Idenix Arb Play

Even though there has been a lot of M&A activity, it’s been a bit difficult zeroing in on a good risk reward opportunity. One of the plays I do like is Idenix (Ticker: IDIX), which is being acquired by Merck (Ticker: MRK) for $24.50 in cash. Idenix still carries a decent spread (~ 1.9% or ~ 15.54% annualized based on yesterday’s closing price of $24.04. This is assuming the cash hits the account by August 8th). I believe this deal is going to close pretty fast. The companies have already filed with the FTC and the waiting period will expire on July 3^rd. I don’t see any issues with the FTC taking a closer look at this deal as Gilead (Ticker: GILD) owns this market right now. Merck’s tender offer will expire on August 4^th and this deal should close shortly after.

I’ve been playing this via long common (average price of $23.60) and short out of the money Puts. The large spread can be attributed to the painful memories of Bristol Myers (Ticker: BMY) acquisition of Inhibitex. Bristol Myers acquired Inhibitex for its early hepatitis C candidate, which was in clinical trials. Shortly after the merger closed, adverse events were reported in the Inhibitex hepatitis C trial. This resulted in Bristol Myers pulling the plug on Inhibitex’s hepatitis C program and writing off the entire acquisition. 

Can this happen with Idenix? Yes, but I see the odds as very low. I’m sure Merck has performed extensive due diligence to ensure there is no replay of Inhibitex.

EDIT: Updated tender filing with the SEC today... The FTC waiting period is now expected to expire on July 18th.