Tuesday, May 2, 2017

GenVec: Intrexon Buyout, Novartis Partnership CVR

GenVec (GNVC) is another semi-failed biotech (and pretty tiny - only a $14MM market cap), GenVec is being purchased by Intrexon (XON) in a deal that should close by the end of the second quarter.  GNVC shareholders will receive 0.297 shares of XON + contingent payment right equal to 50% of any milestone or royalty payments received within 36 months after closing from GenVec's collaboration agreement with Novartis (NVS).  Assuming the deal closes as expected, the CVR is currently being valued at approximately zero.

Back in 2010, GenVec struck a partnership agreement with Novartis to discover and develop treatments for hearing loss and balance disorders.  The partnership centers around CGF166, currently in phase 1/2 trials, the goal of CGF166 is to regenerate sensory hair cells in the inner ear using gene therapy to restore hearing.  Hearing loss is a big addressable market and many of those suffering don't utilize hearing aids and the like due to social stigmas.  GenVec licensed the rights to this program to Novartis, in return, GenVec received a $5MM upfront payment, Novartis purchased $2MM of GNVC common stock, and GenVec was eligible to receive up to an additional $206.6MM in milestone payments.  To date, GenVec has only received $5.6MM in milestone payments, and none in the past two years.
Sorry if that's too small, but there's $201MM in potential milestone payments out there, plus royalties on any sales, the CVR will split any potential payments 50/50 with Intrexon.

Without knowing much about the probability of milestones being met (let's just go with a very low probability), the interesting thing about this CVR is its success or failure is in the hands of Novartis, a third party not involved in the merger.  The 36 month clock on the CVR doesn't directly relate to anything I can see in the Novartis partnership, so Novartis has less incentive to game the milestone dates, the 50/50 split with Intrexon puts the CVR on equal footing.  Within 36 months, we should know if there's something to CGF166 or not.

There's likely not much value in the CVR, but with a tiny market cap and a long dated non-tradeable CVR, I could come up with some behavioral arguments on why its being completely discounted.  Intrexon feels a bit scuzzy to me, they're highly promotional and did a weird faux spinoff earlier this year, so I'd recommend shorting out the 0.297 shares of XON for every share of GNVC to just synthetically own the CVR.

Thanks to the reader who sent me this idea after my INNL post.

Disclosure: I own shares of GNVC