Saturday, April 14, 2018

AveXis Merger Arb

I initiated a position in AveXis Inc (Ticker: AVXS) via common and short Puts. On April 9th Novartis (Ticker: NVS) announced the acquisition of AveXis for $218 per share in cash via tender offer. The tender offer will officially commence ~ 10 days from the date of the merger agreement. I am currently modeling this deal to close by June 15th. The reason I like this deal so much is that the risk of this deal breaking due to an adverse event from the clinical trial is pretty much nil. During the conference call an analysts asked a question regarding the impact on the merger from an “unexpected event in one of the clinical trials that questions the safety potential of the product”. Novartis’ Head of Business Development responded with the following: “So in regard to unexpected events, we do not have an out, if there is an event opportunity.” I’ve never seen this before where the acquirer has no outs at all… AveXis is currently trading at $211.14, which still presents an attractive annualized return of ~ 17% (assuming a close by June 15th).

29 Comments:

At April 15, 2018, Anonymous mergerpie said...

great analysis! May initiate a position if MON closes soon...

 
At April 17, 2018, Anonymous Anonymous said...

Hi MT,

Very good insight. Why are you modeling 67 days to close?

Thanks

 
At April 17, 2018, Blogger Money Turtle said...

It was simple based on ~ 10 working days to commence the tender offer and another ~ 30 days for the tender offer to close. I guess my analysis was conservative. Novartis just commenced the tender offer with the tender expiring May 14th. That was fast…

 
At April 17, 2018, Blogger lamano said...

Hi MT,

Do you expect NVS to complete the tender at the end of the first deadline in case more than 50% of shares is tendered? Or did they mentioned more conditions to closing which makes it likely that the company will extend the Tender offer beyond the deadline even when enough shareholders tender?

 
At April 17, 2018, Blogger lamano said...

I guess the last question on the call sort of answers my earlier question:

The analyst stated that she thought that the timeline incorporated quite some time for the anti-trust review. Management did not really respond but said they expect to receive approval before mid June. So I suppose that even while the tender will end May 14th, it will be extended until the Antitrust review is completed. So I guess this review is the main driver of the spread?

Any thoughts on the anti-trust review? It seems a rather new area for them, and size wise the acquisition is not something expected to raise a lot of eyebrows either..

 
At April 17, 2018, Blogger Money Turtle said...

We'll see later today from the filing as to when they submitted for anti trust review.

 
At April 17, 2018, Blogger lamano said...

Under the HSR Act, each of Parent and AveXis is required to file a Premerger Notification and Report Form with the FTC and the Antitrust Division in connection with the purchase of Shares in the Offer, which filings were made on April 13, 2018


So april 13th (anyone superstitious?) + 30 days?

Also, seems to be a 7$ raise in price if HSR causes a delay or am I misunderstanding...

Wrt the material adverse clause: Deal seems protected from most stuff - Only in case of fraud by the Target, would following points become relevant (and otherwise not)


any determination by, or delay of a determination by, the United States Food and Drug Administration or any other governmental entity, or any panel or advisory body empowered or appointed thereby, or any indication that any such entity, panel or body will make any determination or delay in making any determination, with respect to the approvability, manufacturing, labeling, contents of package insert, prescribing information, risk management profile, chemistry, manufacturing and controls (CMC) matters or pre-approval inspection matters relating to any product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis, or any requirement relating to the results of any pre-clinical or clinical testing being conducted by or on behalf of AveXis, any of its competitors or any of their respective collaboration partners, including any requirement to conduct further clinical trials or any delayed or accelerated launch of any product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis;


the results of, or any data derived from, any pre-clinical or clinical testing being conducted by or on behalf of AveXis, any of its competitors or any of their respective collaboration partners or any announcement thereof;


increased incidence or severity of any previously identified side effects, adverse events or safety observations, or reports of new side effects, adverse events or safety observations, with respect to any product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis;


any recommendations, statements or other pronouncements made, published or proposed by professional medical organizations or any governmental entity or representative thereof, or any panel or advisory body empowered or appointed thereby, relating to any product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis;


any supply chain disruption affecting product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis;


any determination or development relating to coverage, reimbursement or payor rules or policies applicable to, or pricing of, any product candidates of AveXis or its subsidiaries or any products or product candidates of any competitors of AveXis; and


the expiry, finding of invalidity or unenforceability or loss of exclusivity with respect to any patent owned or licensed by AveXis and covering any product candidate of AveXis;

 
At April 17, 2018, Blogger Money Turtle said...

HSR review for tender offer is 15 days so we should know of the HSR decision on May 1st.

 
At April 18, 2018, Blogger lamano said...

Ah ok, didn't know. Is that standard HSR practice for tender offer Acquisitions?

Think the set-up looks good.

 
At April 18, 2018, Blogger Money Turtle said...

Yes, the 15 day HSR review is standard for tender offers.

 
At April 18, 2018, Anonymous Anonymous said...

Hi MT,

Would that be 15 calendar days or 15 business days?

Thanks

 
At April 18, 2018, Anonymous Anonymous said...

Hi MT,

Do you think this recent news will have any impact on the AVXS FTC review? It looks like Trump Admin. has nominated four FTC commissioners. Unless more commissioners are approved by the U.S. Senate, future FTC reviews could face some risk.

FTC Commissioner Terrell McSweeny to Resign
https://www.ftc.gov/news-events/press-releases/2018/04/ftc-commissioner-terrell-mcsweeny-resign

Last Democratic Commissioner at FTC steps down
http://thehill.com/policy/technology/383452-last-democratic-commissioner-at-ftc-steps-down

Thanks

 
At April 18, 2018, Blogger Money Turtle said...

That would be 15 calendar days. I don't believe the recent FTC news will have any impact on the review of this merger.

 
At April 18, 2018, Blogger Money Turtle said...

Yes, there is a $7 bump in price if the date is extended to October 6th.

"...if the Acceptance Time (as defined below) has not occurred on or before July 6, 2018 (the "Initial Outside Date" and such date as it may be extended in accordance with the Merger Agreement, the "Outside Date"), and Parent elects in its sole discretion to extend the Outside Date to October 6, 2018, we will become obligated under the Merger Agreement to increase the offer price by an additional $7.00 per Share..."

 
At April 18, 2018, Anonymous Anonymous said...

AVXS: any reason its weak today? considering there's high probability of closing by mid may
Thanks

 
At April 18, 2018, Blogger Money Turtle said...

I can’t find any news to account for today’s weakness.

 
At April 18, 2018, Anonymous Anonymous said...

https://www.streetinsider.com/Mergers+and+Acquisitions/AveXis+%28AVXS%29+Was+a+Buyout+Target+Before+Its+IPO+and+Had+Three+Other+Companies+Interested+Before+Mega+Novartis+Deal/14068540.html

 
At April 18, 2018, Anonymous Anonymous said...

This is strange that the stock is down close to $4 without any news. Does anyone have any idea what might be causing this?

 
At April 18, 2018, Anonymous Anonymous said...

There has been high volumes of MAY deep out of the money Put activity. Whats up with that?

 
At April 18, 2018, Blogger Money Turtle said...

I'm hearing there was a short hit piece. I don't have the details.

 
At April 18, 2018, Anonymous Anonymous said...

Banc of America mat have been the source.

Bofa-ML was pushing the short today the thesis is: "reading the TO doc it seems they were v keen to ask for hell or high water clause, strong MAC, wanted to get the deal done befire May, maybe it indicates a problem. If there is a delay after May, all bets are off. So worth a small short here"

Make of that what you want - it is indeed true that Novartis has a free put after July. The rest is wild conspiracy theory.

 
At April 18, 2018, Blogger Money Turtle said...

Thanks, who wouldn't want a tight deal term?

 
At April 18, 2018, Anonymous Anonymous said...

MT,
Can you explain the BofA-ML note in detail please?
Thanks

 
At April 18, 2018, Blogger Money Turtle said...

I don't have a copy of the report. Going over the filing, the "Hell or High Water" clause was proposed by a third party acquirer (not by Avexis). I suspect that it was Biogen, who has a competing product on the market.

 
At April 18, 2018, Anonymous Anonymous said...

Does it cause problem with the TO? Did u add or sold out of AVXS?

 
At April 18, 2018, Blogger Money Turtle said...

The tender can be extended another 15 days if the antitrust authorities issue a second request. I have full position in AVXS and probably looking to add on any additional weakness.

 
At April 19, 2018, Blogger lamano said...

I think they can extent the offer until the outside date of July 6th if they want.

From 27th of June, to the 6th of July, Novartis has the option to extend the outside date to October 6th. In case they have not yet obtained regulatory approval by that time, they have several options:

- They either feel really good about obtain regulatory approval, and will waive the regulatory approval condition sothat they can buy the company for 218/Share

- They are concerned, but still expect that they can obtain regulatory approvals (at the cost of some concessions/divestitures). This would be a scenario where they will opt to extend the deadline (price/share goes up by 7$) and keep their 'out' to terminate the merger if antitrust agencies impose too burdensome conditions (at the cost of a termination fee payable to AVXS)

- They only see limited chances for obtaining regulatory approval, such that the odds of success and the subsequent benefits of the deal do not cover the costs (termination fee) in case the deal fails. They decide to walk away.

I do think this 'put' option does weaken the MAE clause by a bit: Suppose a MAE occurs between now and July 6th. In case regulatory approval is swiftly granted, the MAE is strong, they will probably acquire the company is they can't proof AVXS committed fraud. But when regulatory approval is not granted at the outside date, Novartis can walk away claiming 'regulatory approval' reasons while in fact the MAE is the reason.

 
At April 19, 2018, Blogger Money Turtle said...

You are right, they can pull and refile, which sets the clock for another 15 days. If not resolved, then it goes to second request.

 
At April 19, 2018, Anonymous mergerpie said...

AVXS is going to release new data for phase AVXS-101...http://investors.avexis.com/phoenix.zhtml?c=254285&p=irol-newsArticle&ID=2343431

i wonder if some investors thought this is a risk..but data will not constitute a MAC as written in the merger agreement.. thought novartis can pay the termination fee to get out of the agreement.

I have added a medium position here.

 

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