This is what we know:

 

1) Straightforward all cash deal (no stock component, no CVR, no other non-standard deal terms)

2) ~$4B market cap

3) Stock is very liquid

 

Given this info, I think the default position of a generalist value investor should be that the market is pricing this more-or-less efficiently. I emphasize "default" because if someone does work on the hemophilia space and/or the relevant antitrust concerns, then they very well may have the "right" to hold an opinion that is quite different than what is currently being priced in by the market.

 

In sum, buying this solely based on the spread, without having an informed view of the dynamics at work, probably isn't very smart.

 

And I'm not trying to call anyone out, or point any fingers here. I've done this sort of thing myself.

[given2invest]

Might as well just say:  Any mid or large cap stock is efficient and thus should not be purchased.

 

That's not what I wrote, or even implied.

Are you sure, because that's also what I'm reading in it.

 

Let me try and be more specific about what I meant. This is what we know:

 

1) Straightforward all cash deal (no stock component, no CVR, no other non-standard deal terms)

2) ~$4B market cap

3) Stock is very liquid

 

Given this info, I think the default position of a generalist value investor should be that the market is pricing this more-or-less efficiently. I emphasize "default" because if someone does work on the hemophilia space and/or the relevant antitrust concerns, then they very well may have the "right" to hold an opinion that is quite different than what is currently being priced in by the market.

 

In sum, buying this solely based on the spread, without having an informed view of the dynamics at work, probably isn't very smart.

 

I'll bite.  Even though I mostly disagree with what you've wrote, let's say you're right.  Why would this "not be very smart?"  If the market is efficient and you have no edge, wouldn't it just be a neutral expected value decision?  Not smart, not stupid, just neutral? 

[writser]

Let's not get too much off-topic. I think FT raises a valid question but maybe he phrased it a bit too strong or other people have a slightly other view on market efficiency. Whatever.

 

ONCE is now trading at a 7%+ spread as opposed to a 1% spread a month ago. There's quite a bit of volume and/or analyst coverage. 7% for an USD cash deal is huge. A few random spreads of other cash deals of similar size: (WBC: ~3%, early 2020 close expected. MLNX: ~4%, end 2019 close expected. ADSW: 2.5%, Q1 2020 close expected). This is now trading at a similar spread as PACB, a cash deal at a 100% premium facing a 2nd FTC request where there seem to be some valid concerns about market competitiveness. The current ONCE spread doesn't just imply a few months delay.

 

I think it's good practice to be skeptical a priori here and at least try to understand why it is trading at such a huge spread. Based on my (very superficial) reading today this deal looks attractive but given where and how it trades I think it's very possible I might be missing something.

 

Of course there's always a trade-off: how much credit do you give the market vs. your own research. But in general, if you manage to buy a few shares of an illiquid smallcap that bounces all over the place in a downspike (e.g. something like MITK or an OTC-listed microcap where you manage to snag a few shares on the bid, or you buy some shares of a merger that has been slowly drifting lower after weeks of no news, I'd say there is a bigger chance that your counterparty is doing something stupid rather than you than is the case here.

[given2invest]

There isn't any huge mystery here.

 

June 110 calls are $2.80 pricing in a 62% chance of closing by opex.

Sept 110 calls are $3.80 pricing in a 84% chance of closing by opex.

 

The reason it's not 99% is because FTC is taking wayyyyyyy longer than it has really ever take on a cash biotech tender.  They usually close very quickly and get clearance the first time someone files.  (15 days after filing).  People are scared the FTC has a problem w/ the concentration in the Hemo A market.  If they do, there is no remedy as the merger docs say Roche will not divest any Hemo A product. 

 

So that's the situation.  $7.50 up, a lot down, potentially A LOT down if a safety issue pops up.

 

I'm taking the bet it will close and close by end of June.

[Guest roark33]

  People are scared the FTC has a problem w/ the concentration in the Hemo A market.  If they do, there is remedy as the merger docs say Roche will not divest any Hemo A product. 

 

 

 

I don't understand this sentence?

[given2invest]

  People are scared the FTC has a problem w/ the concentration in the Hemo A market.  If they do, there is remedy as the merger docs say Roche will not divest any Hemo A product. 

 

 

 

I don't understand this sentence?

 

I'm sorry I made a typo!  There is NO remedy as the merger dovs say Roche will not divest any Hemo A products.  I will correct.

[Haasje]

Can you quote the piece where Roche says it won't divest any Hemo A products because the part I got is so complicated I'm not sure what it says:

 

Notwithstanding anything to the contrary contained in this Agreement, the best efforts, reasonable best efforts, commercially reasonable efforts or other obligations of Parent and Merger Sub shall not include, and Parent and Merger Sub shall not be obligated to (and, without Parent’s prior written consent, no Acquired Company shall) take, except solely with respect to the Acquired Companies, and solely with respect to (and limited to) the Company’s developmental products and programs (other than the Company Hem A Products) that are or would be competitive with the products and programs of Parent and its Affiliates or in which Parent and its Affiliates own or control any interest, any of the following actions: (I) proposing, negotiating, committing to and effecting, by consent decree, hold separate order or otherwise (A) the sale, divesture, license, hold separate or other disposition of any asset, interest or business of Parent, Merger Sub or any of their Affiliates or (B) the sale, divesture, license, hold separate or other disposition, contemporaneously with or subsequent to the Effective Time, of any asset, interest or business of the Acquired Companies; (II) permitting the Company and its Subsidiaries to sell, divest, license, hold separate or otherwise dispose any of its or their assets, interests or businesses prior to the Effective Time; (III) terminating, relinquishing, modifying, transferring, assigning, restructuring, or waiving existing agreements, collaborations, relationships, ventures, contractual rights, obligations or other arrangements of Parent, Merger Sub or the Company or their respective Subsidiaries; and (iv) any other behavioral undertakings and commitments whatsoever including but not limited to creating or consenting to create any relationships, ventures, contractual rights, obligations, or other arrangements of Parent, Merger Sub or the Company or their respective Subsidiaries and, in each case, to enter, or offer to enter, into agreements and stipulate to the entry of an order or decree or file appropriate applications with any Governmental Entity in connection with any of the foregoing and in the case of actions by or with respect to the Acquired Companies or its or their businesses or assets, by consenting to such action by any Acquired Company in any such case of (I)-(iv) (any of the foregoing actions, a “Burdensome Condition”). For the avoidance of doubt, Parent and its Affiliates shall not be required to take any actions (including any of the actions described in clauses (I) through (iv) of the definition of Burdensome Condition) with respect to any of the assets, interests or businesses of Parent, Merger Sub or any of their respective

 

 

[given2invest]

that's it.

[Haasje]

Does this prevent Roche from agreeing to divestiture of Hem A assets before closing? Sorry to be so dense but I have a very hard time understanding this piece of text.