Auxilium Pharmaceuticals (AUXL) was approached by Endo Pharmaceuticals (ENDP) this week in a $2.2 billion unsolicited acquisition attempt. The stock and cash deal would represent a 30% premium to AUXL’s prior closing price.
This complicates the situation for one small Canadian drug developer: QLT Inc (QLTI). QLTI and Auxilium agreed to a merger this June that would domicile the new company in Canada in order to take advantage of the country’s lower corporate tax rate.
Endo’s bid for Auxilium specifically excludes the QLTI deal.
We think Endo and Auxilium get a deal done. AUXL shareholders have been through a rough few years, even under the experienced leadership (read more from PropThink) of newcomer CEO Adrian Adams. The company’s product portfolio isn’t particularly impressive from a growth standpoint, and we suspect AUXL shareholders would rather take a deal than wait to see how the planned QLTI-AUXL merger pans out. This would mean QLTI gets left at the altar.
PropThink covered QLTI extensively late last year, explaining why we liked the long trade at the time: QLTI has a shareholder-friendly board, a solid balance sheet, a progressing phase 2 opthalmology asset, and most importantly, has clearly put itself on the auction block. We recommended closing the trade at a 25% profit when AUXL and QLTI announced the merger in June.
QLTI just got interesting again, dropping to $5.20 this week. QLTI is trading exactly where it did prior to the AUXL merger agreement. If Auxilium walks away, the smaller company will receive a breakup fee of up to $28.4 million ($0.55 per share). And, QLT Inc has made clear that they’d like to sell the company and/or its single asset; we’ve written in the past about this board’s commitment to value creation. One way or another, we believe QLTI’s management and board can figure out a way to deliver for stockholders, if AUXL walks.
To that end, we like the idea of again owning QLTI in the low $5s or $4s, though waiting for AUXL/ENDP to come to an agreement may make sense. Again, our view is that AUXL shareholders will push for a sale to ENDP rather than wait to see how AUXL/QLTI plays out as a standalone entity. While QLTI won’t be a homerun trade and a deal won’t get done rapidly, as with AUXL’s earlier proposal, there’s the possibility of 20-40% upside from this small stock.
Read more about QLTI – FREE
On Wednesday, we sent a note to PropThink Premium subscribers regarding one-time Wall Street darling, Arrowhead Research (ARWR), outlining some components of a forthcoming critical event in November. The company bills its lead drug product, ARC-520, as a potential “functional cure” for Hepatitis B. If -520 truly offers a cure for HBV, it would represent a profound new treatment for the 350 million chronically infected HBV patients worldwide – and an immense business opportunity for the small company.
Last month Arrowhead presented the first results from an ongoing phase 2a study of -520 in HBV patients. The announcement was, at first, confusing, but the street seems to have gotten comfortable with HBsAG knockdown seen with these early doses of the drug – 1mg/kg and 2mg/kg. In November, the company will present more detailed results on these two doses and should have initial data from a third, higher dose of -520 that only moved into the clinic in the last couple of months. It’s this data that Wall Street will be watching closely in just over a month.
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One or more of PropThink’s contributors are long ARWR.
