AMYT - Amryt Pharma: Final Chance To Pick Up An Attractive CVR

2023-04-11 07:56:33 ET

Summary

• Amryt Pharma is being acquired at $14.50 per share and a contingent value right and is trading at $14.69.
• The contingent value right consists of 2 milestones that pay out $1 and $1.50 on certain conditions.
• Today is likely the final day the stock remains traded.

There's been a string of deals where big pharma buys a small biotech for cash and a CVR, or contingent value right. I've been looking into all of these as I greatly like contingent value rights, and I've bought into most of these mergers. However, there are some I like more and some I like less. Amryt Pharma ( AMYT ) is among my favorites of the 2023 deals. Today is likely the final day the company remains publicly traded.

Amryt Pharma plc

Amryt Pharma plc is being acquired for $14.50 per ADS plus Contingent Value Rights of up to an additional $2.50 per ADS based on certain Filsuvez milestones being achieved. The company has nearly a billion in market cap, making this a relatively large target for the acquirer.

Currently, the company is trading at around $14.69 or $14.56 when I wrote it up originally for subscribers . Assuming the deal closes (which is never a certainty), the CVR is estimated to be worth $0.19. ADR holders also tend to get charged cancellation fees of $0.05 a piece but these are covered by the acquirer in this case.

With the CVRs on the other deals, the market is ascribing a much higher value to the CVRs or assumes a much more robust chance of closing deals. In this case, the acquirer is Chiesi Farmaceutici S.p.A. It's an Italian private family company with $2 billion+ in annual revenue and 6k+ employees. It is a B-corporation which I like in this context because B-corporations are held to high ethical standards. Worming yourself out of deals like Musk tried to do with Twitter or Bernard Arnault with Tiffany's isn't a good look. If you care about ethics, maybe you are less likely to pull something like that. The transaction was unanimously approved and recommended by the Boards of both Chiesi and Amryt. It is expected to close in the first half of 2023. The deal is technically a U.K. scheme of the arrangement, and we'll need to wait out HSR (minimum 30 days) and a shareholder vote at Amryt. Significant shareholders are backing the deal, so I don't think this will become an issue. The deal isn't dependent on financing, which is good for the odds of closure.

Assuming closure, we're laying out (tying-up for the longer term) $0.06 for a chance to get a shot at $2.50. Theoretically, nothing stands in the way of this deal closing but you can never be 100% sure until the money is in the bank.

The CVR

The CVR pays out on milestones related to Amryt's product Filsuvez® if these are achieved before December 31, 2024 (this deadline seems very doable now, but it doesn't leave room for many things going wrong).

• There is a milestone of $1.00 per share on FDA approval of Filsuvez.
• There is another milestone of $1.50 if the company gets a Priority Review Voucher from the FDA.

What is super unusual here is that Amryt shareholders already received a CVR tied to the fate of Filsuvez with the EMA and FDA early in 2022.

Filsuvez is a medicine used in adults and children aged 6 months or older with epidermolysis bullosa. This is a disease of the skin where patients easily incur blisters/wounds. There's some good news in that Filsuvez has already been approved by the EMA and you can read about the background of that decision, at a summary level, here . Per the EMA:

EB is an inherited disease of the skin that makes the skin very fragile and causes severe blistering and scarring. Filsuvez is used in two types of EB, dystrophic EB and junctional EB, to treat partial-thickness skin wounds. These are wounds where the upper layers of the skin have been damaged.

EB is rare, and Filsuvez was designated an ' orphan medicine ' (a medicine used in rare diseases) on 23 February 2011. Further information on the orphan designation can be found here: ema.europa.eu/medicines/human/orphan-designations/eu-310845

Filsuvez contains a dry extract from two species of birch bark consisting of naturally occurring substances known as triterpenes, including betulin, betulinic acid, erythrodiol, lupeol and oleanolic acid.

There are two important things to note already, and this appears to be a treatment aimed at children with a rare disease. To my understanding, there are few treatment options available. This being designated an orphan medicine indicates there are no other options. The Wikipedia page for the disease also backs this up.

From what I understand from the EMA review, the treatment appears to help better with certain types of wounds. The effect is merely to shorten the timespan for wounds to heal, but I expect that is more than meaningful to patients with this condition.

The EMA greenlight is relevant because the EMA and FDA usually ultimately OK the same drugs. The drug also has a rare Pediatric Disease Designation and has also received a Fast Track Designation from the U.S. Food and Drug Administration. Meanwhile, Filsuvez has received a complete response letter or CRL (which means they were turned down) from the FDA.

Management is fighting the CRL through the FDA's process. On the last earnings call it commented as follows:

And finally, we will continue to engage with the FDA to seek approval for Filsuvez in the U.S. As previously announced, we are proceeding with the formal dispute resolution pathway with the FDA. We expect to submit for formal dispute resolution in November this year.

I'm unsure how often companies get shot down in the resolution process. Research suggests that the agencies make a similar decision in 90% of cases. Unfortunately, here the FDA has already deviated from that path. This paper suggests the FDA comes around in ~7/10 cases, but it's such a small sample size it probably can't be relied upon. It is at least an indication.

There is some more relevant color from the recent earnings call :

Now to Filsuvez, I'm on Slide 8. We launched the product in Europe in September following the approval from the European Commission in June for the treatment of partial thickness wounds associated with dystrophic and junctional EB in patients 6 months and older. I'm pleased to report that the European launch is progressing well. There has been good demand since launch, exceeding forecasts in the first month, and we are also seeing strong inbound interest in Filsuvez. In September, we also received both marketing authorization approval and orphan drug designation from the MHRA in Great Britain.

In parallel with the initial launch, we are proceeding with market access applications in each of the larger countries, followed by the smaller countries in turn. We hope to have formal reimbursement that will enable us to launch in these additional markets by early 2024, with broad access throughout Europe expected during 2024 and 2025. As a reminder, EU approval can be the basis for submission of marketing authorization applications in other EV markets, such as the Middle East and LATAM, where we also have our own medical and commercial infrastructure in place as well as a fully established distributor network. We also expect to launch Filsuvez in these territories.

And there seems to be an actual demand in the patient population, as I expect that's what is driving inquiries by reimbursement authorities about the roll-out of the product in Europe:

We're still early days, right? So, the revenue is relatively small, but demand has exceeded our forecasts, and that's very encouraging. Plus, we're getting inbounds, which actually is the first time in our history that we've had reimbursement bodies actually contact us about a product. Usually, it's the other way around. But we've actually received inbounds from reimbursement authorities asking when are we going to have the product available in their regions. So, again, that's very encouraging. So we're very encouraged by the early results. I hope that answers your question.

Here is my speculative thesis on what's happening here; in this round of CVRs, the sales-based CVR has disappeared (it is now harder to hit with the FDA approval at least delayed). Management has engaged with the FDA about the CRL. And now what's new is a CVR based on a Priority Review Voucher. The way I understand it the PRVs are sort of a compensation scheme for companies doing rare disease research. Possibly, the FDA wants to see some additional data but is willing to give a PRV. After all, this disease does affect children and there are no treatments available yet. Here's how the FDA describes the PRV :

The Food and Drug Administration (FDA) awards priority review vouchers (PRV) to drug sponsors that develop drugs for tropical diseases or rare pediatric diseases or to use as medical countermeasures. The PRV-which can be sold to another drug sponsor-may be redeemed later to receive priority review from FDA with a targeted review time of 6 months, rather than the 10-month standard review, for a drug application of the PRV holder's choice. The potential for additional revenue from either marketing a drug about 4 months sooner or from selling the PRV could provide an incentive for drug sponsors to develop drugs for these diseases or conditions. From fiscal year 2009, when the first PRV was awarded, through fiscal year 2019, FDA awarded 31 PRVs, mostly for drugs to treat rare pediatric diseases. Of the 31 PRVs awarded by FDA,17 were sold to another drug sponsor for prices ranging from about $67 million to $350 million, according to available data. As of September 30, 2019, available data show that drug sponsors had redeemed 16 of the 31 PRVs to obtain a shorter FDA review time for drugs to treat conditions and diseases such as human immunodeficiency virus (HIV), type 2 diabetes, and different forms of arthritis. These drug applications may not otherwise qualify for priority review.

These seem to be primarily an innovation that has taken off over the last decade or so:

I like how there seems to be patient-driven demand for this product in Europe. This suggests the product is needed, and the interest also shows real-world confidence that it has a meaningful desirable positive effect.

Combined with the new CVR based on PVR, I think management knows what's in the cards but couldn't convince the acquirer to pay it upfront. Why would the company potentially get PVR while not having a shot at appeal? The appeal to the FDA, as well as the negotiation for the PVR, could fail. However, it is only ~$0.19 to receive $1.50 and $1 potentially. The market seems to view the CVR as a long shot (likely due to the CRL). I'm not sure the odds should be this bad, though. There is tremendous upside to the CVR investment, and the milestones could be realized within a relatively short time frame. It is worth mentioning that I've assumed the deal closes, and before this deal, shares were trading at around $7. If it fails at this final stage, there's ~50% downside (or more) from current prices.

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