|Week Ending September 20, 2013|
|By Rajesh Patel, Ph.D|
|Monday, 23 September 2013 15:34|
Retrophin issued a press release on Wednesday indicating that it had proposed to acquire all outstanding shares of Transcept Pharmaceuticals (NASDAQ:TSPT) for $4 per share. Interestingly, RTRX's offer is NOT dependent on a financing contingency. This means that they have probably already lined up financing to make a transaction happen. Let's try to understand whether or not the $4 per share valuation makes sense.
What is Transcept worth
Given that Transcept has 18.76 million shares outstanding plus another 3.85 million shares issuable due to warrants. Retrophin's proposal represents a transaction price of approximately $90.56 million. TSPT's only product, Intermezzo, is approved for treating early awakening due to insomnia. It is a reformulated version of the same active drug as Ambien, at a lower dose and with a time-release formulation.
For the 6 months ended June 30th, TSPT had royalty revenue of $963,000 but paid Purdue advertising expenses of $6.6 million. The company had $77.6 million of cash on hand as of June 30. Since the company burns about $4 million per quarter, current cash on hand should be about $73.6 million. or $3.26 per fully diluted share. If one excludes shares issuable due to warrants (a practice we do not recommend at Red Acre), TSPT actually has $3.92 per share in cash.
In addition to cash on hand, TSPT has net operating loss carry-forwards (NOLs) of $73.4 million. While it's hard to determine the exact value of NOLs since they partially depend upon the tax situation of the potential acquirer, $3.25 per share of NOLs should be worth more than 75 cents per share. For an acquirer who has taxable income, the NOLs income from taxation. Depending upon the corporate tax rate of the buyer, the NOLs could be worth over $1.14 per (fully diluted) share in tax savings.
This analysis suggests that the $4 per share offer is a low-ball opening bid. Even though TSPT has only 1 product, and one that will potentially face generic competition in the not too distant future, the NOLs plus cash on hand are worth more than $4 per share without counting any value for potential future Intermezzo revenues.
Why Retrophin is really pursing Transcept
Let's try to understand why Retrophin's is pursuing Transcept. Here is how the company describes itself on its website:
“Retrophin is a biopharmaceutical company focused on the discovery and development of drugs for the treatment of catastrophic diseases that are debilitating and often life-threatening, and for which there are currently limited patient options.”
Clearly, a drug for the treatment of insomnia related nighttime awakening is NOT a good fit with this strategy. TSPT had another pipeline candidate, T-2061 which the company discontinued development on after it failed to meet primary endpoints in a phase 2 trial. While RTRX has been known to re-purpose drug candidates that failed originally in other indications, we do not believe that this is the case with their interest in TSPT. Our view is that RTRX has absolutely no interest in commercializing intermezzo or in developing TO-2061 for other indications. The real prize for RTRX is the instant up-listing to NASDAQ that a merger with TSPT would provide.
Recall that RTRX, founded by former hedge fund manager Martin Shkreli, originally went public through a reverse merger transaction with shell company Dessert Gateway. While reverse mergers are a cheap and fast way of going public, the problem with going public this way is that the shell company usually has low volumes of daily trading and is usually not listed on a major stock market exchange. Up-listing to a major exchange like NASDAQ is made difficult by the fact that there are average daily volume requirements in order to up-list. One way to solve this problem is to merger with a company already listed on NASDAQ and have the NASDAQ listed entity be the surviving go-forward company. In our view, this is the real reason RTRX is pursuing TSPT. The fact that RTRX made their (so far failed) bid to acquire TSPT public serves to raise the public profile of the relatively obscure firm.
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