AZN - Icosavax CVR Seems Fairly Valued

2024-01-05 15:45:11 ET

Summary

• AstraZeneca plans to acquire Icosavax for $15/share in cash and one non-tradable CVR per share.
• The CVR pays out $4/share upon FDA approval of the vaccine candidate and $1/share upon achieving over $200M in sales.
• The CVR is currently fairly valued, and there are risks involved, including the uncertainty of FDA approval and the illiquidity of the CVR.

Icosavax ( ICVX ) is a pharmaceutical company, developing vaccines for life-threatening diseases that AstraZeneca ( AZN ) plans to acquire . The consideration is $15/share in cash and a potential $5/share contingent value right or CVR. Sometimes, CVRs can be interesting for investors, their potential payments can exceed their discounted value in the stock price. However, they are risky, non-tradable assets that often pay out zero and may also be subject to management making business decisions that minimize the chance of CVR payout.

In this case, the CVR appears to be fairly valued today.

The Terms Of The Deal

As announced on December 12, 2023, AstraZeneca plans to tender for Icosavax's shares for $15/share in cash and one non-tradable CVR per share. The CVR pays out ( see Annex B of this SEC filing ) in the following situations:

• $4/share upon FDA approval of within six years of the acquisition of the Icosavax's RSV/hMPV bivalent vaccine candidate (IVX-A12).
• $1/share upon achieving over $200M in sales of the RSV vaccine candidate within seven years of the acquisition.

Valuing The CVR

IVX-A12 is currently in the midst of phase 2 trails. Phase 1 topline data was reported in May 2023 . If we assume that, based on base rate data , that if all goes to plan the phase 2 trial takes 18 months, the phase 3 trial takes two years and FDA approval takes one year. Then FDA approval were all to go broadly to plan would occur in roughly December 2026, or roughly three years from today. That's an estimated timeline, but we can be reasonably confident that the approval process may not be constrained by the CVR's six-year time constraint for approval (i.e. approval 'needed' by early 2030).

However, whether or not the candidate is successful in gaining approval is a major risk. Studies indicate that base rates for phase 2 to FDA approval is of the order of 11% to 26% success on average. This study reaches a similar conclusion with a chance of success from phase 2 to approval of approximately 15%.

Then sales data is much harder to estimate, $200M in sales is not unreasonable, but in the absence of detailed data I'll weight the chances of that at 50% should approval come. This milestone is less material to the investment thesis with the payment lower, the probability lower and the discounting likely higher.

Compared to a price of $15.74/share at the time of writing, the CVR appears about fair value today.

Note you could also discount the $15/share payment slightly for the risk of the deal not completing or the time value of money.

Risks

• There is some small risk that the deal is not completed and Icosavax falls back to its unaffected price of $7 to $10 per share. That's highly unlikely but would create a material loss.
• As shown above in industry data, getting from phase 2 trials to approval is uncertainty and many candidates are abandoned or not approved on that journey.
• There is also the risk for some investors that they simply cannot hold CVRs and become forced sellers or are unable to realize the value of the CVR.
• CVRs are also illiquid and even if they do pay out the process may take years.

Conclusion

Icosavax appears fairly valued today. The CVR might be worth around $0.60/share on an expected value basis. If the price of Icosavax were to drop to around $15.30/share then there might be sufficient upside to compensate for the considerable risk and illiquidity of the CVR. For now it appears to offer risk without return.

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