XLV - CTI BioPharma: $1.7bn M&A With 85% Premium Expect The Deal To Go Through

2023-05-16 16:26:55 ET

Summary

• Acquisition: Sobi acquires CTI BioPharma for ~$1.7 billion, an 85% premium, aligning with Sobi's focus on hematology.
• Confidence: Main shareholder Investor AB's agreement to rights issue signifies deal confidence; no overlapping drugs between SOBI and CTIC, and Vonjo's safety suggests a smooth transition.
• Risk: A deal withdrawal by Sobi could drop the stock price significantly.
• We maintain a buy rating and a target price of $9.1 as we believe the transaction will likely go through, and the risk of the deal-breaking is highly unlikely.

Big update, CTI BioPharma gets bought with a big premium of ~85%

After we upgraded CTI BioPharma's (CTIC) rating from a hold to a buy in March , on May 10th , the Swedish biopharmaceutical company, Sobi, announced that the company is set to acquire CTI BioPharma for approximately $1.7 billion USD, paying $9.10 per share in an all-cash transaction, representing an ~85% premium over the pre-deal trading stock price. We believe the M&A is the ideal outcome for investors and for the company considering the high up-front premium.

Sobi may be an unknown biotech for some US investors, but Sobi is a Swedish biotech with a market cap of ~$6.7Bn, known for marketing rare disease therapeutics. We believe this premium is justified, considering the strong commercial performance (net sale of $ 54m ) of CTI's drug Vonjo in 2022 and transaction price of about 1.9 times peak sales under similar deals such as GSK/Sierra oncology . Furthermore, we note that the acquisition makes strategic sense for Sobi; for example, the deal will offer diversification to its portfolio by investing in a drug with a strong market share in a niche segment (that Jakafi is currently not indicated in) and considerable future potential (looking at 2022's strong >$50m first-year sales), even though Vonjo is yet to be approved in Europe. Other synergies include, for example, Sobi's focus on hematology aligns with CTI's drug Vonjo, which offers market and knowledge base synergies, especially in the US market.

We expect the deal to go through without a problem

We highlight that Sobi's main shareholder, Investor AB, has agreed to subscribe for its pro-rata share of the rights issue, indicating confidence in the acquisition. Furthermore, we believe the lack of overlapping drugs in Sobi's pipeline and the absence of data readouts anticipated for CTI during the transaction indicate a smooth transition without any hiccups (a break in the deal can lead to stock depreciation considering the ~85% premium). Vonjo's safety has been proven during the multiple clinical trials, and 2022's first-year launch, and any new serious adverse event is unlikely.

Furthermore, we believe that CTIC will likely reach profitability in 2024 (as guided by the company based on the market access and physician's acceptance of the new drug), so the deal should be a net positive for Sobi's shareholders and EPS, justifying dilution through equity issuance (for Sobi shareholders).

Risks

Sobi potentially backing off the deal due to unforeseen reasons could lead to a reversal of the stock price back to pre-deal value, representing close to an 80-85% drop.

Conclusion

We maintain a buy rating and a target price of $9.1 (offer price) as we believe the transaction will likely go through, and the risk of the deal-breaking is highly unlikely for the reasons discussed above (low clinical risk, deal value makes sense, SOBI has the ability to pay, good strategic fit/synergies).

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