2023-06-16 20:36:41 ET
Summary
- Share portion of takeover by Assertio Holdings covers the value of the shares plus a merger spread.
- Contingent value rights on their drug are also included, adding up to $0.20 per share.
- CVR payout will require aggressive sales growth, but they're effectively free.
Spectrum Pharmaceuticals ( SPPI ) is getting taken over by Assertio Holdings ( ASRT ). Both firms are small biotech concerns, and I don't anticipate any regulatory concerns here with respect to closure of the deal. Spectrum's primary product is Rolvedon, which is indicated for preventing infections in chemotherapy patients. The product was approved by the FDA in the fall of 2022, and so sales are still in the growth period for the new drug. Assertio stated that they expect the deal to be accretive for their shareholders by 2024.
SPPI Transaction Terms
SPPI shareholders will receive 0.1783 shares of ASRT for each share of SPPI held. In addition, they'll receive a contingent value right [CVR] with a maximum payout of $0.20, where $0.10 will be paid out if Rolvedon sales exceed $175 MM in 2024 and another $0.10 if those sales exceed $225 MM in 2025. I'll discuss the potential value of the CVR later in the piece, but I think it's worth noting that the value of the ASRT shares exceeds the value of the SPPI shares, and ASRT is easy to borrow at nominal cost to lock in the spread.
Risks to the Deal
The deal requires shareholder approval from both Spectrum and Assertio shareholders. I think approval is likely to be granted. Assertio's shares dropped fairly significantly when the news was announced, probably a mix of arbitrage players shorting the stock for the spread and investors worried about the dilution from the deal. However, they have since rebounded and are now trading at roughly the same level as pre-deal, which I think makes approval quite likely on that side. Assertio's strategy of doing non-personal sales for acquired products also makes acquisitions more accretive (because they can reduce the SG&A of the acquired company), which I think also makes ASRT shareholders more likely to approve. With Spectrum shareholders getting a premium plus the CVR, I think they are very likely to approve.
I don't see much likelihood for regulatory issues here, as both companies are fairly small and don't have competitive products. I also expect financing to be a non-issue given the consideration here is new ASRT shares, so I do think closing is quite likely. The biggest factor affecting the performance of a hedged arbitrage trade here (long SPPI, short 0.1783 ASRT) is likely to be the results of the CVR.
Rolvedon CVR Discussion
The CVR has the potential to pay out nearly an additional 20% of the value, although because the potential payouts are a couple of years out the NPV is obviously lower. In their most recent quarter Spectrum reported $15.6 MM in sales, which only annualizes to $62.4 MM, well shy of the $175 MM they need to get to in 2024 for the first $0.10 payout. However, that was up from $10.1 MM the quarter previously (which was the first quarter of sales) and they received their Medicare J-Code for Rolvedon the day after the end of the last quarter. So there are significant tailwinds for sales, although given they need to approximately triple by next year the bar is quite high as well. I think it's considerably more likely than not that the CVR doesn't pay out, but even a 10% change of receiving the payments would be worth close to $0.02, so I'm happy to take the CVRs for free which I think is the situation here.
Spread and Conclusion
With SPPI at $1.04 and ASRT at $6.14 there is a 5.3% spread without counting any contribution from the CVR. The parties estimated the deal would close in Q3 of 2023 in their announcement press release. To be conservative, I've estimated a closing date of September 30, 2023 in my Special Situations Tracker , which suggests an IRR of 19% prior to any contribution from the CVR. I think that closing estimate is probably conservative. The definitive proxy for the deal came out on June 15, and both meetings are scheduled for July 27th, 2023, so it is certainly possible the deal could close as quickly as early August, which would be additive to the IRR from the arbitrage position, but I don't think assuming that is necessary for this to be a reasonable merger arbitrage position. The absolute spread and nearly 20% IRR plus the kicker of a free CVR make it attractive even assuming the close is delayed to the very end of Q3.
For further details see:
Assertio Holdings: Spectrum Pharmaceuticals Has A Merger Spread Plus A Free CVR