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


  1. How do you monitor/value the CVR? Is there an independent 3rd party or Trustee involved? (Apologies if this is a double post)

    1. There is a 'Rights Agent' but they're sort of an empty bag, really just a paying agent that distributes funds they receive from XON.

      There is some opportunity for conflict, I've heard of lawsuits among CVR holders and the acquirer happening, certainly a risk.

  2. Enjoying the non-tradeable CVR ideas, thanks for the continued great work here...

    * Do you have any more specifics on the "additional clinical milestones" which gets the next $21M?

    * Any insight into the likelihood GNVC shareholders approve this? Are there major shareholders already committed to a 'yes' vote? (Abstaining votes are treated as 'no' votes.)

    1. I don't have specifics, would be interested in them too, here's a link to the original collaboration agreement. The milestone payments are redacted as confidential, but you can get an idea of what each event is at least.


      Good question on the vote, I haven't seen large holders come out in favor, its not in any press release or the filing as far as I can tell. But when you're a tiny micro-cap, need funding, already done a 1-for-10 reverse split, and a much large company throws you a lifeline, you take it right? Plus I'm assuming the shareholder base is turning over to small arb guys who are interested in the CVR, thus increasing the likelihood of a yes vote. But great point too. Thanks for reading.

  3. Liquor & LeverageMay 3, 2017 at 10:01 AM

    Good post again. There are a few more things to think about here, in line with Tjames' questions:

    - the next $21M relate to clinical trial milestones namely (1) first patient visit with CGF166 (the drug) in a phase IIB clinical trial and (2) first patient visit in a phase III clinical trial.

    - they're currently in cohort 4 out of 5 of a phase I/II clinical trial so once this is complete, phase IIB should begin shortly after. What I find a bit of a bummer is that Novartis recently updated the current phase I/II trial's estimated end date to June 2019 from august 2017 previously on clinicaltrials.org). That said, note that in the rodnam & renshaw fairness opinion in the merger agreement, management supplied what appears to be an implied 35% probability of getting that next milestone within 3 years. The next $45M relate to fda approval following phase III. I think that's a long shot but it doesn't matter if you aren't paying anything for the cvr as clarkstreet noted

    - arbitrageurs hold at least 19% of stock and hedge funds 40% total, with the balance in retail hands. Behavioural biases suggest given GNVC's not so great performance last few years and given that it would need to significantly dilute shareholders, long term retail holders should be all too happy to vote with management and arbitrageurs will vote. For instance, days before they announced merger, because they'll run out of cash in early 2018 (current balance $7m vs $4-6m burn rate), mgmt was about to issue 2.6m shares at $5, meaning 50% dilution. So while some shareholders would prefer to get 100% of the milestone optionality without a maturity date, the emotions from the certainty of cash today overrides intelligent consideration. This risk is a non event.

    - as for the matter of hedging out intrexon, let me point out that if deal does fail, then GNVC will fall to $3-5, probably lower end of range in short run on impulsive selling. Meaning a max $3 or 50% loss for the unhedged.

    Where does intrexon end up? Who knows, considering the considerable volatility and the fact that 34% of its float is currently sold short. Thus the risk of a gap upwards on short squeeze in the near term until merger closes outweighs in my view the risk of intrexon meeting calamity either unseen or because it's a fraud. Therefore the loss if deal fails for the hedged investor would be $3 + [75% * x] - [25% * y] where x is the rise in XON if short squeeze and y is the absolute fall in XON if fraud and the probabilities indicate relative likelihood of either XON outcome between now and July 24 (outside date). the benefit of hedging XON is therefore limited

    - but what if one stayed unhedged and the deal closed? Based on 50% of the upcoming $21M milestone or $4.50/sh, meaning that intrexon stock would have to fall $15 after the XON shares are received, for hedging to have been worth it

    1. Just saw this comment as I was responding to tjameson, thanks, great insight.

    2. Thanks for the replies everybody, especially the very thorough analysis from Liquor & Leverage -- usually a bad combo ;). I agree shorting the XON exposure may not be advisable here, could be a scary position in a deal break scenario. Sometimes better to let these things ride and figure you are playing the odds right over the course of many hands dealt.

  4. Was pretty impressed by GRBK's quarter. Surprised none of the questions dealt with updates on potential acquisitions. Would love to hear your thoughts on the quarter if you have a moment. Thank you.

    1. Same here, they've discussed Nashville in the past, at the right price that seems like a good market for them? The NOL is going to be burned off in a ~2 years (how many of that era's shells can say they've even touched theirs?), what happens after that, hopefully there's an acquisition in between to normalize the balance sheet with peers, then they put themselves up for sale? I'm still a fan, continue holding.