LNTH - Why POINT Biopharma Global Is At Least A Hold On Disappointing Readout

2023-12-18 14:00:05 ET

Summary

• Eli Lilly and Company wants to acquire POINT Biopharma Global Inc. with a tender offer of $12.5/share, which represented an 87% premium.
• POINT Biopharma Global is trading at $12.45, just $0.05 above the take-out price, and the tender offer could wrap up by December 22.
• The deal is structured for infrastructure/platform value, and if the tender offer fails, Eli Lilly can walk away.

Eli Lilly and Company (LLY) wants to acquire POINT Biopharma Global Inc. ( PNT ). It has an outstanding tender offer for $12.5/share. When Lilly made the tender offer, it came at a 87% premium to the market price. The pharma has extended the tender several times, without getting many takers. Meanwhile, PNT is trading around $12.45. That's within $0.05 of the take-out price, while the tender could wrap-up by 22 December or get extended once more.

PNT reported key trial results (a phase 3 top line readout) for its most crucial asset PNT2002 this month! The company only has one other phase 3 asset .

Most of its $1.3 billion market cap hinges on these stage 3 assets, although the company does have a solid $300 million+ in cash . PNT is a radiopharmaceutical company, and my impression is that this is currently a desirable niche in early-stage biotech.

From the way the deal is structured, the fact that due diligence has been performed, the Lantheus commercialization is in place, and the awkward timing of the tender offer, I get the impression Lilly is buying this for infrastructure/platform value. This readout is likely not key to the buyer.

Eli-Lilly initially screwed itself a little bit here because if this result gets reported and it is terrible, it remains on the hook for the tender at $12.50. Meanwhile, a positive result could have drawn in other bidders and force it to up its offer. The market appears to take the superficially successful readout as disappointing. Shareholders more or less have a put here (at Lilly's expense) and only upside. Given that key trial readouts could have led to explosive results, this was a lovely gift. The market had been taking advantage of this by bidding up the share price. Now, mega-upside is off the table, and reality sets in that Lilly can walk at some point and the put is removed. Lilly only has one mandatory extension remaining (I estimate that this will last until the end of the year), and then they can walk away.

The company took this $12.50 deal instead of much riskier deals with very heavy sets of contingencies from another bidder. That bidder put forth two proposals that were both very complicated and conditional (which was the reason the company didn't accept them). From the 14D-9 :

...On September 27, 2023, Company B sent POINT two alternative revised proposals to acquire all of the outstanding Shares of POINT (the “September 27 Proposals”). 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”).

and

...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. The September 27 Proposals also indicated that Company B would add one POINT director of Company B’s choosing to the Company B Board of Directors. The September 27 Proposals indicated that the proposed transaction would not require Company B’s stockholders’ approval or be contingent on Company B’s ability to obtain financing. The September 27 Proposals did not request exclusivity.

Strangely, the second of these proposals started at $13 per share in cash and stock. After that, it says a lot of other stuff that's supposed to add up to another $7 of value. I get that $13 in cash and stock isn't the same thing as $12.50 in cash. And, of course, there is already the read-out condition right there, but $20 is almost 60% more than $12.50. It is a huge difference. The company has a lot of cash, so there is no imminent financing need.... Why take the $12.50 right ahead of the readout?

Furthermore, the company has already sold the licensing rights to its two most advanced assets to Lantheus Holdings ( LNTH ). I'm scratching my head why the 2nd bidder would be tying all these conditions to the PNT 2002 and 2003 readout. I wouldn't be surprised if that bidder actually was Lantheus.

But if any bidder tied enough conditions to the readout of PNT 2002, it is getting an excellent deal, because Lantheus is paying up to $1.8 billion in regulatory and sales milestones related to PNT 2002 and PNT 2003. The company also still has a royalty cut. Remember, another $300 million of cash is also on the balance sheet. If you put enough conditions in place, you could virtually buy the company with Lantheus' money. Perhaps that's what Lantheus was interested in doing here.

One analyst saw a 60% chance of positive results from the December readout. That turned out correct. That same analyst saw the stock getting sent to the mid-20s on the readout because PNT still has a 25% royalty rate on sales. In that sense, this has been a disappointment. Still, a percentage of the $1.8 billion milestone, as well as royalty revenue, is now one step closer.

It is a strange and confusing situation. At the end of the day, the common does look like an attractive risk/reward even with very little upside. As we're getting very close to the end of December, Eli-Lilly will soon have the option of walking from the tender. If Eli-Lilly walks, that's a disaster. As that possibility nears, the position of investors becomes much more unsure. LLY isn't likely to say anything to mitigate concerns, because it's that uncertainty that could make its tender work.

Could that 2nd bidder come back now that theoretically positive results are out? What are the odds we'll see a slight bump out of LLY? What are the odds, that shareholders are still going to hold out after the disappointing readout? I think it is very unlikely shareholders will still hold out. I think they are going to tender en masse. I don't think the odds are high that the 2nd bidder is coming back.

However, at $12.45 the company is probably a buy and at least a hold. The POINT Biopharma Global Inc. upside is almost 0.40%. Potentially, that's generated within 1-2 weeks. The odds of a bump or a 2nd bidder re-emerging have decreased greatly, but they aren't zero.

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