PNT - POINT Biopharma Global: Why The Market Believes That A Second Bidder May Emerge
2023-11-14 02:11:42 ET
Summary
- POINT Biopharma Global is currently trading above Eli Lilly's tender offer price of $12.50.
- The reason for this is that the market believes that a second bidder may emerge, and the tea leaves support this possibility.
- BVF fund has refused to tender their shares, adding to the speculative fire.
- Considering the looming readout of SPLASH by the end of this quarter, it makes sense for existing POINT shareholders to hold onto their shares.
Introduction
Twists and turns in POINT Biopharma Global ( PNT ) acquisition saga may make it interesting public biotech story of 2023. About a month ago, POINT Therapeutics announced it had agreed to be acquired by Eli Lilly ( LLY ) for $12.50 a share in cash. Today, the stock trades at ~$13 at the time of the writing. This phenomena in the public markets, where a stock trades above its acquisition price , is rarely seen.
It should be noted that this deal has been approved by both boards. POINT Biopharma Global has also not reneged on the deal, nor has Eli Lilly pulled their existing tender offer. Instead, there exists speculation that another bidder may emerge. Adding to the drama is that BVF Fund — which owns ~16.5% of POINT — has publicly come out against the deal. In reaction shortly thereafter, Eli Lilly extended the expiration of their tender offer from Nov. 9 to Nov. 16.
At the heart of this speculation is a looming binary event: SPLASH , a phase three trial evaluating their lead asset as a treatment for metastatic castrate resistant prostate cancer (mCRPC), is due to report top-line results by the end of the quarter. All eyes will be on the outcome of this trial, as it could ignite a bidding war for POINT.
Thesis
In light of the facts surrounding the story and chance that the outcome of SPLASH is positive, I would assign POINT Biopharma Global a hold rating. (Even though shares of POINT are currently trading at a ~50 cent premium to the buyout price.) At this price point, the downside has a hard limit and the potential upside is tremendous; another buyer emerging is a real possibility that should not be discounted.
Why POINT Is Valuable
POINT Biopharma Global's platform is premised on precision via their novel radio-ligand therapy technology. In other words, their approach to treating cancer is based on delivering targeted doses of radiation to specific cells. The thinking here is that greater precision will translate into more damage to cancer cells and less damage to healthy cells, which then allows the body to tolerate a greater volume of treatment too. By itself and in combination with other therapies, POINT Biopharma Global believes that their novel radiotherapies can make a difference in potentially treating all types of different cancers.
This precision based approach to radiation therapy has already been vindicated by the approval of Novartis' ( NVS ) Pluvicto as a treatment for mCRP cancer last year, which shares a similar approach to POINT Biopharma Global's various therapies. What differentiates POINT Biopharma Global from Novartis is not just the possibility that PNT-2002 may outperform Pluvicto in treating various cancers, but their relentless focus on manufacturing.
Pluvicto's launch has been plagued by supply-chain issues , leading to a shortage that was " resolved " only a few weeks ago. Novartis made a mistake by not bolstering their supply-chain capability prior to launching Pluvicto; POINT Biopharma Global has taken the opposite approach . Instead of rushing clinical development, POINT Biopharma Global focused on guaranteeing their ability to manufacture. (The nature of advanced radioligand therapy necessitates a reliable supply-chain to ensure timely delivery of specialized therapy to patients.)
Manufacturing is the core of the business, with construction of our commercial-scale facility beginning even before initiation of phase 3...In our early days people accused us of over-allocating to manufacturing supply chain, suggesting that a junior biotech shouldn’t be buying physical assets, that it should be focusing on increasing the value of intellectual property."
Consequently, POINT Biopharma Global counts itself as one of the few biotechnology companies in the world that has the ability to manufacture advanced radiopharmaceutical products at a commercial scale. Their new 180,000 square foot manufacturing facility in Indiana is among the largest in the world and can deliver radioligand therapies to anywhere in the US in just 12 hours. (EU shipments can arrive from the facility in less than 72 hours.) Their facility is fully operational and 100% owned by POINT Biopharma Global. The long-term strategic advantage that can be gleaned by acquiring the keys to their castle is enormous. Moreover, the experience that POINT Biopharma Global has gleaned in navigating the production and supply-chain process is immeasurable. Any large biotechnology company looking to develop their own radioligand pipeline faces an immensely complex manufacturing terrain. Buying POINT Biopharma Global would be buying the expertise necessary to navigate said terrain.
A Low Ball-Deal
It is strange to juxtapose the value implied by the tender offer with POINT's immense potential. The $12.50 all cash offer assigns POINT Biopharma Global a ~$1.4 billion market capitalization. To give some perspective from their latest earnings report , POINT Biopharma Global has ~$500 million in assets, of which ~$423 million are stored as cash or liquid treasuries. ~$50 million is represented by property, plant, and equipment (most of which is staked in their CORE production facility + their Toronto Research center.) POINT Biopharma Global had no urgency to do this deal, as their net loss has hovered at around ~$25 million for the past four quarters.
In essence, Eli Lilly was able to acquire POINT Biopharma Global's entire pipeline, manufacturing expertise, supply-chain relations, and hard assets for less than a billion dollars. Pluvicto, which is similar to PNT-2002, is conservatively expected to reach peak sales of ~$2 billion . If PNT-2002 simply matches the efficacy of Pluvicto, then it has the potential to earn a significant share of the market just on the basis of demand from a heterogeneous patient pool. (Oncologists will want to have more treatment options to provide if patients stop responding to their current treatment.) If PNT-2002 outperforms Pluvicto, then it has the potential to dominate the market. Just assuming that PNT-2002 reaches half of Pluvicto's peak sales and then assigning a conservative price to sales multiple of 2 (the sector average is ~5-6 ) gives it a valuation of $2 billion.
Such a crude means of valuing POINT Biopharma Global does not even take into account the intangible value of the supply-chain and the human capital surrounding it, which can either be used to build out a new radioligand pipeline or bolster an existing manufacturing base. No matter how I dice it, I keep seeing signs that POINT Biopharma Global has sold themselves short in agreeing to this tender offer. As demonstrated by BVF's refusal to tender their shares prior to SPLASH's readout, it seems that my perspective is shared by others.
Reading The Tea Leaves: The Shadows Of Party
Fueling the sense of speculation is that there was another interested party in the picture that submitted their own bid for POINT. In an SEC filing illuminating the background of the merger, it was revealed that "Company B" submitted their own proposal to acquire the entirety of POINT Biopharma Global at the same time that POINT Biopharma Global was negotiating with Eli Lilly. The following quote reveals the details of their final offer:
The first proposal did not include the SPLASH Read-Out Condition, and was for an aggregate of up to $20.00 per Share in cash, stock and contingent value rights, payable as follows: (1) $8.50 per Share in cash and stock payable at closing; (2) if the results of the top-line primary analysis of the SPLASH Clinical Trial satisfied a proposed “base” case of detailed pre-defined criteria, an additional $4.50 per Share in cash and stock payable at closing and a contingent value right of $3.00 per Share in cash or stock payable upon regulatory approval; (3) if the results of the top-line primary analysis of the SPLASH Clinical Trial satisfied a proposed “upside” case of detailed pre-defined criteria, an additional $7.50 per Share in cash and stock payable at closing; and (4) two $2.00 per Share contingent value rights tied to net sales, payable in cash or stock, at Company B’s election (the “First September 27 Proposal”).
The second proposal included the SPLASH Read-Out Condition, and was for an aggregate of up to $20.00 per Share in cash, stock and contingent value rights, payable as follows: (1) $13.00 per Share in cash and stock payable at closing, provided POINT met the SPLASH Read-Out Condition; (2) if the results of the top-line primary analysis of the SPLASH Clinical Trial satisfied a proposed “upside” case of detailed pre-defined criteria, an additional $3.00 per Share in cash and stock payable at closing; and (3) two $2.00 per Share contingent value rights tied to net sales, payable in cash or stock at Company B’s election (the “Second September 27 Proposal”). The September 27 Proposals would result in POINT’s stockholders owning an aggregate of between approximately 6.3% and approximately 12.3% of Company B.
Source: SEC 14D-9 Filing
Both offers are much more complex than Eli Lilly's all-cash deal with no stipulations, but both also have the potential to deliver much more value for POINT Biopharma Global's shareholders. It makes sense why POINT Biopharma Global would want to lock the profits from the sale of their company, rather than have it hinge on the outcome of SPLASH in any way. The use of contingent value rights (CVRs) makes Company B's deal much less appealing.
But what this crucial information does reveal is that there is another interested party willing to pay a premium to the current tender offer if SPLASH has a positive readout. So now, a huge question looms over POINT: what happens if SPLASH does succeed? (Primary completion is estimated to be by the end of December.)
It makes sense that SPLASH succeeding could attract more attention to POINT Biopharma Global, thus generating another bid from an interested party. It could be company B, or it could be another party interested in owning a promising asset and concrete radioligand platform. There also exists the non-zero chance that another bid from a party looking to lock down an acquisition of POINT may emerge prior to SPLASH's readout.
Conclusion
Whatever the case may be, it makes sense to hold onto your shares. A positive readout of SPLASH later in December could translate into another bidder emerging, especially when you consider the context that another party already submitted a premium bid to acquire POINT Biopharma Global on the premise of SPLASH succeeding.
The refusal of BVF to tender their shares, and a recent shareholder value lawsuit concerning the deal , also points to the possibility that Eli Lilly could sweeten their tender offer in order to arrest any shareholder dissent.
Moreover, even if SPLASH does fail, the downside of holding onto your shares is capped only to ~50 cents (~4%) from the current level of ~$13 a share. The upside, on the other hand, is enormous. Remember, Company B was willing to offer a deal worth ~$20 a share on the risky premise that SPLASH succeeds. If SPLASH does hit its primary endpoint next month, how much would they be willing to offer? This question is hard to answer, but worth keeping in the back of your mind.
Consequently, I would assign POINT Biopharma Global a hold-rating. It simply does not make sense to sell your shares now when there is so much more potential upside in the short-term.
Risks To Thesis
1) One primary risk to my thesis is that it's entirely speculative. Shareholders stand to lose about ~4% of their investment in the event that Eli Lilly succeeds in acquiring POINT Biopharma Global. Considering how both boards approved the deal, it would require a much more valuable deal to emerge in order for POINT Biopharma Global to renege on their agreement. This deal emerging in the first-place is not guaranteed.
2) Another risk is that SPLASH could fail, and then Eli Lilly pulls their tender. This is highly unlikely in my view, but still a possibility. If they were worried about this possibility, then they would have structured their deal to include a CVR that pays off in the event that SPLASH succeeds. Their willingness to offer hard cash for the entire company suggests that they are willing to stomach the failure of SPLASH. Moreover, it would result in significant damage to the goodwill of Eli Lilly, possibly making it harder for them to acquire companies in the future.
3) A key risk for current shareholders is that the FTC may find issue with it. This is highly unlikely as Eli Lilly does not have a radioligand segment in their pipeline, but it is still a possibility. The FTC under Lina Khan has taken an ambitious approach in litigating against biotech acquisitions and mergers, and POINT could find itself in regulatory crosshairs. Such an outcome has the potential to kill the acquisition completely, sending the stock below the $12.50 price floor provided by Eli Lilly's tender offer.
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POINT Biopharma Global: Why The Market Believes That A Second Bidder May Emerge