Shares of Ventrus Pharmaceuticals (VTUS) ticked lower with the announcement last week that the company would merge with Assembly Pharmaceuticals. The significant change to the Ventrus story and the early-stage nature of the proposed merger asset likely led to the underwhelming response. PropThink received a number of inquiries about the announcement and below is our initial take on the deal.
VTUS is not only changing its name but its strategy. While the company will technically remain in the gastrointestinal (GI) space after the merger with privately held Assembly, the new entity will transform VTUS from a specialty pharmaceutical company, repositioning older molecules, to a full-fledged biotech company. The emerging entity, pending shareholder approval, will trade on the NASDAQ as Assembly Pharmaceuticals (ASMB), with a focus on developing treatments for Hepatitis B (HBV) as well as Ventrus’ existing GI assets.
Through the merger, Ventrus is joining a handful of publicly traded biotech companies targeting HBV that attained significant valuations despite their early-stage pipelines: Arrowhead Research (ARWR), Tekmira Pharmaceuticals (TKMR), and most recently Alnylam Therapeutics (ALNY). The market assigned substantial valuations with little to no evidence that these drugs are safe or efficacious in humans. Historically, this has been true in the anti-viral segment. Pharmasset, for example, which originated the blockbuster compound sofosbuvir and was eventually acquired by Gilead Pharmaceuticals (GILD), carried more than a $1 billion valuation on animal data alone, long before GILD sought to acquire the company. Despite that Assembly won’t have a candidate in the clinic until 2015, an argument can be made that success in early animal testing, for which Assembly expects to have data next year, could lead to a significant valuation step-up.
Assembly was formed in 2012 by researchers at Indiana University to develop small molecules known as Core Protein Allosteric Modulators (CpAMs), which target the HBV capsid. Most drug candidates designed to treat HBV work downstream at the RNA level, but Assembly claims its compounds target viral DNA. Venture capital firms Twilight Ventures, Luson Bioventures, Johnson & Johnson Development Corporation, and more recently, BioCrossroads, have backed Assembly in the past. As the Assembly story is new to the public markets, many will come to know that Assembly is the pioneer of this HBV approach, and the hope is that larger drug companies will target ASMB seeking to own the most advanced technology in the segment.
From a VTUS shareholder perspective, the company now has a real shot on goal – before, the stock was essentially dead money given the failure of Ventrus’ two GI assets.
Assembly Pharma making its debut as a public entity via the merger with Ventrus is not surprising, particularly in light of the new entity’s $17M in enterprise value and the potential upside if the technology bears out. Assembly’s founders have “skin in the game”, with no cash up front and residual ownership of ~49% of the new entity. The all-stock deal, though dilutive, leaves Ventrus well-capitalized with around $23M in cash and an arguably cheap valuation for a player not far behind other publicly traded HBV peers. Ventrus will issue 23 million shares of common stock to existing Assembly shareholders, increasing the emerging company’s share count to just over 50M on a fully diluted basis. Ventrus will meet with regulators on June 19th to discuss the path to approval and will conduct a shareholder vote to ratify the transaction.
