TEVJF - Opiant Pharmaceuticals: Nano-Cap Buyout With Interesting CVR Thrown In

Summary

• I love to get a CVR during a takeover process.
• This happens a lot when pharma or biotech companies with important unapproved assets get bought.
• The CVR helps to bridge the gap between the price the seller wants and the buyer wants to pay.
• They are always uniquely structured which makes them a little bit of a headache to figure out.
• If you can get them cheap enough, they can be really attractive.

Opiant Pharmaceuticals, Inc. ( OPNT ) is a nano-cap pharma that's being acquired by small-cap pharma Indivior PLC (INVVY). Indivior is laying out $20 in cash and a contingent value right that's potentially worth up to $10 per share. Opiant is trading at $20.21, meaning you only pay $0.21 for the option to receive up to $10 in the coming years. That's if we simplify the situation to assume the merger closes. Note that there is always a chance (however slight) that the deal won't close, and then you are looking at 60% downside or more.

Opiant's primary asset is OPNT003 and Indivior probably wanted to take it out before the PDUFA date.

Indivior has around a billion dollars in cash and investments and a favorable free cash flow profile. I'm not worried about whether they have the money.

The companies had to withdraw and refile under Hart-Scott-Rodino, or HSR. This means they have another shot at filing sufficient and clear documents to avoid a 2nd request. A 2nd request means the antitrust authorities would look into the deal more profoundly, and it means things take a lot longer. This has been avoided, but the refining was done on January the 3rd, so it takes at least until February the 3rd before HSR runs out.

Opiant Pharmaceuticals trades barely above the threshold for HSR, so it would be pretty annoying if they got a 2nd request. It is a deal where I can imagine antitrust authorities would be hesitant to let it pass if they felt they didn't have enough information.

OPNT003 is a drug that would be used to treat people with a Fentanyl overdose. It is supposed to work better and/or be easier to administer than what's in the market right now, and unfortunately, it appears this is still a growing market.

Indivior specializes in drugs that treat addiction. As per Indivior CEO Mark Crossley on the merger (I've emphasized what I think regulators would take note of):

"Opiant's portfolio of product candidates is an excellent strategic fit that diversifies and strengthens our offerings, while Indivior's strong commercial capabilities are expected to propel a combined product pipeline with the potential to help patients along a continuum from substance use disorder and rescue to recovery . The combination with Opiant will provide Indivior with one of the most comprehensive and relevant treatment platforms to address the ongoing U.S. opioid and overdose epidemic and extends our leadership position in addiction treatments. We look forward to working with Opiant's talented team as we undertake our shared mission of changing patients' lives through access to life-transforming treatment for substance use disorders."

An antitrust regulator would likely not be thrilled with a pharma tying up the market of addiction treatment and/or overdose treatment. However, that doesn't seem to be the case here.

Almost all of Indivior's assets are focused on treating addiction. You take these, so you don't use/abuse substances. The Opiant assets are aimed at patients that have overdosed.

This isn't likely to be a killer acquisition that regulators don't like. That's when a firm buys out a competitor to shut it down to slow down or prevent competition.

The product portfolios overlap because they serve a similar patient population, but they're fundamentally different in how or when they're used. OPNT also has financial backing and collaborates with U.S. government agencies, which is a soft sign that there is at least governmental/societal interest in getting its product out there.

Without the acquirer, that becomes a lot more challenging. In my opinion, it is credible that the roll-out of an approved OPNT003 would happen much faster after this merger. I don't think the deal results in an anti-competitive situation.

There's a special meeting of stockholders on March 1, and I'd expect the deal to close out soon after, provided HSR runs out without any issues.

The merger trades at a slight negative spread before taking into consideration the CVR, so let's take a look at that:

Each CVR entitles the holder thereof to receive four contingent cash payments with an aggregate maximum amount payable of $8.00, without interest (each, a “Milestone Payment”) if the following milestones are achieved:

•$2.00 per CVR upon achievement of net sales of OPNT003 of $225 million or more during any period of four consecutive quarters prior to the seventh anniversary of the U.S. commercial launch of OPNT003.

•$2.00 per CVR upon achievement of net sales of OPNT003 of $250 million or more during any period of four consecutive quarters prior to the third anniversary of the U.S. commercial launch of OPNT003.

•$2.00 per CVR upon achievement of net sales of OPNT003 of $300 million or more during any period of four consecutive quarters prior to the seventh anniversary of the U.S. commercial launch of OPNT003.

•$2.00 per CVR upon achievement of net sales of OPNT003 of $325 million or more during any period of four consecutive quarters prior to the seventh anniversary of the U.S. commercial launch of OPNT003.

I'm not a drug abuse, public health or biotech expert, and it is challenging to say whether these sale targets are achievable. However, the drug is supposed to challenge Naloxone, owned by Emergent BioSolutions ( EBS ). EBS projects nasal naloxone product sales within $350mm–$365mm. Generics have just arrived on the market from Teva ( TEVA ) and Sandoz. The company is also applying to the FDA to get Narcan approved for OTC sale. That could boost sales by a lot. Experts argue it would save many of the 70k deaths per year because of OD's:

Narcan, which is one name brand for the drug naloxone, quickly reverses the harmful effects of opioids. It works fast. It's easy to use. People start breathing again. But right now naloxone is often really hard to get. Dr. Rahul Gupta, head of the White House Office of National Drug Control Policy, points out that last year alone, 80,000 Americans died from opioid overdoses. With naloxone, many of those deaths would have been avoided.

There are all kinds of expensive research reports floating around that estimate the Naxolone spray market at $1.1 billion already or that project growth to $1.94 billion by 2028 or $1.3 billion in 2031

A lot will depend on how much better the product is and if it justifies a premium price. My understanding is that victims sometimes require 2-4 applications of Naxolone. Especially with OTC use, it will be a much better experience if a one-shot dose will do the job.

To my understanding, the clock starts running on the CVR once the product is approved. If the sales targets are then achieved in a sequence of 4 quarters within the next seven years, the corresponding milestones are due. The target looks ambitious but certainly not impossible to me.

I like CVRs, and I tend to buy into these merger situations ( here is another public write-up , and here's a non-pharma one ), so I've bought some shares in this merger as well. It is not my favorite merger with CVR because of 1) the HSR refiling, 2) OPNT003 isn't approved yet, and 3) I'm not quite sure how much better the product will be compared to the incumbent 4) It also appears Narcan has some branding power which means it may take time to acquire market share even if the product is solid. If I put aside the uncertainties around closure, the upside is vast compared to the outlay.

This is likely a decent investment even if Opiant Pharmaceuticals, Inc. is 80% likely not to achieve even the first milestone paying out $2. It is simply so profitable if one or more milestones are achieved. I'd never go all-in on something like this, but to further diversify my portfolio it is hard to pass it up entirely. I've allocated a ~3.8% of the net asset value of my portfolio here.

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