Home Value Investing Flawed Deal w/ INFI, Activist Goal

Flawed Deal w/ INFI, Activist Goal

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Flawed Deal w/ INFI, Activist Goal

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MEI Pharma (MEIP) ($50MM market cap) is a fledgling scientific stage biotech that has a pending merger with Infinity Prescribed drugs (INFI) ($18MM market cap), the merger is dealing with activist pushback from a shareholder group (14.8% stake) led by Cable Automotive Capital and Anson Advisors.  

Final November, MEI Pharma’s growth associate (Kyowa Kirin) on their major drug candidate (Zandelisib) walked away after the FDA offered suggestions on the necessity for a brand new scientific trial design that may be expensive, the partnership ended and MEI Pharma laid off a very good portion of their workers.  The corporate does have two further packages, each in Part 1b trials with anticipated readouts round year-end.  In February, in an try to restock their growth pipeline, MEIP entered right into a stock-for-stock merger settlement with INFI the place INFI shareholders would find yourself with 42% of the brand new firm (to be renamed Kimbrix Therapeutics – KMBX) regardless of solely bringing $4MM in internet money to closing in comparison with $80MM from MEIP (utilizing the minimal internet money quantities within the merger settlement).  INFI has one product of their pipeline, Eganelisib (for use together with Keytruda) for sufferers with a sort of pores and skin most cancers, that desperately wants capital to fund a part 2 trial.  As ordinary, I’ve no view on the deserves of the science, however it’s clear why INFI desires to do that deal, with out it, INFI will run out of money rapidly and be pressured into a fast asset sale or liquidation.  From INFI’s Q1 10-Q:

If the Merger isn’t accomplished, we might want to increase further capital with a purpose to efficiently execute on our present working plans to additional the event of eganelisib. If the Merger isn’t accomplished, we are going to discover different plans to mitigate the circumstances which increase substantial doubt about our potential to proceed as a going concern. We think about one of many following programs of motion to be the most certainly options if the Merger isn’t accomplished:

Pursue one other strategic transaction. We could resume the method of evaluating a possible strategic transaction, together with the sale of the corporate or its belongings. Based mostly on our prior evaluation, we don’t anticipate that we’d have the mandatory time or monetary assets to pursue one other strategic transaction just like the proposed Merger.

Wind down the corporate. If the Merger doesn’t shut and we’re unable to enter into one other strategic transaction, our board of administrators could conclude that it’s in one of the best curiosity of stockholders to stop regular operations and wind down the corporate by means of chapter or dissolution proceedings. In such case, there can be no assurances as to the quantity or timing of accessible money remaining, if any, to distribute to stockholders after paying our obligations and setting apart funds for reserves.

MEIP’s intentions are much less clear as the corporate trades effectively under money.  The agreed stock-for-stock alternate ratio is 0.052245 MEIP shares for every share of INFI, at present costs, the unfold is roughly 100%; the market has severe doubts this merger can be authorized and/or vital issues about INFI’s worth on a deal break.  Final week, the corporate postponed their shareholder assembly to July twenty third, presumably as a result of they do not have sufficient votes, and this week, the activist group filed a preliminary consent solitication looking for to interchange the whole board.  Regardless of having the assist of the proxy advisory companies, this merger appears doomed to fail.  Nonetheless, MEIP does have two readily obvious various choices:

1) The activist group did beforehand submit a proposal to purchase the shares they do not already personal for “money consideration of not lower than $8.00 per share” plus a CVR for the disposition of MEIPs remaining scientific belongings.  Administration has rejected this proposal.

2)  As a part of MEIP’s strategic options course of, they did consider a liquidation, from the S-4 (6/2/23):

 Liquidation Worth

The professional forma DCF analyses suggest a big premium to each MEI’s standalone DCF valuation vary and present buying and selling worth. Torreya additionally in contrast the implied worth of MEI as introduced within the professional forma DCF analyses to the estimated liquidation worth of MEI. To calculate the liquidation worth, administration offered its finest estimate for the money obtainable to shareholders upon a hypothetical liquidation. Based mostly on discussions with administration, a hypothetical liquidation may happen within the second quarter of 2023, and after paying all wind-down obligations, a completely wound-down MEI entity can be left with $82.8 million of accessible money. This could suggest a liquidation worth of $0.62 per share. On condition that the professional forma DCF represents a big premium of as much as 134% to the liquidation worth, and as much as 52% within the situations with required fairness fundraising, Torreya believes the DCF helps their opinion that the alternate ratio is truthful to MEI shareholders.

That evaluation was pre-reverse cut up, post-split the liquidation worth per share can be $12.40.  Just like MGTA, the liquidation evaluation assumes an unrealistic situation the place the corporate could possibly be wrapped up inside a number of months with minimal bills.  A extra life like situation is as follows:

To be a bit conservative, I am utilizing the minimal internet money quantity required if the deal closed in July of $78MM.  That is seemingly too low, administration’s projected (versus the minimal to shut the deal) internet money stage as of 6/30 was $92.8MM, however MEIP is spending cash on this merger and preventing off the activists, is sensible to be somewhat conservative.  After which MEIP would escrow $10MM for any contingencies and nonetheless have the ability to make an preliminary distribution of $10+, effectively above the place the shares commerce at the moment.  I purchased shares not too long ago.

The largest threat I see, even when the deal breaks and the activist group fails to take away the board, MEI Pharma may proceed on with their two part 1 product candidates whereas burning money.

Different ideas:

  • Infinity Prescribed drugs (INFI) on a break could be fascinating in a really speculative manner.  The corporate does not have any actual debt the liabilities, the associated to sale of future royalties line merchandise on the steadiness sheet is just payable on the receipt of any royalties to belongings they’ve beforehand bought (and are not Eganelisib).  Even in a probably conflicted sale, MEIP did assign considerably extra worth to INFI’s IP than the market.
  • Daniel Gold stepped down as CEO on 6/2 and was changed by former Common Counsel and COO David Urso, in all probability a non-event as INFI administration would take over the reigns, however reveals somewhat insecurity in seeing the deal by means of to completion.
  • One other in all probability nothing-burger, however MEIP and INFI do share a board member, Sujay Kango who orchestrated the unique assembly between the 2 firms, he then excused himself in accordance the background part within the S-4.

Disclosure: I personal shares of MEIP

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