Applied Genetic Technologies: No Deadline CVR

It has been a while since I've dipped a toe into the CVR ("contingent value rights") pond, full disclaimer, I've only had one payout in the last 7-8 years, these normally don't work out.  But Applied Genetic Technologies (AGTC) ($25MM market cap) is an interesting situation because it has two buckets of CVR payments with attractive twists: 1) the miscellaneous AGTC assets the acquirer doesn't want that have values you can point to on AGTC's balance sheet; 2) your traditional FDA approval and sales milestones style payment thresholds but without a clock or deadline that often have the appearance to be gameable by CVR counterparties.

AGTC is the typical clinical-stage biotechnology company that relies on open capital markets to fund its development program, with current tight market conditions and their liquidity quickly draining, AGTC announced Monday it is being acquired by Syncona (LON: SYNC) for $0.34/share plus a CVR.  The alternative was bankruptcy as the company has near term debt and only had a cash runway through the end of the year.  AGTC's area of focus is gene therapy treatments, primarily for a rare eye disease, X-Linked Retinitis Pigmentosa ("XLRP"), that approximately 20,000 people suffer from in the U.S. and Europe.  No approved treatments exist for this condition.  In May, the company reported positive clinical results for their AGTC-501 product (positive based on their press release, I have no expertise to be able to confirm), but they don't have the resources to continue development themselves.  This *might* be a non-zero value asset that is just caught up in a terrible biotech capital raising market, Syncona is at least making that bet.

The shares currently trade for $0.37/share, a $0.03 premium (8%) to the $0.34/share cash consideration.  There's no financing condition, the buyer is real, the deal is scheduled to be a quick close (via a tender that launched tonight), now its just time to look at the CVR (link to the agreement) which has 4 potential milestone payments:

Milestone 1. Parent will be obligated to pay up to $12.5 million, in the aggregate, upon the (a) sale, license, transfer, spin-off of, or the occurrence of any other monetizing event, whether in a single or multiple transactions, involving, all or any part of the Non-RPGR Assets (as defined in the CVR Agreement), (b) the sale or transfer of the Bionic Sight Equity (as defined in the CVR Agreement) and/or (c) the sale, lease or transfer of the Manufacturing Assets (as defined in the CVR Agreement), in each case, that closes on or prior to the date that is eighteen (18) months after the date of the closing of the Merger. The aggregate amount payable in connection with such milestone will be equal to the amount by which the sum of (i) 60% of the Gross Proceeds (as defined in the CVR Agreement) attributable to the Non-RPGR Assets and/or (ii) 100% of the Gross Proceeds attributable to the Bionic Sight Equity and/or (iii) 100% of the Gross Proceeds attributable to the Manufacturing Assets (reduced by the amount of certain taxes and expenses as more particularly described in the CVR Agreement), collectively, exceeds $5.0 million;

Milestone 2. Parent will be obligated to pay an aggregate amount equal to $12.5 million upon obtaining U.S. Food and Drug Administration (the “FDA”) approval of a Biologics License Application (BLA) for AGTC-501 to treat patients with XLRP caused by mutations in the RPGR gene, as evidenced by the written notice of such approval by the FDA, which approval (a) must be consistent with the patient population, at a minimum, as established by the inclusion/exclusion criteria of patients studied in the pivotal clinical trial, (b) may be subject to conditions of use, contraindications, or otherwise limited, and (c) may contain a commitment to conduct a post-approval study or clinical trial (the “Marketing Approval”);

 Milestone 3. Parent will be obligated to pay an aggregate amount equal to $12.5 million if, as of the date of the Marketing Approval, no other AAV gene therapy product expressing the RPGR protein (including any derivative or shortened version of the RPGR protein) has received a marketing approval from the FDA; and

Milestone 4. Parent will be obligated to pay an aggregate amount equal to $12.5 million the first time that Net Sales (as defined in the CVR Agreement) of AGTC-501 in any calendar year is equal to or exceeds $100.0 million.

For simplicity, putting these in my own words, the first one is if Syncona decides (unfortunately I don't see anything that forces them to try) to monetize the non eye disease assets of ATGC.  These non-core assets include a 15.2% stake in Bionic Sight (partner in their optogenetic program) which is on the balance sheet for $7.8MM, ATGC's Manufacturing Assets, which I read to mean their $4.7MM in PP&E, plus other early stage programs that AGTC has abandon/paused.  If the total is more than $5MM within 18 months of closing ("Milestone 1 Deadline Date"), the CVR holders receive 100% of the excess for Bionic Sight/Manufacturing Assets and 60% of the excess for the other pipeline assets.  Some big "ifs" ahead, but if Syncona sells the assets in Milestone 1, and if they go for their book value (attributing no value to the other pipeline assets), that equals $12.5MM, or $7.5MM ($0.11/share) in excess of the $5MM threshold to CVR holders.  That would more than cover the $0.03-$0.04 the market is valuing the CVR above the $0.34 cash consideration.

The other three milestones are typical FDA approval and sales related, interestingly, combing through the CVR Agreement, they don't appear to have a termination date other than:

7.8 Termination. This Agreement shall be terminated and of no force or effect, the parties hereto shall have no liability hereunder (other than with respect to monies due and owing by Parent to Rights Agent), and no payments shall be required to be made, upon the earlier to occur of (a) the payment of the full amount of each potential Milestone Payment required to be paid under the terms of this Agreement, (b) the termination of the Merger Agreement in accordance with its terms and (c) the final determination that no further Milestone Payments will ever be payable under of this Agreement. Notwithstanding the foregoing, no such termination shall affect any rights or obligations accrued prior to the effective date of such termination or Sections 2.4(e), 3.2, 7.4 to 7.8 and 7.11, which shall survive the termination of this Agreement, or the resignation, replacement or removal of the Rights Agent.

There is a "Milestone 1 Deadline Date" but no corresponding ones for milestones 2-4.  This leads me to believe there isn't one, that is it open ended intentionally and doesn't allow Syncona the option to slow roll the development of AGTC-501 to reduce their CVR liability.  The total payout if all milestones are met is $0.73/share, to be clear that's highly unlikely to happen, but it seems like a lottery ticket worth taking given the structure of the CVR and the quick close on the deal.

Disclosure: I own shares of AGTC