MRTX - Mirati Therapeutics: Anatomy Of A Long Simmering Buyout

2023-10-10 07:30:00 ET

Summary

• After years of buyout rumors, Mirati has finally received a buyout offer.
• The offer from Bristol-Myers Squibb was disappointing to shareholders who were anticipating a significant buyout premium.
• Although there is always a possibility of additional bidders, the chances look slim, and there is little incentive to open new positions in MRTX stock.

I first covered Mirati ( MRTX ) in 11/2022's "Mirati Therapeutics: Poised For Takeoff" ("Takeoff"). In the intervening year, it harvested accelerated FDA approval for KRAZATI (adagrasib) in treatment of adult patients with KRAS G12C¬-mutated locally advanced or metastatic non-small cell lung cancer (NSCLC). Qualification for the treatment must be determined by an FDA-approved test.

Now as I write on 10/09/2023 nearly a year after Takeoff, Mirati has finally attained a buyout offer from Bristol-Myers Squibb ( BMY ) as discussed below.

This article reviews the terms of the buyout (the " Buyout ") and Mirati's investment merits now that Mirati is in play with the Buyout on the table.

Mirati Therapeutics stock has followed a long downward path from its elevated levels in 2020

Mirati shareholders have en/joyed/dured plenty of high and low points over its ~10-year tenure as a public company. It priced its 10/2013 IPO at $17.50. Its 12/2020 highs >$240 were ephemeral as shown by the chart below:

Mirati's wild 2020 action developed under the penumbra of the ripsnorting cancer therapy market highlighted by a spate of Gilead ( GILD ) acquisitions. I reviewed these in 10/2020's "Gilead's Cancer Follies ". Mirati has since trended down over several years.

Mirati's most recent sharp downdraft during three days in early 12/2022 was directly attributable to Mirati-specific developments. It closed at $92.75 on 12/05/2022, then at $71.52 on 12/06/2022, then at $49.59 on 12/07/2022. In three days it lost more than 46% of its value.

On 12/06/2022 it had released :

...preliminary results from a phase 2 trial, dubbed KRYSTAL-7, and from a group of a phase 1b study called KRYSTAL-1, evaluating adagrasib (400mg twice daily) combined with PD-1/L1 checkpoint inhibitor Keytruda as a first-line treatment of NSCLC harboring a KRASG12C mutation across all PD-L1 subgroups.

While Mirati's release was couched in upbeat terms, nonetheless it MRTX)%20pain,Merck's%20immuno%2Doncology%20drug%20Keytruda." rel="nofollow noopener noopener" > disappointed several analysts. One dropped his price target from $121 to $58, another from $110 to $59. The drop should not have been surprising. There was considerable blue sky baked into Mirati's >$10 billion dollar market cap at its highs.

I question whether the analysts were not using the trial results as an excuse for lowering targets that had gotten ahead of Mirati's fundamentals by a good margin. Mirati's shares have lagged in 2023.

They traded to a closing high for 2023 of $54.26 on 02/02/2023. For the bulk of 2023 they have closed in the $30's and $40's. Mirati's big break upward to close at $62.35 occurred on 10/05/2023. It was propelled by buyout rumors and competition issues.

MRTX shares have long been impacted by buyout rumors

The second lead news item on Seeking Alpha's Mirati news feed as I wrote pre-buyout on 10/08/2023 reported the stock soaring on takeover speculation about possible Sanofi ( SNY ) takeover interest. Mind you the stock jumped ~45% not on a potential takeover bid, but on takeover interest.

The article noted:

The latest potential takeover comes after Bloomberg reported last November that Mirati ((MRTX)) was drawing interest from large pharmaceutical companies ahead of updates on its drug pipeline. The company has received interested in previous years without a deal coming to fruition.

This has to be frustrating for investors who are trying to figure out the merits of investing in Mirati. While it's always exciting when one's shares go up on takeover speculation; the post-excitement hangover when deals don't turn out... not so much.

The whole excitement/disappointment then more excitement/disappointment merry-go-round is of course catnip for traders. Those who can nimbly jump in and out of a stock, without losing their shirt, can profit handsomely from such scenarios.

The Buyout which has triggered share declines, as discussed below, is a particularly undesirable outcome for investors.

BMY's buyout includes a fixed purchase price plus CVRs

A Seeking Alpha news article dated 10/09/2023, the day after the late Sunday afternoon 10/08/2023 Buyout was first reported , succinctly described the situation as:

Mirati Therapeutics ((MRTX)) slipped nearly 6% in pre-market trading, with the stock among the most actively traded ahead of the opening bell. Bristol-Myers Squibb ((BMY)) has agreed to buy MRTX in a deal with a total equity value of $4.8B. The purchase price of $58/share is at a 3.7% discount to MRTX's last close. BMY said the deal will allow it to add MRTX's lung cancer drug Krazati to its portfolio.

The deal also included a $12 per share contingent value right [CVR]. The CVR is contingent on:

1. FDA acceptance of an NDA for MRTX1719 for the treatment of either locally advanced or metastatic NSCLC in patients who have received no more than two prior lines of systemic therapy

2. within seven years after the closing of the merger.

The market is not valuing the CVR at anything close to a par of $12. Instead as I write on 10/09/2023 Mirati shares trade at a discount to the nominal $58 offer price. There is significant doubt as to whether the CVRs will ever benefit shareholders.

Bristol-Myers' buyout was unattractive for those who were looking for a big premium

Buyout premium expectations

Mirati shares have usually responded positively to buyout rumors on expectation that any buyout would involve a big premium. The Buyout falls short in this respect. I submit that there are good reasons for this.

Mirati's financial fundamentals are unappealing

I was not expecting a big premium to be built into a buyout. Mirati's losses from operations for its three most recent full years 2020 (-$369,363), 2021 (-$573,181) and 2022 (-$759,589) have been growing like gangbusters. The excerpt below from its 2023 10-K paints a sorry picture:

Mirati has been a loss-making machine since its inception. Its accumulated deficit through 2022 is $2.5 billion (10-K p. 36).

During the Call, CFO Seltzer reported its latest results and cash burn expectations for full year 2023. Expenses for Q2, 2023 compared to those of Q2 2022 were:

1. R&D expenses - second quarter of 2023 $124.2 million, compared to $128.3 million for the same period in 2022;
2. SG&A expenses - second quarter of 2023 $75.5 million, compared to $54.2 million for the same period in 2022;
3. aggregate of R&D and SG&A expenses $199.2 million for Q2, 2023 compared to $182.5 for the same period in 2022.

At its elevated share price and market value on 10/08/2023, Mirati was fully valued

Mirati's run from a closing price of $42.89 on 10/04/2023 to its latest closing price of $60.20 prior to the Sunday afternoon Buyout left it with no leeway for any buyout premium. The valuation of a development-stage biotech such as Mirati is more art than science.

In Mirati's case whether one approaches the stock artistically or scientifically one looks in vain to support a significant valuation premium above $4 billion. Its significant R&D costs show how expensive it is to maintain its pipeline of therapies in development.

Its KRAZATI FDA-approved therapy is a second-to-market, second-line therapy. It has only two-quarters of its revenues. It is too early to project its full revenue potential. We do know that it generated $6.3 million in Q1, 2023 revenues and $13.1 million during Q2, 2023 as stated during the Call.

In terms of Seeking Alpha's ratings for Mirati, the 19 Wall Street Analysts covering the stock give Mirati an average price target of $61.71. Its Quant ratings, accessed on 10/09/2023 gave it a D- valuation grade at a price of $57.02. Neither approach finds much alpha in shares of Mirati.

Conclusion

There has been no lack of takeover smoke in recent years impacting Mirati's sharers. As for takeover fire in the form of an actual offer, Bristol-Myers Squibb is so far the only company that has been willing to take the plunge.

Now that Mirati is clearly in play, Sanofi or some other large pharma could make a new sweetened offer at any time. This potential may ignite FOMO in some. I submit that at its current 10/09/2023 price of $57.02, Mirati is dead money. There is little reason to add shares now.

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