NVS - Chinook: Surprising Acquisition By Novartis Deal Should Go Through

2023-06-21 10:56:39 ET

Summary

• Novartis has struck a deal to acquire Chinook Therapeutics for $3.5 billion in cash, with Chinook shareholders set to gain $40 per share and a potential additional $300 million if regulatory hurdles are cleared.
• By buying Chinook, Novartis will be able to enter into one of the hottest rare disease spaces with attractive pricing power.
• Despite risks such as regulatory concerns (FTC blocking the deal), we believe there is a high likelihood that the deal goes through.

Key update: The best outcome for investors

On June 12th , Novartis (NVS) announced that the company has struck a deal to acquire Chinook Therapeutics (KDNY) for $3.5Bn in cash. As soon as the news was published, Chinook's stocks gained 67%+ and is currently trading around $37.9.

According to the press announcement :

Chinook shareholders stand to gain $3.2 billion, equivalent to $40 per share in cash, once the deal is closed, in addition to a contingent value right potentially worth ~$300mn if regulatory hurdles go through.

We believe the decision was based on Novartis's effort to acquire late-stage pipeline candidates targeting two distinct mechanisms of action, a) ERA (atrasentan) targeting more early stage, and b) anti-APRIL, targeting late stage. Through acquiring Chinook, we believe Novartis will be able to leverage a pre-existing established rare disease and kidney commercial force to market those two products.

We believe that for investors who hold shares on Chinook, this was the best possible outcome considering that a) overhang around eGFR that we have seen from Travere's ( TVTX ) sparsentan (that did not meet statistically significant eGFR improvement during its FSGS trial) still haunts Atrasentan (if during the ALIGN trial Atrasentan doesn't show statistical significant eGFR, the FDA will likely not allow the drug to be approved through an accelerated pathway), b) the deal was at a significant premium, where we were hoping the stock to trend toward after the positive IgAN data, and c) the risk of the deal falling through (biggest risk for a merger arbitrage trade) is limited considering Novartis is a major big pharma player with deep pockets.

We expect the deal to go through

Moving forward, we believe the key question to consider is whether the FTC will allow the deals to go through. The short answer is that we do not think the FTC will have an issue with the deal due to three reasons, a) IgAN space is crowded with multiple candidates competing, even within the ERA and APRIL inhibitor space (chart below), b) Chinook is a Canadian company (Vancouver based) and would have lesser geopolitical considerations to be made (vs US biotech), and c) Chinook is a small/mid-cap biotech without cashflow (it would be a different story for two large-cap pharmas dominating the kidney space to merge with each other).

IgAN space has become highly congested with multiple players:

Drug

Company

Description

Status

Reduction in proteinuria

Tarpeyo

Calliditas

Oral formulation of budesonide

Approved (accelerated); eGFR data reported Mar 2023

34% (31% pbo-adjusted) in ph3 Nefigard

Filspari (sparsentan)

Travere

Oral endothelin type A & angiotensin II type 1 inhibitor

Approved (accelerated); eGFR data due Q4 2023

50% (35 points adjusted for irbesartan control) in ph3 Protect

Narsoplimab (OMS721)

Omeros

Anti-MASP2 antibody

Ph3 Artemis-IgAN ; proteinuria data due mid-2023

64% (no control arm) in ph2

Atrasentan

Chinook

Oral endothelin A receptor inhibitor

Ph3 Align ; proteinuria data due H2 2023

55% (no control arm) in ph2 Affinity

Iptacopan (LNP023)

Novartis

Oral complement factor B inhibitor

Ph3 Applause-IgAN ; proteinuria data due H2 2023

23% pbo-adjusted in ph2 *

Sibeprenlimab (VIS649)

Otsuka

Anti-April antibody

Ph3 Visionary ends Dec 2026

43% pbo-adjusted in ph2 **

*At highest dose (200mg BID); **pooled data with IV doses 2mg, 4mg & 8mg monthly. Source: Evaluate Pharma & clinicaltrials.gov.

Source: Evaluate Pharma

Risks

1. Regulatory Risk : Even though we believe the deal will go through, there is always a risk that regulatory bodies, such as the Federal Trade Commission, could block or delay the merger. This could happen if there are concerns about creating a monopoly or other anticompetitive behavior, which can impact the share price and expected deal completion.

2. Drug Development and Approval Risk : Chinook's pipeline drugs, like atrasentan, are still in the trial phase and there is a risk that they might not meet their clinical endpoints or fail to gain regulatory approval. Even slight negative news about the drug's efficacy or safety could influence Chinook's share price negatively.

3. Market Competition : The IgA nephropathy (IgAN) space is becoming highly crowded. There are multiple companies, each with their candidates in various stages of development. This intense competition can pose a risk to the future commercial prospects of Chinook's pipeline, which can influence its valuation and Novartis may potentially decide to walk away from the deal.

4. Geopolitical Risks : While Chinook is a Canadian company, and might not face intense scrutiny as a U.S. company would, geopolitical risks can still affect the merger. Unexpected changes in trade policies, political unrest, or a shift in international relations could potentially delay or disrupt the deal process.

5. Financial Risks : If, for any reason, Novartis experiences financial difficulties or changes its strategic priorities, they might reconsider the acquisition, causing significant risk to Chinook's shareholders who are counting on the premium from the sale.

Conclusion

In a major development, Swiss pharmaceutical giant Novartis is set to acquire Chinook Therapeutics for a cash deal of $3.5 billion, causing Chinook's stock to surge by over 67%. Despite the inherent risks involved in such mergers, including regulatory concerns, we believe this deal is poised to go through without a problem. Given Novartis' reputation and Chinook's Canadian origins and status as small/mid-cap biotech, it's unlikely that the Federal Trade Commission would block the deal. We maintain a buy rating on Chinook until the deal closes.

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