ACHN - Achillion Pharmaceuticals

[writser]

Let me start with a shameless plug from the Achillion IR website: Achillion Pharmaceuticals, Inc. (NASDAQ:ACHN, mcap ~$870m as of now) is a clinical-stage biopharmaceutical company focused on advancing its orally administered factor D inhibitors into late-stage development and commercialization. Factor D is an essential protein within the amplification loop of the alternative pathway of the complement system. Achillion is focusing its drug development activities on alternative pathway-mediated, rare diseases where there are no approved therapies or where existing therapies are inadequate for patients.

 

Achillion is basically a biotech company with 1 promising drug, danicopan, which potentially has multiple uses and is currently in a phase II trial. It also has two more speculative drugs in phase I trials. This week Alexion (ALXN, ~$22b mcap) offered to buy Achillion for $6.30 per share and two contingent payouts:

 

$1 per share if danicopan gets FDA approval for 'something' within 4.5 years of the deal close.

$1 per share if ACH-5228, one of their drugs currently in a phase I trial, gets to a phase III trial within 4 years of the deal close.

 

So, the bull case is obvious here: pay $6.20, get back $6.30 in a few months and up to $2 over the next few years. Small transaction for the buyer, financing should be no problem. Domestic deal. Friendly deal. I foresee absolutely no problems on the financial / business side of the deal.

 

I am not a doctor so I cannot confidently judge th Achillion pipeline but I can look at some base rates. Achilion wants to start a Phase 3 trial for danicopan in 2020. The base rate for getting from a phase 3 trial to FDA approval for a new molecular entity is ~38%. The base rate for a phase I trial getting to a phase III trial is ~16%. This would suggest that the CVR's combined have a value of around $0.50. However, I think this is actually a bit too negative as the pipeline is looking at (quote from the latest 10Q): "the therapeutic areas of hematology, nephrology, ophthalmology and neurology". Hematology and ophthalmology FDA applications have among the highest base rates of success (as opposed to, for example, psychiatry). Danicopan is in a phase II trial for a rare blood disorder and the base rate for a hematology phase III trial to FDA approval is closer to 63%. ACH-5228 is also expected to treat a rare blood disease, in which case the relevant base rate would be closer to ~41%. Source for these base rates: link.

 

Again, I am not a doctor and if you are, feel free to tear apart my terrible research. But I'm pretty sure these CVR's are worth something, and my best guess would be an expected value of ~$0.50 - $1.00 for the both of them. So, a very simple model of expected return would be: buy now for $6.20. Get $6.30 back in H1 2020. Get $0.75 in 2023. That would imply a mid/high teens IRR, depending on when you expect to get your $6.30 back.

 

But obviously it is never that simple. The main issue here, which I would like to know a bit more about, is regulatory approval. The buyer, Alexion, is according to wikipedia 'best known for its development of Soliris', a drug used to treat PNH - paroxysmal nocturnal hemoglobinuria. And, guess for the treatment of which disease danicopan is being tested? And which disease they want to treat with ACH-5228? Of course: PNH .. So, is this deal in the best interest of people suffering from this rare disease? Or does Alexion simply want to buy a 'monopoly' on PNH treatment? And what does the FTC think about this?

 

What I like is that Alexion seems confident about the deal. The merger agremeent has an 'end date' of April, 15, 2020. Alexion has the option to extend the merger agreement three times by three months if regulatory approval has not been received yet. They promised to cough up a large reverse termination fee if the deal falls apart: if the deal gets terminated due to regulatory intervention within six months, Alexion will cough up $30m. Between 6 - 9 months: $40m. Between 9 - 12 months: $50m. Even longer: $60m. That is quite a large termination fee for a transaction with an enterprise value of ~$600m.

 

Aradhana Sarin Alexion Pharmaceuticals, Inc. – Executive VP and Chief Strategy & Business Officer

Yes. I think we'll just be filing for FTC clearance in the next several days, and so you should be able to know that. But we'll have pretty good visibility within 45 days or so.

 

Also, Ra pharmaceuticals is a competitor (also in the process of being acquired, not by Alexion)  that has a pipeline with a phase II study on PNH. So it looks like there are some competitive products out there, i.e. not a complete monopoly in case the deal goes through. But again, I am not a doctor - hard to judge these pipelines.

 

All in all, hard to judge. I own a few shares, there might be some value here. Small, speculative complemental deal for the buyer. Competing products seem to be in development. Current price implies a very decent IRR. On the other hand, regulatory problems seem like a real possibility and give that the deal is at close to a ~70% premium the downside is significant. I'm wondering if anybody has some thoughts.

 

 

 

Some background reading: A week after UCB bought Ra to get hold of its complement inhibitor, Alexion takes out Achillion for much the same reason.

Some more background reading: Alexion makes 'high risk, high reward' bid for Achillion amid FTC deal scrutiny.

 

And finally a footnote: Foreign Tuffett basically forced me to open a thread about this to make him share his thoughts. So if this post turns out to be crap, blame him, not me :) .

 

I've done some work on this since the announcement and own it. Agree that this situation is all about whether or not FTC signs off. I think the odds are pretty good this gets through. If you make a thread I'll be happy more than happy to share anything/everything I know.

[Foreign Tuffett]

 

I'm not a biotech expert whatsoever, but I did sleep at a Holiday Inn Express last night, so here we go.

 

First of all, I agree with everything writser wrote, so I'm going to try and avoid rehashing everything he's already covered.

 

The biggest issue here is whether or not the FTC will block this deal. In the ~31 minute call announcing the deal analysts asked about FTC approval no less than three times:

 

"What gives you confidence this will pass FTC scrutiny given the recent and repeated delays for other similar deals in the space?"

 

"Any remedies you have in mind if the FTC raises issues and puts this to a second review?"

 

"Can you remind us of the process of getting FTC clearance? What are the next events and what mileposts will we as independent observers be able to watch?"

 

Obviously ALXN management wasn't able to give particularly substantive responses to questions about what the FTC will or will not do, but for the reasons writser already mentioned, ALXN is signaling that it's relatively confident that the FTC will sign off. 

 

Some Background

 

PNH is a rare, often deadly, blood disease. This transaction is a defensive acquisition by ALXN in an attempt to protect its PNH franchise. Soliris (eculizumab) is a ~$500K (not a typo) per year treatment for PNH and is by far ALXN's most lucrative drug (86.3% of 2018 revenue). Soliris treats PNH by blocking C5. ALXN also owns PNH drug Ultomiris (ravulizumab), which is a longer acting C5 blocker. ALXN is attempting to migrate patients from Soliris to Ultomiris (2018 10K: "One of our principal business objectives is to facilitate the conversion of PNH patients from SOLIRIS to ULTOMIRIS").

 

ACHN has two drug candidates of note. Danicopan (ACH-4471, Phase 2) treats PNH by blocking "Factor D." ACH-5228 (Phase 1) blocks Factor D with a lower dose / less side effects. ACHN's Factor D blocking drugs can be used alongside Soliris. Drugs that block Factor D appear to be especially beneficial for anemic PNH patients, who comprise ~6 - 10% of the total PNH population. The idea here is that ALXN will be able to lock in PNH patients, especially those afflicted with anemia, by being able to offer a Soliris/Ultomiris + Danicopan/ACH-5228 combo therapy.

 

Competition

 

writser already mentioned Ra Pharmaceuticals (RARX), which just (Oct 10th) announced that it is being acquired by UCB. Ra is working on an alternative C5 blocking drug.

 

Additionally, Amyndas (private) and Apellis (APLS) are working on PNH drugs that block C3, with APLS' candidate already being in Phase 3. Scuttlebutt tells me that some biotech investors familiar with the space believe that blocking C3 may prove to be a more efficacious PNH treatment than even the combo therapy ALXN hopes to offer. This probably explains why APLS has a ~$1.75B market cap despite having only one prospective drug candidate (APL-2).

 

Roche is working on an alternative C5 blocking drug for PNH.

 

Given the increase future competition, I think ALXN will be able to make a strong case to the FTC that this transaction will not substantially lessen competition in the PNH space.

 

One last thing I would note is that ACHN had an enterprise value under $300 million before this deal was announced. Investors weren't expecting great things from it as a stand alone company.

 

Full Disclosure: I own ACHN shares. Nothing in this post is investment or medical advice.

[Gregmal]

I dont think looking at the CVR's like that is the best way. From my quick glance, these are binary and non-tradable(correct me if I'm wrong there). I dont think this has issues with FDA, but I look at the $6.30 number as my expected return, and if you figure q2 2020, I'm not excited about a maybe 5%.

 

But back to the CVR's, I dont know if it s available or not, but a better way of approaching probability IMO would be to look at other CVR's over a timeline, maybe the past 5-10 years. These companies know the probabilities better than the average investor, and would almost certainly nail down figures to a better probability outcome than "X out of 100 typically get approved". From my recollection(and its purely going off memory) not too many CVR's have really produced great outcomes for shareholders(so again, I'd be curious if there is any info tracking them). Typically, they are thrown in to a deal to help sell it better to shareholders. I'd be curious, and maybe over the weekend will look at it, but what type of packages do ACHN management get for change in control? Ive always viewed this as a semi floundering company that existed most for the purposes of getting investors excited enough to bid up the stock only to drop secondaries on them. So alignment of interests may also be a helpful gauge.

 

Just my 2c.

[thepupil]

thanks for the idea. I will attempt to recreate the SWY trade I did back in 2015.

 

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

wake up in a few years and you have a luxury vacation's worth of Casa Ley proceeds in your account.

 

Alpha vulture did the same thing

https://alphavulture.com/2018/01/17/safeway-sells-interest-in-casa-ley/

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/safeway-6471/msg209111/#msg209111

 

 

[minten]

But back to the CVR's, I dont know if it s available or not, but a better way of approaching probability IMO would be to look at other CVR's over a timeline, maybe the past 5-10 years.

 

I personally don't really see the point of looking at other CVR's, as every CVR is completely different in terms of setup. Even those tied to pharma deals are not all that similar to each other. Some are nearly guaranteed to payout, others are nearly guaranteed not to pay out. What would a general approach tell you?

 

[minten]

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

i honestly believe there's no possible way ACHN will trade below (or even close to) 6.30 if/when the offer is approved and the deal is a sure thing. CVR's (unless basically worthless) are virtually never "free", and there have been quite a lot of them since SWY.

[thepupil]

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

i honestly believe there's no possible way ACHN will trade below (or even close to) 6.30 if/when the FDA eventually approves this and the deal is a sure thing. CVR's (unless basically worthless) are virtually never "free", and there have been quite a lot of them since SWY.

 

yea, i had the Dyax one on big in 2015/6 but sold it pre-close to free up capital for higher beta stuff because the market sold off a lot. I switched jobs in 2016 to where I don't trade as actively so I haven't done any since. by "my strategy", I should've said "one time I did this" lol.

 

Just looking it up on bloomberg, Dyax traded  5-35 cents through the merger price for a month or so after approval, ended up closing at $1.11 through the merger (creating a $4.00 CVR potential for $1.00) If I recall correctly I bought it and puts a bit through so was paying somehting but payoff was high. but then 2015 sell-off accelerated and I ended up selling dyax to free up margin to buy LUK bonds and stuff.

[Gregmal]

But back to the CVR's, I dont know if it s available or not, but a better way of approaching probability IMO would be to look at other CVR's over a timeline, maybe the past 5-10 years.

 

I personally don't really see the point of looking at other CVR's, as every CVR is completely different in terms of setup. Even those tied to pharma deals are not all that similar to each other. Some are nearly guaranteed to payout, others are nearly guaranteed not to pay out. What would a general approach tell you?

 

Potentially nothing. It's just data, from which you can perhaps draw some conclusions or get comfortable making a few assumptions. Biotechs are notorious for being quite liberal with their data. This includes big companies making acquisitions. I mean Pfizer did a $300M deal with Opko for completely useless stuff. All I know is I wouldn't be comfortable buying a perennial turd with a history of failure, share issuance, and although small, regulatory risk, for 5% and a small shot at a buck or two. CVR's in certain cases are just window dressing. In certain cases they are not. Given the above mentioned discription of ACHN, I'd be hesitant. I hope everyone makes money through.

 

 

Pupil, now that is an awesome trade idea if the setup is there!

[given2invest]

thanks for the idea. I will attempt to recreate the SWY trade I did back in 2015.

 

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

wake up in a few years and you have a luxury vacation's worth of Casa Ley proceeds in your account.

 

Alpha vulture did the same thing

https://alphavulture.com/2018/01/17/safeway-sells-interest-in-casa-ley/

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/safeway-6471/msg209111/#msg209111

 

You will have a real hard time doing this.  It's trading sub $6.20 because there *is* real FTC risk.  Once FTC clears, it will likely go to $6.70 or higher valuing CVRS 40-75 cents in total is my guess.

 

I like this idea after FTC approval.  Until then, I won't touch it at these levels.

[given2invest]

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

i honestly believe there's no possible way ACHN will trade below (or even close to) 6.30 if/when the offer is approved and the deal is a sure thing. CVR's (unless basically worthless) are virtually never "free", and there have been quite a lot of them since SWY.

 

The SWY one was particularly mispriced, probably due to the size of the deal and the non tradeable aspect.  Was a great trade, even with the Peso sucking, and them waiting max 3 years to sell the asset.

[writser]

You will have a real hard time doing this.  It's trading sub $6.20 because there *is* real FTC risk.  Once FTC clears, it will likely go to $6.70 or higher valuing CVRS 40-75 cents in total is my guess.

 

I like this idea after FTC approval.  Until then, I won't touch it at these levels.

 

Agreed. You aren't buying the CVR's for free now: you are buying the CVR's bundled with the FTC risk for free. I would absolutely not recommend going 100% long with puts at this point.

 

The deal is at a large premium so even assuming a small chance of FTC intervention (and the subsequent butchering of the share price) quickly makes this less attractive. Very simplistically, a 10% chance of FTC intervention and a subsequent price drop to $3.75 yields a $6.05 break-even price for the merger, ignoring the CVR's. Even if you add in the expected value of the CVR's, above that 10% intervention hurdle the trade quickly gets less attractive. And do you really want to bet on the chances of FTC approval being >90% in this case? I'm not sure.

 

On the other hand, Alexion is buying a small, speculative pipeline, there are some issues with its Soliris patents - and they are expiring soon, there seem to be a few companies developing competing drugs out there and the large parent termination fee also suggests confidence at the buy-side. I'll probably keep a small position with the intent of adding later.

 

Just looking it up on bloomberg, Dyax traded  5-35 cents through the merger price for a month or so after approval, ended up closing at $1.11 through the merger (creating a $4.00 CVR potential for $1.00) If I recall correctly I bought it and puts a bit through so was paying somehting but payoff was high. but then 2015 sell-off accelerated and I ended up selling dyax to free up margin to buy LUK bonds and stuff.

 

That's a shame, the DYAX CVR's paid out in 2018. Turned out to be a great trade. Though maybe you did better on your other purchases.

[writser]

_JJ_ (@Aceglobalvalue - recommended on Twitter) pointed out that there are some interesting tidbits in the proxy. For some reason (read: laziness) I hadn't spent much time on the proxy. In my experience the 'background' section is usually one of the most interesting parts of a special situation proxy. You get to know a little about the actors involved and their behavior, the history of a deal, if there was any competition, why it is structured the way it is, etc. I think it helps you to get a feeling for the situation - however vague that is.

 

On September 21, 2019, Dr. Sarin delivered a letter to Mr. Truitt, proposing a revised non-binding offer to acquire all of the outstanding common stock of Achillion for an aggregate price of $8.65 per share, which consisted of upfront cash consideration of $6.15 per share plus one contingent value right with a nominal value of up to $2.50 per share in cash, including $1.50 per share payable upon the start of a Phase III clinical trial for ACH-5228 and $1.00 per share upon the approval by the FDA of the combination of ACH-4471

 

On September 23, 2019, following the direction of the Board of Directors, Mr. Gibney called Dr. Sarin and informed her that Alexion would likely need to improve its offer of upfront cash consideration

 

On September 30, 2019, Dr. Sarin called Mr. Gibney with a revised non-binding proposal, which was characterized as Alexion’s “best and final” offer, to acquire all of the outstanding common stock of Achillion for an for an aggregate price of up to $8.30 per share, which consisted of upfront cash consideration of $6.30 per share plus one (1) CVR with a nominal value of up to $2.00 per share in cash, including $1.00 per share payable following the start of a Phase III clinical trial for ACH-5228 and $1.00 per share payable upon the approval by the FDA of ACH-4471

 

So, first they get offered $6.15 and a $2.50 CVR. Achillion says the cash component is too low. A final deal is negotiated at $6.30 and a $2 CVR. Apparently $0.15 now is preferable to $0.50 for a phase III clinical trial for ACH-5228. However (page 50):

 

.. based solely on the assessments of Achillion’s management as to the probability of success and the estimated timing of achievement of the milestones, and discounting the two probability-adjusted payments under the CVR back to the valuation date using the midpoint of a range of discount rates from 11% to 13% based on Centerview’s analysis of Achillion’s weighted average cost of capital, Centerview calculated an illustrative net present value for one (1) CVR of $1.14

 

So, "our CVR is very valuable according to our calculations. But we prefer a little bit of extra cash right now" ..

 

Anyway, I still think the situation is interesting. At this point the market seems to be pricing in a >25% chance of regulatory intervention (or I'm way more excited about the CVR than the market). Seems high-ish. I don't think I have that big of an edge handicapping this type of situation (recent reminder). On the other hand: who has? The combination of regulatory uncertainty + high downside + large contingent payout seems like a showcase 'unlikable' special situation. I have a very tiny position. I hope to spike a bit more on a huge price drop / if FTC approval is in. But buying now might not be the worst idea ever either.

[minten]

ftc clearance received..  now we'll see what the market thinks those cvr's are worth..

[given2invest]

thanks for the idea. I will attempt to recreate the SWY trade I did back in 2015.

 

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

 

wake up in a few years and you have a luxury vacation's worth of Casa Ley proceeds in your account.

 

Alpha vulture did the same thing

https://alphavulture.com/2018/01/17/safeway-sells-interest-in-casa-ley/

 

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/safeway-6471/msg209111/#msg209111

 

You will have a real hard time doing this.  It's trading sub $6.20 because there *is* real FTC risk.  Once FTC clears, it will likely go to $6.70 or higher valuing CVRS 40-75 cents in total is my guess.

 

I like this idea after FTC approval.  Until then, I won't touch it at these levels.

 

$6.95 post approval...no free lunch!  I won't be buying here for CVRs but argument to be made they +NPV given all the reasons why non tradeable CVRS are awesome.

[writser]

Bit disappointing, but yeah, efficient market. Was hoping to pick up CVR's a tiny bit cheaper. Probably not buying > $7. Maybe it drops a bit after the excitement is over.

[Jurgis]

Another win for writser.  8) Thanks.

[writser]

Thanks but I only owned a tracker position. Was a speculative idea, could have turned out worse. If I open 10 of these topic and 1 blows up are you still making a profit? Anyway, what's done is done, FTC approval is there. I'm actually slightly more optimistic about the CVR than I was when I opened this topic. Mainly because I missed (or it was released later, I don't know) that ACH-5228 has already completed a successful (according to the company .. ) phase I trial and they plan a phase II trial in 2020. Still a chance that regulators intervene but this should make the second part of the CVR more valuable.

 

I think $1 is a decent back-of-the-envelope estimate of fair value. The deal is probably closing very soon so you pay approximately $0.55 for a CVR that has an expected value of $1, to be paid out in 2-4 years. Not too bad if you have some spare cash and don't mind some non-market risk.

 

Still, obviously not the best idea in the world either. I bought a few shares but at current prices I'm not super eager.

[writser]

Looks like this is the last day of trading: http://www.nasdaqtrader.com/TraderNews.aspx?id=ECA2020-17 . Ridiculous volume, >50m shares traded today according to Bloomberg, getting close to 50% of all shares outstanding. Index funds and/or other shareholders dumping? Might explain why the price looks reasonably attractive as of now. I'm buying more.

 

Update: ended up buying quite a bit around the close. Paying less than $0.50 for the CVR looked like a very good deal to me. Stuffed my account to the hilt with ACHN. Effectively only a ~0.5% position in the CVR though.

[Jurgis]

Update: ended up buying quite a bit around the close. Paying less than $0.50 for the CVR looked like a very good deal to me. Stuffed my account to the hilt with ACHN. Effectively only a ~0.5% position in the CVR though.

 

Now we know why this did not drop into the close.  8)

 

I sold whatever I had at ~6.95. Did not re-buy.

[given2invest]

I bought this as well into close, 6.78 average.  Thanks for the thread writser though I didn't find this cause of you. 

[writser]

From the Alexion 10K:

 

Subsequent to the acquisition date, we have adjusted the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to changes in the discount rates and the passage of time as development work progresses towards the potential achievement of the milestones. As of December 31, 2020, the fair value of the contingent consideration for the Achillion acquisition was $210.6 based on the probability-weighted cash flows, discounted using a cost of debt ranging from 2.8% to 3.3%. Changes in fair value of the contingent consideration associated with the Achillion acquisition for the year ended December 31, 2020 was $49.9.

 

With ~150m shares that would imply $1.40. Seems quite optimistic eh? Would be nice, we will see ..

[given2invest]

From the Alexion 10K:

 

Subsequent to the acquisition date, we have adjusted the contingent consideration to fair value with changes in fair value recognized in operating earnings. Changes in fair values reflect new information about the probability and timing of meeting the conditions of the milestone payments. In the absence of new information, changes in fair value will only reflect the interest component of contingent consideration related to changes in the discount rates and the passage of time as development work progresses towards the potential achievement of the milestones. As of December 31, 2020, the fair value of the contingent consideration for the Achillion acquisition was $210.6 based on the probability-weighted cash flows, discounted using a cost of debt ranging from 2.8% to 3.3%. Changes in fair value of the contingent consideration associated with the Achillion acquisition for the year ended December 31, 2020 was $49.9.

 

With ~150m shares that would imply $1.40. Seems quite optimistic eh? Would be nice, we will see ..

 

I own this.  I wouldn't pay too much to that.  That said, I'm very optimistic we get $2 here.  It would seem the "easy" $1 will be 2050 going into P3.  If it doesn't happen in the primary indication (the P2 trial is going on right now) we have a bunch of shots on goal with the bucket they running this year.  It's hard to handicap whether the P3 of 2040 is successful but the endpoints are the same as the very successful P2 trial and that wasn't data mined or anything.