Icosavax: Tender Offer With Contingent Value Right

seekingalpha02-11

AstraZeneca has made a tender offer to acquire Icosavax's shares for $15 per share, with a contingent value right worth up to $5.The CVR includes milestone payouts based on FDA approval and net sales ...

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The contingent value right or CVR can be worth up to $5 under the right circumstances. The CVR consists of:  $4 milestone payout if the FDA approves IVX-A12 (or any vaccine incorporating IVX-A12) in the six years after closing. $1 per share milestone based on $200 million in net sales of all ICVX products in the European Union, United Kingdom, and Canada. This has to be achieved within seven years of the deal closing.  IVX-A12 is the Icosavax lead candidate. It is an RSV (Respiratory Syncytial Virus) and hMPV (Human Metapneumovirus) vaccine. I'll review some of their slides from a October 2023 presentation because they are especially relevant to this acquisition. IVX-A12 (Icosavax) AstraZeneca is mostly paying up for IVX-A12. Contingent value rights can be disappointing as the party that issued them sometimes tries to fade them. In this case, the purchase price is primarily in cash. Only 25% of the deal value depends on the CVR paying out. AstraZeneca isn't as likely to try to fade this payment because the CVR milestones are tied to the main asset and not a sideshow. Respiratory illness can be quite threatening for older adults. RSV hMPV vaccine (Icosavax) One of the challenges with vaccines is getting people in the door. Combining vaccines is quite valuable because it means more people are getting them. IVX-A12 topline (Icosavax) There is no approved hMPV vaccine yet, but there are approved RSV vaccines. Icosavax pipeline (Icosavax) If IVX-A12 is approved by EMA and the U.K. (if the FDA approves, these tend to do so in most cases as well), the sales milestone appears easy enough to be met. Analysts put the RSV opportunity at $10 billion per year. That's a global number, but it doesn't include the hMPV market. Combination vaccines should be much preferable and likely expand the market beyond the size of the individual vaccine markets taken together. As I'll show later, the sales milestone (which is $1 vs $4 for approval) isn't critical to this investment. But it looks achievable to me. RSV / hMPV Seasonality (Icosavax) My go-to baseline for probabilities of success is this paper. The phase 1 trial is in the bag. Phase 2 trials are challenging for respiratory illnesses but not so much for vaccines. I think it is better to classify this as a vaccine. Because the interim data is good, I'm further raising the odds of success to 85% for phase 2. This gives me a 55% probability of likelihood of approval or LOA. This ultimately gets me to an expected value for the CVR of $2.20. Probability of trial success (Alacrita consulting) The company had to do an HSR pull and refile, which is probably a net negative. The market treated it that way because previously the stock traded at $15.60. I have the sense that HSR refilings are pretty common as of late. The FTC has also suspended early terminations of HSR. This could just mean the agency did simply not have the time to look at the deal deeply enough to wave it through. It appears to me that as of late, if in doubt, they're getting at least this extension. The FTC can always get the company to do a refile once. AstraZeneca does have respiratory products but focuses on asthma and COPD (see here). It also has a COVID-19 vaccine, and it's an area they want to grow, but this acquisition is a key driver of that initiative. The company isn't exactly dominating the competition. The agency may also want to check if it could be a killer acquisition. That's where pharma buys up biotech that are developing products that could hurt their existing revenue or valuable pipeline products just to kill it in the bud. The reason the FTC may want to make sure this isn't one of those could be AZ's phase III Beyfortus, which is a pediatric monoclonal antibody to treat RSV. However, this doesn't feel like a killer acquisition to me, either. The pipeline and products of AZ in this area are yet quite sparse. IVX-A12 is a potential first-in-class combination vaccine (with other competitors) and is targeted at adults 60+ as opposed to AZ's existing product which has a pediatric focus. The break risk still looks low, but clearing HSR with no questions asked is always preferable. I want to touch briefly on the early February stock sale by the CEO. At first glance, I interpreted it as fairly bullish. It looks kind of bad if you're the CEO of the acquired company, you sell a bunch of stock, and a week later, you get a 2nd request... So, this was done with a 10b-51 plan. That's an automated stock sale plan set up ahead of time. It was set up September 16, 2023. Still a bit curious to me because the merger agreement says: On September 15, 2023, representatives of AstraZeneca contacted Mr. Simpson to express that AstraZeneca was interested in discussing a potential strategic transaction with the Company, indicating that AstraZeneca was contemplating a licensing structure for IVX-A12. Mr. Simpson expressed that a licensing structure involving only IVX-A12 would be challenging due to IVX-A12 being the lead asset of the Company. Specific terms regarding the licensing structure, including price and timing, were not discussed at this time. I don't think it means much but it doesn't look great. I'll review some simplified calculations to determine whether this is an exciting exposure to add to my portfolio. Currently, the CVR costs around $0.20 if we assume no break risk (that's probably incorrect, but it is likely very low). Meanwhile, I put the expected payoff value in year 6 at $2.20. This means I think it is pretty favorable to be down $0.20 tendering into this merger. That's before considering that there is another $0.55 of expected value for the sales milestone in year 7. Something to keep in mind is that the payout is very binary. Sometimes, you'll get $4, and sometimes, you'll earn $0. This means it is best not to oversize positions like this. The potential payouts are uncorrelated to broader markets, which is worth something to most investors. The difference between the value I perceive here and the value ascribed to it by the market ($0.65) is significant enough that I'm pretty confident this is interesting exposure to add to my portfolio.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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