ACHN - Achillion Pharmaceuticals

[writser]

You will have a real hard time doing this.   It's trading sub $6.20 because there *is* real FTC risk.  Once FTC clears, it will likely go to $6.70 or higher valuing CVRS 40-75 cents in total is my guess.

I like this idea after FTC approval.   Until then, I won't touch it at these levels.

Agreed. You aren't buying the CVR's for free now: you are buying the CVR's bundled with the FTC risk for free. I would absolutely not recommend going 100% long with puts at this point.

The deal is at a large premium so even assuming a small chance of FTC intervention (and the subsequent butchering of the share price) quickly makes this less attractive. Very simplistically, a 10% chance of FTC intervention and a subsequent price drop to $3.75 yields a $6.05 break-even price for the merger, ignoring the CVR's. Even if you add in the expected value of the CVR's, above that 10% intervention hurdle the trade quickly gets less attractive. And do you really want to bet on the chances of FTC approval being >90% in this case? I'm not sure.

On the other hand, Alexion is buying a small, speculative pipeline, there are some issues with its Soliris patents - and they are expiring soon, there seem to be a few companies developing competing drugs out there and the large parent termination fee also suggests confidence at the buy-side. I'll probably keep a small position with the intent of adding later.

Just looking it up on bloomberg, Dyax traded  5-35 cents through the merger price for a month or so after approval, ended up closing at $1.11 through the merger (creating a $4.00 CVR potential for $1.00) If I recall correctly I bought it and puts a bit through so was paying somehting but payoff was high. but then 2015 sell-off accelerated and I ended up selling dyax to free up margin to buy LUK bonds and stuff.

That's a shame, the DYAX CVR's paid out in 2018. Turned out to be a great trade. Though maybe you did better on your other purchases.

[writser]

_JJ_ (@Aceglobalvalue - recommended on Twitter) pointed out that there are some interesting tidbits in the proxy. For some reason (read: laziness) I hadn't spent much time on the proxy. In my experience the 'background' section is usually one of the most interesting parts of a special situation proxy. You get to know a little about the actors involved and their behavior, the history of a deal, if there was any competition, why it is structured the way it is, etc. I think it helps you to get a feeling for the situation - however vague that is.

On September 21, 2019, Dr. Sarin delivered a letter to Mr. Truitt, proposing a revised non-binding offer to acquire all of the outstanding common stock of Achillion for an aggregate price of $8.65 per share, which consisted of upfront cash consideration of $6.15 per share plus one contingent value right with a nominal value of up to $2.50 per share in cash, including $1.50 per share payable upon the start of a Phase III clinical trial for ACH-5228 and $1.00 per share upon the approval by the FDA of the combination of ACH-4471

On September 23, 2019, following the direction of the Board of Directors, Mr. Gibney called Dr. Sarin and informed her that Alexion would likely need to improve its offer of upfront cash consideration

On September 30, 2019, Dr. Sarin called Mr. Gibney with a revised non-binding proposal, which was characterized as Alexion’s “best and final” offer, to acquire all of the outstanding common stock of Achillion for an for an aggregate price of up to $8.30 per share, which consisted of upfront cash consideration of $6.30 per share plus one (1) CVR with a nominal value of up to $2.00 per share in cash, including $1.00 per share payable following the start of a Phase III clinical trial for ACH-5228 and $1.00 per share payable upon the approval by the FDA of ACH-4471

So, first they get offered $6.15 and a $2.50 CVR. Achillion says the cash component is too low. A final deal is negotiated at $6.30 and a $2 CVR. Apparently $0.15 now is preferable to $0.50 for a phase III clinical trial for ACH-5228. However (page 50):

.. based solely on the assessments of Achillion’s management as to the probability of success and the estimated timing of achievement of the milestones, and discounting the two probability-adjusted payments under the CVR back to the valuation date using the midpoint of a range of discount rates from 11% to 13% based on Centerview’s analysis of Achillion’s weighted average cost of capital, Centerview calculated an illustrative net present value for one (1) CVR of $1.14

So, "our CVR is very valuable according to our calculations. But we prefer a little bit of extra cash right now" ..

Anyway, I still think the situation is interesting. At this point the market seems to be pricing in a >25% chance of regulatory intervention (or I'm way more excited about the CVR than the market). Seems high-ish. I don't think I have that big of an edge handicapping this type of situation (recent reminder). On the other hand: who has? The combination of regulatory uncertainty + high downside + large contingent payout seems like a showcase 'unlikable' special situation. I have a very tiny position. I hope to spike a bit more on a huge price drop / if FTC approval is in. But buying now might not be the worst idea ever either.

[minten]

ftc clearance received..  now we'll see what the market thinks those cvr's are worth..

[given2invest]

thanks for the idea. I will attempt to recreate the SWY trade I did back in 2015.

my strategy with these is to wait until the merger has a 99.9% chance of approval, buy 2-3x notional OTM puts for 5 cents, then take a ~100% position in the common a few days/weeks before close, hopefully paying nothing for the CVR.

wake up in a few years and you have a luxury vacation's worth of Casa Ley proceeds in your account.

Alpha vulture did the same thing
https://alphavulture.com/2018/01/17/safeway-sells-interest-in-casa-ley/

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/safeway-6471/msg209111/#msg209111

You will have a real hard time doing this.   It's trading sub $6.20 because there *is* real FTC risk.  Once FTC clears, it will likely go to $6.70 or higher valuing CVRS 40-75 cents in total is my guess.

I like this idea after FTC approval.   Until then, I won't touch it at these levels.

$6.95 post approval...no free lunch!  I won't be buying here for CVRs but argument to be made they +NPV given all the reasons why non tradeable CVRS are awesome.

[writser]

Bit disappointing, but yeah, efficient market. Was hoping to pick up CVR's a tiny bit cheaper. Probably not buying > $7. Maybe it drops a bit after the excitement is over.

[Jurgis]

Another win for writser.  Thanks.

[writser]

Thanks but I only owned a tracker position. Was a speculative idea, could have turned out worse. If I open 10 of these topic and 1 blows up are you still making a profit? Anyway, what's done is done, FTC approval is there. I'm actually slightly more optimistic about the CVR than I was when I opened this topic. Mainly because I missed (or it was released later, I don't know) that ACH-5228 has already completed a successful (according to the company .. ) phase I trial and they plan a phase II trial in 2020. Still a chance that regulators intervene but this should make the second part of the CVR more valuable.

I think $1 is a decent back-of-the-envelope estimate of fair value. The deal is probably closing very soon so you pay approximately $0.55 for a CVR that has an expected value of $1, to be paid out in 2-4 years. Not too bad if you have some spare cash and don't mind some non-market risk.

Still, obviously not the best idea in the world either. I bought a few shares but at current prices I'm not super eager.

[writser]

Looks like this is the last day of trading: http://www.nasdaqtrader.com/TraderNews.aspx?id=ECA2020-17 . Ridiculous volume, >50m shares traded today according to Bloomberg, getting close to 50% of all shares outstanding. Index funds and/or other shareholders dumping? Might explain why the price looks reasonably attractive as of now. I'm buying more.

Update: ended up buying quite a bit around the close. Paying less than $0.50 for the CVR looked like a very good deal to me. Stuffed my account to the hilt with ACHN. Effectively only a ~0.5% position in the CVR though.

[Jurgis]

Update: ended up buying quite a bit around the close. Paying less than $0.50 for the CVR looked like a very good deal to me. Stuffed my account to the hilt with ACHN. Effectively only a ~0.5% position in the CVR though.

Now we know why this did not drop into the close. 

I sold whatever I had at ~6.95. Did not re-buy.

[given2invest]

I bought this as well into close, 6.78 average.  Thanks for the thread writser though I didn't find this cause of you.