Wednesday, May 15, 2024

Inhibrx Inc: Cash Buyout + SpinCo (Inhibrx Biosciences) and CVR

Inhibrx Inc (INBX) (~$1.8B market cap) is a clinical stage biotech that announced the sale of their most advanced therapy, INBRX-101 (a treatment for patients with alpha-1 antitrypsin deficiency or "AATD"), in January to Sanofi (SNY) for $30/share in cash, plus 92% ownership in the remaining development pipeline via a taxable spin of NewCo Inhibrx Biosciences (SNY to retain the other 8%) and a $5/share CVR that pays out if INBRX-101 receives final FDA approval prior to 6/30/2027.  INBX shares trade for $34.20 today -- all approvals have been received and the merger will close 5/30/24.

The advantage of this structure is Inhibrx won't pay corporate taxes on the sale of INBRX-101, but shareholders will still pay taxes based on their tax basis, avoiding the double tax if Inhibrx had simply sold INBRX-101 and continued on in the same corporate structure.  We've seen similar deals with Pfizer/Biohaven (they even mention in the proxy wanting to do a "Biohaven-like structure")  and a little further back, JNJ/Actelion/Idorsia, where both SpinCos performed well initially post deal completion.

My thinking around this transaction is pretty straight forward, because the $30/share makes up a vast majority of the consideration here, the merger/stub securities are likely undervalued, although it is hard to size this up enough to create a meaningful position (INBX isn't marginable at my broker for some reason).  For the SOTP, I'm going to lean on the proxy statement as I don't have an informed view on the science other than this team already developed one valuable asset in INBRX-101.

The CVR is fairly simple, there's only one milestone, that's FDA approval of INBRX-101 for AATD:

At or prior to the Effective Time, pursuant to the Merger Agreement, Parent will enter into a Contingent Value Rights Agreement between Parent and Continental Stock Transfer & Trust Company (the “Rights Agent”), in substantially the form attached to the Merger Agreement (the “CVR Agreement”). Each CVR will represent the right to receive a contingent payment of $5.00 in cash, without interest, payable to the Rights Agent for the benefit of the holders of CVRs, if the following milestone is achieved:

The final approval by the U.S. Food and Drug Administration (“FDA”), on or prior to June 30, 2027, of the new drug application or supplemental new drug application filed with the FDA pursuant to Section 351 of the Public Health Service Act and 21 CFR §§ 600 et seq. (for clarity, including accelerated approval) that is necessary for the commercial marketing and sale of the Company’s precisely engineered recombinant human AAT-Fc fusion protein, also known as INBRX-101 in the United States of America for the treatment of patients with AATD and clinical evidence of emphysema following the clinical trial with identifier INBRX101-01-201, entitled “A Phase 2, Double-Blind, Randomized, Active-Control, Parallel Group Study to Assess the Pharmacokinetics, Pharmacodynamics, Immunogenicity, and Safety of INBRX-101 Compared to Plasma Derived Alpha-1 Proteinase Inhibitor (A1PI) Augmentation Therapy in Adults with Alpha-1 Antitrypsin Deficiency Emphysema,” regardless of any obligation to conduct any post-marketing or confirmatory study (which we refer to as the “Milestone”).

For the CVR valuation, Centerview (INBX's advisor) put the NPV at $2.05/share using a 60% success rate, which the company provided (management took down the success rate from 90%, citing a less advantageous regulatory environment and potential success of similar products):

Contingent Value Right Analysis
For analytical purposes, assuming a 60% probability CVR holders receive an aggregate payment of $5.00 per CVR upon the achievement of the Milestone based on the probability of success as estimated by Company management in, and the estimated timing of achievement of the Milestone under the CVR Agreement implied by, the Management Forecasts, as described under the section entitled, “The Transactions — Certain Financial Projections” and further assuming a discount rate of 13.5%, the midpoint of a range of discount rates from 12.5% to 14.5%, based on Centerview’s analysis of the Company’s weighted average cost of capital, Centerview calculated an illustrative net present value for one (1) CVR of $2.05.

Inhibrx Biosciences (SpinCo) is a little more complicated, SNY is going to seed the company with $200MM of cash, which is expected to get them about a year of cash runway.  The spin ratio is 0.25 shares of SpinCo for each share of INBX.  The spinoff will have INBX's remaining development assets, which includes two oncology therapies currently in clinical studies with data readouts within the next 12 months:


INBRX-106 is a hexavalent product candidate agonist of OX40. OX40 is a co-stimulatory receptor expressed on immune cells that is enriched in the tumor microenvironment. OX40 ligand is a trimeric protein that activates OX40 signaling through clustering.

INBRX-109 is a precision-engineered, tetravalent death receptor 5 (DR5) agonist antibody designed to exploit the tumor-biased cell death induced by DR5 activation.

INBRX-109 (which has both fast track and orphan designations) is farther along, it is currently in a registration enabling Phase 2 trial for the treatment of chondrosarcoma (an aggressive type of bone cancer where most patients do not respond well to current therapies) with data expected in the first half of 2025.  INBRX-106 is in a Phase 1/2 study testing it in combination with Keytruda, initial data is expected towards the end of 2024. Again, leaning on Centerview's analysis:

SpinCo Discounted Cash Flow Analysis
Centerview performed a discounted cash flow analysis of SpinCo based on the Management Forecasts. A discounted cash flow analysis is a traditional valuation methodology used to derive a valuation of an asset or set of assets by calculating the “present value” of estimated future cash flows of the asset or set of assets. “Present value” refers to the current value of future cash flows or amounts and is obtained by discounting those future cash flows or amounts by a discount rate that takes into account macroeconomic assumptions and estimates of risk, the opportunity cost of capital, expected returns and other appropriate factors.
For purposes of the analysis of the net present value of the future cash flows of SpinCo, Centerview calculated a range of equity values for 0.25 of a share of SpinCo common stock by (a) discounting to present value as of June 30, 2024 using discount rates ranging from 14.0% to 16.0% (reflecting analysis of SpinCo’s expected weighted average cost of capital) and using a mid-year convention: (i) the forecasted risk-adjusted, after-tax unlevered free cash flows of SpinCo over the period beginning on June 30, 2024 and ending on December 31, 2043, utilized by Centerview based on the Management Forecasts, (ii) an implied terminal value of SpinCo, calculated by Centerview by assuming that unlevered free cash flows would decline in perpetuity after December 31, 2043 at a rate of free cash flow decline of 60% year over year (with the exception of platform cash flows for which a 0% perpetuity growth rate was assumed), and (iii) tax savings from usage of SpinCo’s federal net operating losses from SpinCo’s estimated future losses, as set forth in the Management Forecasts, and (b) adding to the foregoing results SpinCo’s estimated net cash of $200 million, assuming SpinCo is capitalized with $200 million in cash and no debt, as of June 30, 2024, and the net present value of the estimated costs of an assumed $150 million equity raise in 2025 and $300 million equity raise in each of 2026 and 2027, as set forth in the Internal Data. Centerview divided the result of the foregoing calculations by the number of fully diluted outstanding shares of estimated SpinCo common stock (determined using the treasury stock method and taking into account the dilutive impact of warrants on the then-existing terms and 8% of shares of SpinCo common stock to be retained by the Company, and assuming no exercise of Company options receiving SpinCo common stock, as instructed by Company management) as of January 18, 2024, based on the Internal Data, resulting in a range of implied equity values per 0.25 of a share of SpinCo common stock of $5.85 to $7.95 rounded to the nearest $0.05.

Just based on cash, the NewCo would be worth $3.40/share of INBX at the outset, although that's a bit faulty logic as the cash is already spoken for in the projected cash burn.  But again, pattern recognition here tells me that this situation has a decent shot of working out well in the near term, $30.00 + $2.05 + $5.85 = ~$38/share versus the current $34.20/share.  If you back out the $30/share in cash, the stub is a potential bargain heading into closing at month end.

Disclosure: I own shares of INBX

28 comments:

  1. INBX is marginable at interactive brokers

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  2. Compare with spinoff Mural Oncology. Similar cash, also with cancer drugs that have had small trials with similar results. Both will likely spend existing cash within a year.

    Biohaven's spinoff sold more equity shortly after the time of spinoff.

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    1. I have been watching MURA too, seems attractive. One difference here is the intention of the spin, with MURA it seems like ALKS was dumping it or at least isolating the development risk, with new INBX, the management team is moving to the spin, its more resetting the clock.

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  3. INBX seems sure INBRX-101 can go straight from phase 2 results to FDA approval filing and skip phase 3 . How do they know the FDA will sign off on that ?

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    1. No clue, but seems like SNY must agree?

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  4. Nice write up. The record date for the spin off is May 17 so looks like it’s too late to buy this pre-spin.

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    1. Actually I'm not sure about this- you still might have rights to the spin off after the record date.

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    2. Isnt today the last day to collect the spinco?

      At the Distribution Time, each holder of shares of the Company’s common stock will receive one share of SpinCo common stock for every four shares of the Company’s common stock held as of the Record Date.

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    3. Beginning on May 16, 2024, and continuing until the occurrence of the distribution at the Distribution Time, shares of the Company’s common stock will trade with an entitlement to the distribution under the symbol “INBX”. *****Any holders of shares of the Company’s common stock who sell shares on or before the Distribution Time will also be selling their right to receive shares of SpinCo common stock******. Investors are encouraged to consult with their financial advisors regarding the specific implications of buying or selling shares of the Company’s common stock on or before the Distribution Time.

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    4. INBX will trade with the spin until the distribution date, which is 5/29.

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  5. Anyone look at INBX puts? I sold some pretty rich which put me in INBX below $34. They seem priced as if put buyers do not "owe" the CVR. To my knowledge they would obviously owe $30 distribution the equity stub as well. If I had to guess I'd say they owe the CVR too, but....?

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    1. As it turns out, definitively, put buyers do not owe the CVR so options are priced a bit more appropriately. https://infomemo.theocc.com/infomemos?number=54605

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    2. That's right. Anything non-tradeable, the OCC doesn't include in the settlement consideration. I've learned that the hard way going long calls on a merger with a CVR that closed quicker than I expected.

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  6. I'm curious about the success likelihood lowering from 90% to 60% due to "a less advantageous regulatory environment and potential success of similar products." I can't identify what has changed in the past year or two. A company does have a trial for Inhaled AAT, but that trial has been ongoing for years and no sign of completion or success.

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  7. Why are you trusting their DCF so much?

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    1. I'm not, just using it for illustrative purposes to outline the potential opportunity.

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    2. How do you value the spinco then?

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    3. There's $3.40/INBX share in cash at the SpinCo, or $13.60/New INBX share. That's a good starting point. I don't have a firm price target or anything like, instead this is sort of pattern recognition of other situations that have worked out well. Given the size of the SNY cash payment, hard to really size up the spin/stub, on a proforma basis, its on the smaller end of position sizing for me. Not trying to be precise.

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    4. If a standalone relatively early stage biotech with a year of cash runway was trading at 63 cents on the dollar would you buy it?

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    5. That describes MURA, though it is trading at about 25% of Net Cash.

      For INBX, INBX describes 109 - not 101 that is being sold - as its most advanced product.

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    6. I'm more interested in the incentives and setup with INBX. This management team easily could have negotiated a full sale of the company, they're taking a huge cash payday and still want to focus on the remaining development pipeline.

      MURA seems interesting to me, but the setup is much different, it was spun to isolate the oncology drugs, not as part of an M&A transaction. I think the motivations are different and its not an apples-to-apples comparison.

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    7. I am not trying to encourage anyone to consider MURA. I was responding to your comment that Net Cash is "a good starting point" for valuation, and Leard's response. By year-end 2024, net cash should be about $100 million.

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    8. Management may like it but I find it too hard to predict if the market will like spinco enough to allow for equity to be raised on good terms.

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  8. Using a bearish 33% chance of success on the CVR lowers its expected value to $1.66, discounted @10% for 3 years, takes it to $1.25. I don't see SNY paying 1.7B for something with even lower odds of getting approval than this. Combined with today's close @ $34.12, the SpinCo backs out to $2.87. I find it unlikely that management and the board chose this Biohaven style merger because they thought the sub was worth $2.87, they think they've got another winner in the box. If you buy a handful of these pieces at unloved prices then over time, you really ought to win more than you lose.



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  9. I’m seeing the when issued market for INBXV at $31. Can anyone confirm if this is just bad data or if this is pre $30 payout + 0.25 spinco but no cvr?

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    1. I'd be cautious on the when issued price, looks to be minimal volume.

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    2. Agreed, I like tracking them for spins and sometimes you see crazy pricing but this is especially egregious. Albeit only 7k shares traded around that

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