MRTX - Evaluating Mirati Therapeutics' CVR Value In The Wake Of The Bristol Myers Acquisition

2023-12-25 05:42:51 ET

Summary

• Mirati Therapeutics is a biotech company specializing in oncology therapies, with its star product being adagrasib for treating lung cancer.
• Bristol Myers Squibb is set to acquire Mirati Therapeutics for $4.8 billion, with shareholders receiving a Contingent Value Right (CVR) worth $12 per share.
• The market values the CVR at $1 per share, indicating an 8.3% probability of it paying off, making Mirati Therapeutics fairly valued as a speculative investment.
• I rate MRTX a "hold" at these levels, but for investors that think MRTX1719 has a higher LOA than 8.3%, then MRTX could be a viable investment.

Mirati Therapeutics, Inc. ( MRTX ) is at the forefront of oncological biotechnology. Its star product is adagrasib, commercially known as Krazati, a drug for treating KRAS G12C-mutated non-small cell lung cancer, which obtained accelerated approval from the FDA. This successful drug got the interest of Bristol-Myers Squibb ( BMY ) to acquire MRTX for a significant payout. The deal is moving forward without obstacles, and the market seems optimistic that it will be completed. In my valuation analysis, I argue that we can price MRTX as a play on the value of the deal's embedded CVR. The CVR itself is a binary outcome that can be worth either $12 or zero. However, the analysis concludes that the CVR is priced adequately, given historical FDA approval rates. Thus, I rate MRTX a "hold."

Business Overview

Mirati Therapeutics is a commercial-stage biotechnology oncology company founded in 1995 and based in San Diego, California. MRTX specializes in developing therapies for targeting genetic and immunological drivers of cancer. The company has agreements for collaboration with Asian Companies, such as Zai Lab, for oncology products. MRTX has a license agreement with Zai Lab for its therapy adagrasib [MRTX849], commercially called Krazati, a small-molecule KRAS^G12C inhibitor, in mainland China, Hong Kong, Macau, and Taiwan. Under the agreement, MRTX receives milestone payments and royalties on sales in the licensed territory.

MRTX's primary product is Krazati , an oral treatment for adult patients suffering from KRAS G12C-mutated non-small cell lung cancer [NSCLC]. Krazati was granted accelerated approval by the FDA on December 12, 2022, as monotherapy for second-line and beyond treatment for NSCLC. Additionally, Krazati is under different stages of clinical trials for several types of cancer, either as a standalone therapy or in combination with other medicines. On November 10, MRTX announced the endorsement of a regulator agency, the European Medicines Agency [EMA], for Krazati as a therapy for certain types of lung cancer.

The other MRTX product that advanced to phase 3 of the clinical trials is sitravatinib, which did not meet its endpoint of overall survival in the Sapphire study that evaluated it in combination with nivolumab (Opdivo) compared to docetaxel for non-small cell lung cancer (NSQ-NSCLC) in patients who have previously received chemotherapy. As a consequence, the company has halted further clinical development for sitravatinib. Instead, MRTX is focused on other early-stage programs such as MRTX1133 for pancreatic cancer, colorectal cancer [CRC], and NSCLC, which is in phase 1/1b clinical trials to test the safety and tolerability of the therapy.

Therefore, as of today, MRTX's current pipeline is adagrasib, MRTX1719, MRTX1133, and MRTX0902. In particular, MRTX 1719 will be key for our valuation later on. This is because MRTX's merger terms include a financial instrument that'll pay shareholders an additional value on top of the $58 per share in cash agreed (more on this later).

MRTX1719 is a MTA cooperative PRMT5 inhibitor in Phase 1/2 clinical trials for MTAP-delete cancers. It is designed to exploit the vulnerability of the cancer cells that present the deleted MTAP gene to bind selectively to the PRMT5-MTA complex to inhibit these cancer cells while sparing healthy cells. MRTX1133 is a KRAS^G12D inhibitor in Phase 1/2 clinical study for Pancreatic, CRC, and NSCLC. This drug targets the cancer mutation KRAS^G12D, treating cancer cells with this genetic change. MRTX0902 is a SOS1 inhibitor that continues to advance in Phase 1/2 clinical trials evaluating results in combination with adagrasib. SOS1 is part of the pathway that can lead to the growth and survival of cancer cells.

Bristol Myers to Bolster Portfolio with MRTX Merger

As previously mentioned, in October 2023, MRTX and Bristol Myers Squibb announced a merger agreement under which BMY will acquire MRTX for $58.00 per share in cash, with an equity value of $4.8 billion. This could be a disappointing price tag, given that MRTX traded close to $100 per share in December 2022, just a year ago. Since then, MRTX's research has progressed, so it appears the deal isn't as favorable as some shareholders might have hoped.

However, the most notable feature of the merger is that MRTX's shareholders will receive one non-tradeable Contingent Value Right [CVR] for each share with a potential value of $12.00 in cash under compliance with certain conditions, adding to the agreement $1 billion of value. This acquisition will allow BMY to add Krazati to its commercial portfolio. This transaction is expected to close by the first half of 2024 after the stockholders approve and the required fulfillment of regulations.

On December 19, MRTX's stock increased 1.6% after an important milestone for the acquisition was reached with the expiration of the HSR waiting period without any action blocking the transaction. In my opinion, the market reaction appears optimistic about the deal's likely closure.

A Binary Outcome: Valuation Analysis

From a valuation perspective, MRTX currently trades at $59 per share. This means it's $1 above the stipulated $58 per share merger price. Thus, the market values the deal's CVR at $1. Looking at it differently, MRTX is now a speculative investment vehicle purely contingent on the value of the CVR. As previously mentioned, the CVR's value is binary. It'll be worth $12 per share or zero within seven years.

Consequently, MRTX's valuation can be assessed from a purely probabilistic perspective. For this, we'll use the expected value approach. According to the deal's terms, the CVR pays $12 per share if two conditions are met: 1) a successful NDA for MRTX1719 and 2) within seven years of the deal's closure. The CVR will be worth zero if these conditions don't occur together. Additionally, the CVR can't be traded, meaning shareholders will own this right at the deal's closing date until it pays off or expires worthless. You can think of CVR as an option in a way, and the price for this right is $1 per share today.

Looking at it differently, if the probability of the CVR paying off was 100%, it would be worth $12, and MRTX would trade at $70 per share. Following that same reasoning, given that the price of said CVR is worth $1 at today's prices, we can infer the market assesses the probability of the CVR paying off at 1/12, or about 8.3%.

Looking at the table above , we can see the approval rates given the research phase. MRTX's MRTX1719 is in Phase 1/2, which isn't the same as Phase 2. However, it's technically a combination of Phase 1 and Phase 2, which is allowed when a particular drug shows promise, expediting its ultimate approval if proven successful. For simplicity of our calculations, we can see that Phase 2 oncology drugs have an 8.1% likelihood of approval [CRC]. This aligns with the market's current pricing of MRTX's CVR at $1, implying an 8.3% LOA within seven years of closing the merger. Therefore, MRTX appears fairly valued from a probabilistic perspective.

However, if you firmly believe it'll get to Phase 3 with ease, then the CVR's value should be higher for you, making MRTX a viable investment. For context, if the research stage were at Phase 3 today, the CVR should be priced at 33% of the total $12 or roughly $4 per share. This would put MRTX's share price at $62. However, remember that your net investment will be just $1 at today's prices because, for every $59 per share you pay today, you'll get $58 in cash when the merger closes. In my view, it's a relatively interesting investment vehicle to speculate on MRTX1719, but for most investors, I'd say MRTX is fairly valued at this juncture, and thus I rate it a "hold."

Conclusion

Overall, MRTX is a promising biotech stock, but its investment profile has changed after the recently announced merger terms. MRTX is more of a speculative investment vehicle that lets investors bet directly on MRTX1719 LOA via MRTX's CVR embedded in the merger's terms. However, at the current $59 per share price tag, I believe MRTX itself is appropriately valued. Hence, I give it a "hold" rating at these levels. Yet, it can be a good financial instrument for those with a more nuanced probability perspective of MRTX1719's true LOA.

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