- Ipsen has bid for Epizyme at $1.45 per share cash
- There's also a potential $1 contingent value right
- That $1 is currently valued at 10 cents
Ipsen (OTCPK: IPSEY) has bid for Epizyme (NASDAQ: EPZM)and the structure of the deal gives a possible $1 value CRV option at a price of 15 cents. Is this something that we'd want to buy into?
Epizyme is a commercial-stage biopharmaceutical company working on epigenetic medicines for cancer and other diseases. The major drug is for epithelioid sarcoma and there are others in varied and late stages of development. Overall market capitalisation is around the $150 million level – before the bid that is. That Epizyme stock is down 90% over the past year is not a grand sign for the success of the company, that has to be said.
So, Ipsen comes in with a bid. Epizyme stock was at 95 cents before the bid and now trades, premarket, at $1.55. Which could be seen as a little odd as the bid is at $1.45 cash. So anyone buying in at this price is guaranteed to lose cash – except not so fast. There is actually an associated option along with the cash bid. That's what makes the Epizyme takeover a little more difficult to value.
A contingent value right is not entirely unusual in this pharma space. Clearly, there's a value to those drugs in development. But that value is highly variable dependent upon who is valuing it. Those who are certain that the drug will work, gain FDA approval and then sell well will put one value upon it. Those who are more dubious about one or more of those stages rather less. During a takeover – especially for cash, all stock deals are easier – that difference in valuation of the future can be a killer blow to a deal being done.
The solution is to agree the takeover of the company, then possible additional payments dependent upon the performance of drugs under development. Those contingent value rights. Here, the cash bid is at $1.45. That's a decent premium to Friday's closing 95 cents price. It also solves all of the development capital problems for Epizyme. But there's the possibility of those extra payments as well.
Those CVR payments are a further $0.30 cents per share if and when Tazverik achieves quarterly sales of $250 million, plus another $0.70 cents if and when Tazverik and other drugs are FDA approved as a treatment for follicular lymphoma before Jan 1 2028.
Now we out here aren't all that well placed to judge how likely any of those occurrences are. So, we can't really place a value on the CRVs. On the other hand, the nominal value is $1, the current price of them is $0.10. For that's the premium of the current Epizyme stock price over the immediate cash component of the bid. Whether that's a fair price depends upon the probability assigned to that CVR paying out. What probability will we assign? That determines the trading position then.
What is obvious though is that if the Ipsen bid drops back to that $1.45 cash component of the bid for Epizyme then that option comes for free. So, perhaps we should simply watch for weakness in the Epizyme stock price during the rest of the bid process. Sure, options often don't pay out but free ones always have a value.