ORTX - Why The Small Orchard Therapeutics Buyout Is Worth A Look

2023-12-04 07:02:21 ET

Summary

• Kyowa Kirin is acquiring Orchard Therapeutics for $16 per share and a CVR worth up to $1, adding up to a $350 million deal.
• The acquisition comes after extensive research collaboration and will allow Kyowa to accelerate research programs.
• The CVR holders will receive $1.00 per ADS if regulatory approval is granted for the commercial marketing and sale of OTL-200 in the U.S. for the treatment of MLD.

Kyowa Kirin Co. (KYKOY) is buying Orchard Therapeutics ( ORTX ) at $16 per share and a CVR of up to $1. The stock is trading at a small premium to the cash takeout. These are financial instruments that are used in mergers and acquisitions. They represent a right to possible future payments based on milestones or events post-acquisition. The deal adds up to around $350 million before the CVR. The buyer is a $8.5 billion market cap Japanese pharma. The acquirer can fund the acquisition out of cash, including the CVR. Not to mention, the acquired company has over $100 million in cash. A nice discount to the buyer.

This transaction was put together after both companies cooperated in research on Orchard's hematopoietic stem cell ((HSC)) gene therapy.

This collaboration led Kyowa to want to buy Orchard and get it off the market. Orchard agreed to it because the board thinks it can do more research programs and do them faster than if the company were to remain independent. Small biotech deals where big pharma already collaborates with the target are unlikely to fail.

The CVR says ORTX holders get $1.00 per ADS related to the approval of OTL-200 for treating MLD in the U.S:

The CVRs represent the right to receive contingent payments, payable to the Rights Agent for the benefit of the holders of CVRs, if regulatory approval is granted by the U.S. Food and Drug Administration for the commercial marketing and sale of OTL-200 in the United States of America for the treatment or prevention of metachromatic leukodystrophy ((MLD)), which includes as an intended patient population (for clarity, in addition to any other patient cohorts, if any) both (i) children (or pediatric patients) with late infantile forms of MLD, and (ii) children (or pediatric patients) with early juvenile forms of MLD, in each case that are pre-symptomatic or without clinical manifestations of the disease, on or before 11:59 p.m. Eastern Time on December 31, 2024.

On October 26, the company presented positive data related to OTL-203 which isn't OTL-200, but I'm surprised the share price didn't respond at all or even declined. More importantly, recently the FDA indicated no Adcom was necessary for OTL-200. This is generally seen as a positive because it implies the FDA doesn't need a second set of eyes to get to a decision, which also means the process can be a little bit faster. One reason I think this has a particularly high chance of making it to market is that EMA already approved the therapy. Usually, the FDA and EMA approve therapies that were approved by the other.

One thing that's quite confusing in this transaction is that you are receiving $0.10 per ordinary share in case the CVR pays out. But 10 ordinary shares equal 1 ADS.

The CVR has a deadline in December 2024. If OTL-200 isn't approved by then there won't be a CVR payout. However, OTL-200 has a PDUFA date of March 18, 2024. Based on the data from this paper , I believe the odds are very much in favor of approval being granted. The odds could even be as high as 90%. Especially, because of the prior EMA approval.

Given the relative sizes of the companies and the niche nature of Orchard's therapies, antitrust involvement seems unlikely. The deal doesn't create a monopoly or significantly reduce competition in any significant therapeutic area. This smoothens the path for deal closure.

Conclusion

The acquisition of Orchard Therapeutics by Kyowa Kirin Co offers investors a promising merger arbitrage opportunity that appears to be a bit overlooked. The deal terms, combined with the potential of a CVR payout, the short timeframe for deal closure, and the minimal regulatory hurdles, make this a compelling package. With the stock at around $16.21, this is still quite interesting. I wrote it up when it was a bit cheaper. This is essentially a binary bet. It works or it doesn't. If it doesn't work, you're out of $0.21, and if it does work, you're up $1. Theoretically (I believe the probability of this happening is very low), there is also the risk the transaction doesn't close with a potential downside of around ~50%.

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