Javelin Pharmaceuticals (JAV) is a specialty pharmaceutical company with a focus in the pain management market. Their primary technical innovations are improved formulations of existing drugs. Javelin has one marketed product - Dyloject - in the UK. In the US, it has submitted a New Drug Application (NDA) for Dyloject and has two drug candidates in Phase III clinical development: Ereska (intranasal ketamine) and Rylomine (intranasal morphine).
Its stock price has been in wild swings in the last several months because of its involvement in two M/A activities. Late last December, Myriad Pharmaceuticals (NASDAQ:MYRX) entered into an agreement to merger with Javelin. But in April shortly before the closing date, Javelin struck a better deal with Hospira (NYSE:HSP) for an all-cash acquisition of $2.20 per share (~$145M in value with a ~60% premium over its closing price). However, things are not all rosy from there for Javelin share holders. On May 19th, Hospira announced that it is extending the tender offer for another 2 weeks because certain conditions were not fully satisfied prior to the expiration of the initial offering period. Understandably, Javelin's stock price dropped ~40% at the start of the day. But that's not all; five days later, Javelin announced that its UK partner, Therabel Pharma which licensed the commercial rights to Dyloject in the European Union, is withdrawing the product from the UK market because of the presence of a white particulate matter in some vials of Dyloject in its supply chain. It appears to be a bigger blow to Javelin and its stock price dropped to as low as $1.15, but it soon bounced back to as high as $1.77 the day before the deadline of the extended tender offer.
On June 3rd after the expiration of the extended tender offer, Hospira announced that it has already have ~78% of the outstanding shares of Javelin common stock tendered but decided to extend the offer one more time for another two weeks. Again, the reason cited for the extension was that not all of the conditions to the offer had been satisfied; although not specified, Hospira did mention that the supply chain problem was one of the issues they were still evaluating. Javelin then promptly filed lawsuit against Hospira for breach of agreement. Investors are certainly disappointed again with JAV trading at ~$1.3 which is right around where it was before the Hospira offer. So what will happen next? I don't have a crystal ball, but the following is my take on the recent events and a peek into the not so distant future.
I think there are three scenarios that may play out:
- Hospira brushes off all the concerns and completes the acquisition;
- Hospira finds the supply chain problem is big and serious enough, but still likes the product and its potentials thus decides to reduce the offer price.
- Hospira has buyer's remorse and backs off from the deal.
Obviously with the worst-case scenario, JAV's share price may be depressed even further. But here are a few observations making me think that scenario #1 or 2 is more likely to happen than #3:
Dylojet fits with Hospira's business vision; its CEO publicly stated that he likes the product at the Sanford C. Bernstein's 26th Annual Strategic Decisions Conference 2010 on June 2nd, one day before the announcement of the second extension.
- Dylojet has been on the UK market since 2007; this is the first report of a supply chain problem which should be solvable.
- Hospira is buying JAV for its pipeline and Dyloject's US sale potential, not the EU market.
- Hospira has much more experience in dealing with manufacturing of injectables. Its scientists are aware of it and if the problem is really serious they can just call the whole thing off rather than extending it one more time.
- Details of the buyout agreement are not available to the public but Javelin's lawyers must have studied it. The fact they sued Hospira right away suggests such a supply chain problem would not materially affect the agreement.
So what if Hospira does decide to back off from the deal? Is this the end of the world for Javelin? I think not. Dylojet is a new formulation of a generic drug that has been on the market for ~30 years. Javelin's two pivotal Phase III trials were very successful, and a nod from the FDA is very likely. That's pretty much why Hospira liked Javelin in the first place. With Hospira out, Myriad may want to rekindle the flame. Other specialty pharmaceutical companies may be interested as well. Even without an immediate suitor, the anticipation or the actual approval from the FDA may still be able to move the stock price substantially higher. Of course, Javelin is currently operating with very limited cash; so another round of dilution may be required in the near future.
All in all, I think there definitely is risk to trade JAV without knowing whether the deal with Hospira will go through. However, with a drug candidate on the verge of regulatory approval, a couple more in Phase III trials and a current market cap of only $85M, I believe the downside risk is limited. A little bit of patience and a strong stomach may yield a sizable profit within a fairly short time frame.
Disclosure: Own JAV shares at time of writing.