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Previously it was announced that Opko Health Inc. (OPK) would acquire Prolor Biotech Inc. (PBTH) in an all-stock transaction roughly valued at about $480 million, or $7.00 per share for each share of Prolor common stock. The transaction is expected to close in the second half of 2013.

What to Know About Prolor

If you are not aware about Prolor Biotech, here is a quick summary of what you need to know. Prolor specializes in long-acting versions of already approved therapeutic proteins. Prolor currently has three major market indications it wishes to address with its technology and each addressing a sizeable market. These market indications include growth disorders ($3 billion), hemophilia (about $2 billion), and type 2 diabetes / obesity ($2 billion).

These are all sizable market opportunities and to top it off; Prolor offers a significant advantage to current once-a-day treatments. For instance, their once-a-week human growth hormone (hGH-CTP) not only offers convenience for both patients and doctors, but also has an excellent safety profile due the simplicity and nature of the protein. CTP (the added protein to increase longevity) offers a considerable array of future applications. CTP also posses limited risk of immunological or toxic events, while still maintaining biological activity of the overall protein within the bloodstream.

Currently, hGH-CTP for adults is expected to move into phase III trials by the end of 2013. Likewise, the children indication of hGH-CTP phase II is currently ongoing. There are also two products in phase I trials: GLP-1, which is used in the treatment of type II diabetes and factors VIIa and IX; both used in the treatment of Hemophilia.

Prolor also isn't the first/only to apply CTP to various proteins. In fact, after CTP's discovery at Washington University of St. Louis, the technology was exclusively licensed off to Prolor and Merck (MRK). Prolor has rights to basically everything else except; thyroid stimulating hormone, luteinizing hormone, human chorionic gonadotropin, and aforementioned follicle stimulating hormone. Merck received approval in Europe for their drug Elonva® (corifollitropin alfa injection) back in 2010 and proved the legitimacy and applicability of CTP due to the ability to initiate and sustain multiple follicular growth for an entire week; replacing the need for daily injections. The overall point is that Prolor has a lot of potential as they move forward and their hGH-CTP has the ability to capture a sizable chunk of the growth disorder market; positioning Prolor as a formidable biobetter company.

So What? Prolor Is To Be Acquired By Opko Health

That's the point! Why should Prolor be acquired for a meager $480 million when Prolor addresses markets that it can have an advantage in? Even if Prolor has no intention of bringing its drugs to market on its own, they could still have decent royalty revenue which would fuel future CTP applications and thus further projected income.

I originally purchased shares of Prolor for long term holding. I'm sure a great deal of investors of Prolor had the very same holding periods in mind. Opko Health buying Prolor at this point seems like a steal at $480 million. Despite the announcement, I do not think this is going to go through. Despite CEO and Chairman of Opko Health, Dr. Phillip Frost owning about 20% of Prolor common stock, the shareholder backlash at this point seems far too large for the deal to go through at current valuations. In one week, numerous law firms have begun to demand a higher price on behalf of shareholders and, in my personal opinion, if Opko Health does not sweeten up the deal or have a significant increase in its own shares (since it's a share for share transaction), this deal is probable to fall through.

The Deal and the Possibilities

As of 4/26/13, Prolor shares trade at $6.30, an 11.1% upside to $7.00 and a 12.5% premium to what shares traded at in the beginning of the week. The deal currently offers a total premium of about 25% on $5.60. Despite a 25% total gain and a current gain of about 11%, this current premium is not as delightful as the possible future profits Prolor could have in store for it. Some analysts have projected a share price of about $10 to $15 for Prolor. Deerpath Capital indicated that the Company is worth more than $10.00 per share. The overall point here is that the company has been deemed undervalued compared to the current buyout price. So there are a few things investors can do now to take advantage of the situation. Currently, there's about an 11% upside as I am writing this, and so an arbitrage play is defiantly a possibility; but 11% may not be all you get. Considering the current shareholder backlash and analyst valuation of the company, there could be further gains (assuming Opko raises its offer). If Prolor is offered $10 per share; (about 58.73% upside from $6.30) valuing the company at about $634 million and if at $15 per share (138% upside from $6.30), the company would be valued at about $951 million.

Worst Case Scenario For Now

Even if the deal didn't go through at $7.00 per share, and if an investor were to purchase shares now at $6.30, the probable scenario would be that the shares fall back to their $5.50 levels. This drop would propose a 12.7% downside from $6.30. This is not the end of the world either, because even if this acquisition doesn't work out, Prolor still has the possibility of being a profitable and very successful company in the future.

Conclusion

Although I can't tell the future, at the current valuation and possibilities, I believe it's safe to say that Prolor offers a nice arbitrage play with a speculative bonus. Based on the possible upside and limited downside as addressed above, I personally feel comfortable increasing my shares. In fact, I have already increased my position as of 4/26/13, and have the intention of increasing it further.

Please feel free to express your opinions below as I greatly appreciate opinions and criticism. I understand everyone is different in their views towards particular subjects of interests and whether or not you agree with my views, I still appreciate your feedback. I only hope my article provided some insight and help in your investing analysis. Please also keep in mind I address my opinions and views in this article and encourage readers to forge their own opinions when considering trades and investments.

Disclosure: I am long PBTH, MRK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Source: A Sweeter Deal On The Horizon For Prolor Biotech?