ALBO - Buyout From Ipsen: Do Not Underestimate The Value Of Albireo's Contingent Value Right

Summary

• The backbone of the Albireo is Bylvay, a product in a platform already approved in one indication and expected to be approved in two significant larger indications.
• Ipsen recognizes the huge potential and is offering $42 plus a $10 CVR to acquire Albireo. The deal is expected to close in the first quarter of 2023.
• In addition to Bylvay, Ipsen will also benefit from the early stage compounds with unique mechanism of action and the established sales infrastructure.
• The CVR offers an opportunity to investors who are willing to take the risk.

I have highlighted Albireo's undervaluation and potential in numerous Seeking Alpha articles over the past few months . The A-Team has done a remarkable job over the past few years. In addition to the approval of Bylvay in PFIC in both the U.S. and Europe, an indication expansion in ALGS is expected in the second half of 2023 based on positive study results. The BOLD study in BA has been fully enrolled , with top-line data expected in 2024 and approval in 2025. Moreover, the pipeline has been further strengthened. With A3907 and A2342, the company has identified compounds with a unique mode of action that are currently in early clinical trials and are expected to address an even larger market than Bylvay.

The positive progress at Albireo ( ALBO ) was also observed by other market participants and resulted in strong strategic interest from various companies . The result of this strong strategic interest was the acquisition of Albireo by Ipsen ( IPSEY ; IPSEF ), which ended up making the highest bid. Ipsen is offering to acquire all of the remaining shares of Albireo for $42 in cash plus a $10 per share contingent value right ((CVR)) related to FDA approval of Bylvay in BA before the end of 2027.

Following Myovant Sciences ( MYOV ), Albireo is the second company in a short period of time for which I am ending coverage due to a buyout. Finally, in my last article, I would like to evaluate the buyout offer as well as the potential resulting from the CVR.

Business of Albireo

Albireo is a commercial-stage biopharmaceutical company focused on diseases of the liver, particularly ultra-rare pediatric diseases. Bylvay, a product as a pipeline, is already approved for PFIC in both the US and Europe and is generating first revenues. In addition, Albireo has filed an sNDA for an indication expansion in ALGS and is investigating the efficacy of Bylvay in a phase 3 trial in BA.

In addition to the approved IBAT inhibitor Bylvay, the powerful pipeline also includes two early-stage developing therapeutics with a unique mode of action: A3907 as an ASBT inhibitor for adult cholestatic liver disease, and A2342 as an NTCP inhibitor for viral liver disease.

If you are not yet familiar with Albireo as a company, I recommend reading my previous articles .

Background of the Merger

Throughout 2022, management has had many strategic discussions with various interested companies . Management's initial intention was to identify a partner for A3907 and A2342.

We have the capabilities and plans to develop both A3907 and A2342 in rare disease, at the same time, both drugs have generated strategic interested with the potential to develop the products in more or larger diseases, so we remain open minded at this stage to the path forward for value creation.

Source: Cooper, Q1 business Update

The first company interested in A3907 was Ipsen. But shortly after Ipsen expressed interest in A3907, another company confirmed its interest and made an offer to acquire Albireo as a company. The last and highest bid was $57 plus a CVR of $8, representing a premium of 82.7% to Albireo's previous closing price.

However, just as Albireo started to initiate the transaction, the interested company withdrew its offer and stated that its board of directors did not approve the offer. The main reasons for the withdrawal of the offer were, among others, macroeconomic factors and the poor sales performance of Bylvay.

In the end, 3 companies entered into a bidding war for Albireo. Ipsen not only won due to the highest bid, but also promised the fastest and easiest execution of the potential acquisition.

The premium to the last closing price of $22.82 prior to the announcement of the buyout represents a premium of approximately 110% and may increase up to 126% taking into account the CVR.

The Ipsen offer includes a CVR

Ipsen's offer includes both a $42 cash component and a $10 CVR. Ipsen initiated the offer on 23 January and shareholders are encouraged to vote on its acceptance until 21 February. If Ipsen beneficially owns more than 50% of the total number of shares outstanding, the acquisition can be completed without further shareholder approval .

A CVR entitles the owner to receive benefits upon the realisation of certain predefined events . CVRs are often used in transactions when the value of a business is highly dependent on a binary event and the involved parties do not agree on the valuation. Most of the CVR's have an expiration date, beyond which the rights to the additional funds will not apply .

In this particular situation, the CVR holders are entitled to receive a further $10 should Bylvay receive FDA approval in BA. The approval must be obtained before 31 December 2027. With this extended timeline, Ipsen reserves the right to include more patients in the BOLD study and thus increase the probabilities of success.

The true value of the CVR is $10 in the case of approval, while there is no payout in the case of rejection of the sNDA. Nevertheless, today's illustrative net present value can be calculated using simple techniques. For this purpose, the $10 is multiplied with the probability of realizing the milestone and discounted back to the valuation date.

The chart shows a list of possible scenarios, discounted with an interest rate of 12%. Albireo's advisors set a fair value of $3.26 for the CVR by simply averaging both the probability of realization and the timing.

In my opinion, the CVR should be valued higher. I myself assume a probability of success of 80%. Even if more patients were to be included in the trial, I expect approval by the end of 2026, resulting in a fair value of $5.10 for the CVR.

Bylvay has demonstrated the ability to reduce both pruritus and serum bile acids with a very favorable tolerability. The reduction in serum bile acids was associated with long-term liver survival, the primary endpoint of the BOLD study.

Source: Albireo: Reasons for a successful transformation into a commercial company.

Due to the competitive market and patent situation, Ipsen has an incentive to achieve regulatory approval in the largest indication as quickly as possible. The potential additional revenue is totally disproportionate to the additional CVR payout of $240 million. I therefore do not assume that Ipsen is intentionally delaying the approval in order to avoid payments.

Albireo assumes that no other company will make a higher offer and that the deal with Ipsen will be executed. Nevertheless, Albireo can bail out of the deal under certain specified circumstances by paying a termination fee of $36 million.

Evaluating the transaction

Finally, I would like to make an assessment of the deal. In my opinion, Ipsen has landed an excellent deal and got Albireo very cheaply. This is also shown by the first analyst question in Ipsen's Conference Call and Webcast regarding the Acquisition of Albireo:

I think, the main question that people have is why you are able to get something with peak sales potential of around $800 million for something in the region of $1 billion. Normally, you seem to pay a much higher multiple of potential peak sales.

Source: Jo Walton, Pharma Analyst, Credit Suisse

Albireo recommends that shareholders accept the offer based on the following arguments:

• The offer represents a substantial and compelling premium to the historical market prices of the Shares.
• The tender offer will be paid in cash , providing shareholders with secure and immediate liquidity, which is of great value especially in the current market conditions.
• Considering the potential value of the best strategic alternative , including other acquirers and acting as a stand-alone business.
• Taking into account the likelihood and the speed of the transaction.

Of course, these aspects all make sense when considered in addition to the fair value of a company. High gains overnight satisfy all shareholders, especially when many other attractive investment opportunities exist in the market. Nevertheless, I believe that the timing of the transaction was not favourable for Albireo shareholders. Many of the points reflect only the present and less the potential. Furthermore, another potential acquirer was willing to pay $65 per share for Albireo a few months ago.

To create a better understanding, I want to show the elements of the transaction and their valuation.

The transaction focuses on Bylvay, which is approved in PFIC and is a potential product in the pipeline, potentially gaining approval in two other indications.

The launch of Bylvay in PFIC in the US was significantly below expectations and led to a reduction in guidance in May. It should be noted that PFIC is the smallest of the three indications and is expected to account for only 25% of peak sales. In addition, the global rollout will really accelerate in 2023 following the launch of Bylvay in several European countries in recent weeks.

Overall, sales figures were mainly responsible for the low share price as further progress was made in clinical development. In addition to full patient enrollment in BA, Albireo was also able to publish positive study results in ALGS. Based on these study results, approval is likely in the second half of 2023. ALGS is more than twice as large as PFIC, for example Mirum ( MIRM ) estimates potential peak sales of 500 million in the US alone.

As part of the acquisition, Albireo created various scenarios about the potential sales revenue growth in the coming years. It is evident that Albireo would have more than doubled its revenue both this year and next year. The NPV at a discount rate of 12% would be over $1.7 billion in Base Case Scenario B, while even in Scenario D and excluding the revenue potential in BA, it would be an NPV of over $1 billion.

Especially considering that Albireo was in good financial position and there was no need to sell its lead product, it is questionable whether a price of $950 million for Bylvay is justified, not considering the $260 million in cash. Of course, the CVR also contributes a total of $240 million, but the numbers clearly show the enormous impact of BA.

To determine a benchmark for the acquisition price, Centerview analyzed the ratio of enterprise value to expected 2023 revenues for selected companies. Based on this analysis, Centerview defined a fair range of multiples between 3.0x and 6.5x on projected 2023 revenue.

Of course, these comparisons serve as a benchmark for reasonable valuation, but individual aspects must always be taken into account. For example, BioCryst ( BCRX ) has a revenue multiple of 5.5x, but the product has been on the market since late 2020 and addresses the entire patient population in a market with already approved products. Bylvay, on the other hand, is a platform product with approval expected in ALGS in the second half of 2023 and in BA in 2025. Finally, in the case of an acquisition, even higher premiums on multiples are typically paid.

Using the average multiple of 8.3x and Albireo's revenue forecast, Centerview would have derived a fair value of approximately $1.4 billion in one year and nearly $5 billion in five years.

The potential value of A3907 and A2342, on the other hand, is not included at all in the deal. The year 2022 was dominated by the search for potential partners for the unique assets. This process has massively delayed further development. For example, Albireo had originally planned to start a Phase 2 clinical trial with A2342 in 2023 . Instead, the Phase 1 trial has not even started yet. Albireo's goal was to bring these assets to a point where their true value could be realized based on the study results. By selling these assets, Albireo will no longer be able to achieve its goal and will be selling the assets below their true value.

For Albireo, it's important to bring early assets into points where people understand their real value.

Source: Cooper, Post-AASLD Business Update

In addition to the pipeline, Ipsen will also benefit from Albireo's established sales infrastructure. Ipsen has a drug in liver disease in a Phase 3 trial as a result of the license agreement with Genfit ( GNFT ) for the global rights to Elafibranor in PBC, with top-line results expected in the first half of 2023. In the event of positive study results, Ipsen will need to establish its own sales force. The acquisition will allow Ipsen to benefit from Albireo's existing structures as well as Albireo's relationships and experience with prescribers and payers.

Summary

To summarize this transaction, I would like to quote the headline of my last article: The commercialization of Bylvay is the key to a fair valuation . The launch of Albireo in the US was not very successful. For this reason and due to other macroeconomic factors, Ipsen's offer is acceptable, but does not represent the true value of Albireo, despite the high premium. Ipsen expects to close the transaction in the first quarter 2023.

In my opinion, shareholders should continue to hold the stock until the acquisition is completed to take advantage of the CVR. Investors willing to take the risk can even buy the stock at current prices for a potential $10 payout by the end of 2027 for a bet of about $2. In contrast, risk-averse shareholders should liquidate or reduce their position.

Finally, there is always the possibility that another company will make another bid for Albireo. However, I personally do not expect this to happen. On the one hand, the previously interested parties have already made their highest offer, and on the other hand, the time required for due diligence and the submission of a binding offer is limited.

For further details see: