Tramadol is a fairly common pain reliever (~40th most prescribed medication in the U.S.), it has been around for decades internationally and was first approved in pill form in the U.S. in 1995. Tramadol is an opiod, but it's considered a weak or a non-conventional opiod, most of the conventional opiods are classified as Schedule II controlled substances by the DEA, which essentially means they're highly susceptible to misuse and abuse, Tramadol contrastingly is Schedule IV (DEA's schedule is a I-V ranking, I being the most dangerous/no medical use). Given the growing awareness of the opiod epidemic in this country, there's an opportunity for a painkiller that sits somewhere between Schedule II opiods like morphine or Vicodin and over-the-counter drugs like Tylenol and Advil.
Tramadol is currently only approved in oral/pill form in the U.S., Avenue (via their controlling shareholder Fortress Biotech - FBIO) owns the exclusive license to develop and commercialize an intravenous ("IV") version of Tramadol, IV Tramadol is widely approved and used (~10% of IV painkiller market share in Europe) internationally but hasn't been approved for use in the United States. Avenue has already completed two Phase 3 studies of IV Tramadol with positive results, for moderate to moderately severe pain IV Tramadol has generally performed as well as morphine (don't need something as strong as morphine if you're only in moderate pain, something weaker does the job just as well). Currently the company is putting together their new drug application ("NDA") to submit to the FDA for approval.
The conditions of the merger specify:
- Final FDA approval of the Product on or before December 1, 2020, if as of such date there are no pending queries from the FDA with respect to such Product approval, but if there are such pending queries from the FDA as of such date, then such FDA approval shall have been obtained on or before April 30, 2021;
- Labelling for the Product containing an indication as moderate to moderately severe (post-operative) pain, not restricted to any specific type of surgery; and
- Classification of the Product by the U.S. Drug Enforcement Agency (“DEA”) as a Schedule IV Drug under applicable Legal Requirements;
If the merger is completed following FDA approval, Avenue shareholders will get an additional kicker in the form of a CVR tied to the sales of IV Tramadol with a $325MM annual revenue threshold with a favorable graduated tier scale above that. One similar example to look at is IV acetaminophen (Tylenol), it is both a success story we can point to where it was approved in oral form for many years and then was only recently (well, 9 years ago) approved in IV form, but a quick Google and there's a lot of dispute whether the IV form is any different from than oral, especially hard to justify given that Mallinckrodt has done a series of price increases. In 2017, IV acetaminophen did $300MM in sales, still below the CVR threshold for Tramadol many years after IV acetaminophen was commercialized. But again, Tramadol might have a better chance of filling that pain gap than acetaminophen considering it's a weak opiod, either way, the CVR's value is likely many years off and not worth underwriting.
Avenue is an interesting binary outcome, the market is pricing in a less than 50% of chance of the merger with Cipla being completed, despite what appears to be a mostly straight forward FDA approval process (at least to this clueless retail investor) considering the drug is already approved in a different form in the U.S. and in the same form in many other developed markets. Why is it mispriced? Management answered this question by pointing to the lack of investor relations and promotion, they don't need additional financing after the deal with Cipla to complete the FDA approval process, so no need to promote the stock. Makes some sense to me along with the relatively low float given the large stakes owned by FBIO and Cipla. Additionally, I think people don't like such explicitly binary outcomes and general loss aversion keeps people away despite the seemingly favorable odds. Thanks to "Ben's Jamin" who mentioned Avenue in a comment section a while back.
Disclosure: I own shares of ATXI
Thanks for the idea. Already follow this idea. Your thesis is very complete. For more information, maybe you can check this. Always thanks for your sharing.
Thanks SQL - great post, better sense of the risks now, I'll need to read through it a couple times to fully digest it, encourage others interested in Avenue to do the sameDelete
Have you take a look at RRGB? Interesting merger arb opportunity.
I do like that one - As I'm sure you've seen, Andrew Walker recently did a post on it along with all the activity at TAXA (this week they bought the Outlet segment of SHOS, these guys are moving fast on their new plan!), not sure I have much else intelligent to add.Delete
HGV is another interesting one to look at, I guessed that Apollo might try to take them out because of Diamond Resorts (unfortunately didn't do anything with that guess), I don't think Apollo could re-IPO Diamond as-is at a decent valuation, combining Diamond and HGV would help them move up market and rebrand the combined company down the road when they want to exit.
Yes, I followed Andrew and he did a great analysis on RRGB.ReplyDelete
HGV is interesting. It has become a bidding war. Will take a look at this.
Apollo is trying to steal HGV for ~10x ebitda while precedent transactions suggest prices that are a good deal higher.ReplyDelete
Thanks for the post and I found this opportunity very interesting. One question:
-I was looking at the merger requirements and saw that the product cannot be subject to REMS. Have you looked into this? It seems like most other opioid based painkillers are subject to REMS.
I ultimately feel like the risk here is that some obscure provision of the merger agreement isn't satisfied, but I find it to be a compelling stock.
Good question - I read it as a REMS related to the IV piece specifically of IV Tramadol, because you're right, appears that every opioid is subject to REMS - including Tramadol. That clause was negotiated for a reason, so certainly it could provide Cipla an out if they're looking for one. If others have a more intelligent take, please chime in too.Delete