Thursday, January 19, 2012

Nucs Proliferate

Gilead's acquisition of Pharmasset (NASDAQ: VRUS) has been completed and PSI-7977 is now safely tucked into Gilead's pipeline drawer. As we discussed earlier this year, this was a relatively attractive merger arbitrage opportunity if you could stomach some downside risk.

Sure enough, the love affair with pre-approved HCV products and the companies developing them continues to proliferate. On January 8th, Bristol-Myers (NYSE: BMY) announced it will acquire Inhibitex (NASDAQ: INHX) for $26 or $2.5B. Inhibitex shares were trading at around $10 before the announcement. Inhibitex's crown jewel is INX-189, a nucleotide polymerase inhibitor or "Nuke" for short. For obvious reasons I prefer the acronym "Nuc". If you want to know what a Nuc looks like, here is a nice picture:

Inhibitex shares are trading at $24.61 today. By buying the shares and waiting for the acquisition to be completed, the return on investment would be 5.65%. The acquisition is expected to be closed by February 10th and would result in a spectacular annualized return.

It is important to note that this investment opportunity is somewhat riskier than the Gilead/Pharmasset merger arbitrage trade. INX-189 has not cleared the all important 12 week hurdle in its Phase II trials and therefore it is possible that an adverse event such as liver toxicity signals in patients enrolled in the trials will occur prior to close, scuttling the acquisition.

The bidding for Inhibitex was a competitive process as Bristol-Myers had to raise its offer several times to fend off other companies which rumors suggest included Johnson & Johnson and Merck. I highly recommend that you read the Tender Offer filing by Bristol-Myers, which lays out the bidding process in detail, prior to making an investment in Inhibitex shares. You will note that Bristol-Myers was able to review non-public material information prior to making its bid. Somewhat comforting.


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