BioCryst Investors Breathe Sight Of Relief, But What's Next?

Completing BioCryst's (NASDAQ:BCRX) all-share takeover of Presidio Pharmaceuticals was always going to be tricky after the acquiring company's stock lost two-thirds of its value. But the curious thing about the deal’s termination, announced on Friday after three weeks of legal wrangling, was how much BioCryst’s shareholders loved it.

Confirmation that the takeover was being canned caused an early 56% surge in BioCryst stock before the shares settled back and closed up 8% at $1.72. But this sigh of relief at BioCryst being spared some particularly onerous terms belies the risks now facing a company that hardly has a pipeline and is desperate for cash. Perhaps reality dawned this morning when early trade wiped out Friday’s gains.

After the Nov. 8 failure of its lead project, peramivir, BioCryst had insisted that it remained committed to buying Presidio, but the writing was on the wall. The double setback of peramivir and BCX5191, a hepatitis C agent whose U.S. IND was withdrawn on toxicity concerns, had destroyed BioCryst’s share price and threw the takeover’s financial metrics into doubt ("BioCryst flu failure puts Presidio move in doubt," Nov. 9, 2012).

The company’s only remaining asset of any immediate value is a Phase II gout project, ulodesine, and any remaining case for investing in its stock rests on this being licensed out.

No Floor

Not only had the Presidio deal been structured as an all-stock move, it was also dependent on a $60 million fund raising, and crucially the agreement did not set a floor on the latter’s price. Given how depressed BioCryst shares are, if an equity offering were to be attempted -- assuming that it was even possible -- it would have necessitated the issue of such a huge amount of stock at such a steep discount that current investors would risk almost complete wipeout.

Then again, if the financing were not done but Presidio refused to be freed from the takeover, BioCryst might have had to advance it $6 million or, under certain circumstances, pay it a $10 million termination fee. The threat of further share price damage on one hand and the risk of additional liabilities if the deal remained in limbo on the other explains the initial investor exuberance on its scrapping.

Clean Break

The termination document stipulates the ending of both the deal and the associated financing "without further action of any party," and such a clean outcome would have been unlikely if Presidio’s private investors did not themselves also have good reason to want out. They had agreed to sell the company for a fixed number of BioCryst shares -- now worth a third of their October value -- as well as undertaking to participate in the equity raise.

The second key to the break is the presence of Baker Brothers as a prominent investor of both companies. Baker was clearly a major driver of the initial deal and, conversely, must have fought hard to limit its own losses when it fell apart.

Still, operationally the alarm bells might have been ringing even before the peramivir failure. Presidio’s main assets were two hepatitis C candidates, and the obvious combination approach was put in doubt by the stumble of BioCryst’s BCX5191.

Perhaps taking advantage of the focus on Presidio, BioCryst last week also quietly revealed that its hereditary angioedema project BCX4161 had been placed on clinical hold because of a manufacturing issue. The company had wanted to start a phase I study with BCX4161 by the end of the year, but now says this will be delayed by at least three months.

The most pressing issue now for the failure-prone BioCryst is that it has barely a year’s cash in the bank. With a practically empty pipeline and a share price that makes equity fund raising virtually impossible it is difficult to see which way management can now turn, assuming that they remain in their jobs for much longer.

The company has promised to reveal its "future strategy and initiatives" on Dec. 7. Investors expecting a miracle solution should probably not hold their breath.