A Review Of Concert's Filed PRE 14A: The CTP-656 Saga May Not Be Done Yet

Summary

Concert recently sold their CTP-656 drug to Vertex for up to $250 million in total consideration.

PRE 14A reveals negotiation dynamics and multiple interested parties.

Because the deal is still pending shareholder approval, more bidding for CTP-656 could be underway.

Concert (NASDAQ:CNCE) recently "sold" their Cystic Fibrosis Potentiator candidate CTP-656, a deuterated Kalydeco (speculated to be a 1x daily version due to a differentiated PK profile), to Vertex (NASDAQ:VRTX) for up to $250mn in total compensation ($160mn in cash and up to $90mn in future milestone payments). Management announced on their recent earnings call that the cash payment would likely come as the deal closes by October 31st of this year, pending due diligence and shareholder approval.

A PRE 14A, or a filing for when a vote is required on a matter not related to M&A, has been filed and is up for review. A piece of the PRE 14A labeled "Background of the Asset Sale" is included, which is typical when a company needs a shareholder vote to sell an asset. These are also included in DEF 14A's when there are sales (proxy materials) and are typically my favorite thing to read when analyzing deals because you get to know if your speculations throughout the process were right or not, as the section is a chronological recitation of events leading to how an asset is sold. I've used this previously in my professional analyses to see if a sale was competitive or not, and this one doesn't disappoint! There is a major implication here that, when reading between the lines, could serve as a near-term catalyst for Concert Pharmaceuticals. This directly contradicts "The Value Investor's" overview that there are no short term catalysts so I really wanted to post it here. (love your work though!)

The Overview

Per the PRE 14A CTP-656 was announced in March 2015, with positive phase 1 data marketed in September 2015. Around the time of the positive data Concert entered into NDAs with seven different parties to discuss potential strategic relationships. (Seven?!) All discussions were preliminary at the time. In this document the included parties are labeled A, B, C, D, and Vertex, but I would argue for our interests that Party C and Vertex are the most interesting. For starters this is because Parties A, B, and D all expressed interest that seemed to have slowly petered out through the sales process.

Anyways, the games begin in March of 2016 when Vertex reaches out with interest, and in May 2016 Concert enters into an agreement to share nonpublic information with Vertex. It's clear from discussions that Vertex wants exclusive access to CTP-656 in these talks, but Concert is adamant that at the time they wanted to work on non-exclusive collaborative agreements.

As negotiations developed Vertex actually tried to purchase Concert in its entirety for $11.50/share in November 2016 when the stock traded at $9.92/share (~$256mn offer). This was quickly turned down by the board (and justly so!). Afterwards, negotiations went back and forth to bump the price of CTP-656 around, while Party C entered the negotiations in January 2017. The last we hear of Party C is in February 2017, where "Party C and its collaborator" request further diligence information, and Concert informs them they would need to move quickly to compete in the bidding process. They're granted access to a data room but it terminated on March. Remember this "collaborator" commentary, because I get to it further in this article.

Between December and March the negotiations are intense, and rather than list the details I figured I'd summarize some key points (for the readers' sanity sake). There are some interesting takeaways from the negotiations to sell a multi-million dollar drug asset that I think we could all learn a thing or two from…

· The balance between upfront payments and royalties were heavily discussed between the two parties. While Vertex wanted to simply buy the entire company for $250mn upfront Concert was much more interested in retaining tail-end value of the asset by attempting to get royalty payments. At the end of the day the companies settled on $160mn upfront, with $90mn in approval milestone payments.

· The approval milestone payments were initially based on a once daily formulation getting approvals, but Concert negotiated getting payment for approval of a therapy including CTP-656 that was not contingent on dosing frequency. This is significant because it's been speculated that by deuterating Ivacaftor (structure name for the branded Kalydeco) you remove drug-drug interactions present in the lumacaftor-ivacaftor combination branded Orkambi that is on the market today.

· Vertex was the group that fought for approval of the deal by Concert shareholders due to their fear they were purchasing "all or substantially all" of Concert's assets. This was the lawyers dotting their I's and crossing their T's, but may come back to bite Vertex in the butt…(more on this below!)

· Vertex's original proposal did not allow for Concert to accept competitive bids throughout the closing of the deal, but Concert was able to obtain the right to accept better offers for CTP-656 (or the company) before the deal closes, as long as they pay $500,000 in termination fees to Vertex. Vertex has a right to top any bids that come in. This was a point negotiated by Concert near the end of the closing of the deal.

· An indemnification escrow account was proposed to be 30% of the sales price, where the cash had to be held for 24 months, and indemnification damages could be higher than the escrow amount. Concert was able to negotiate this down to 10% of the initial purchase price, and limit damages to the escrow account amount. I am not a lawyer so I know little about indemnification clauses, but as an investor I rarely hear of these clauses justifying damages payments.

A Quick Reminder On Space Dynamics

I've previously written on the CF market in depth here. Just as a quick reminder I want to mention that the Cystic Fibrosis space is very competitive, and the therapies on the market are complex. Today the only approved therapies are Potentiators and Correctors. While the science is complex the key for you to understand is that Potentiators are efficacious on their own, but Correctors must be paired with Potentiators to be efficacious. Lastly, combination therapies reach a broader percentage of the CF population (due to genetic variation) than do potentiators on their own.

So Back to This "Party C and its Collaborator"...

So why am I interested in "Party C and its collaborator?" Well it's clear from the PRE 14A that someone with a collaboration agreement was interested in CTP-656 throughout the bidding process but joined the game too late to do the required due diligence needed. It's even mentioned explicitly in the document that,

"Although party C indicated that it might have interest in considering a potential strategic transaction for CTP-656, it did not appear to Concert that Party C would be able to expedite its efforts regarding its stated interest and discussions between Concert and Party C ceased on March 3, 2017."

If you look at the CF market there is only one definitive collaboration in place that I'm aware of, and that is Galapagos (NASDAQ:GLPG) and AbbVie (NYSE:ABBV). They are attempting to construct a triple-drug combination therapy to enter the CF market but it has been a process for them. Galapagos received data on their first clinical potentiator GLPG-1837 back in December 2016 and results were generally disappointing because of a concerning safety profile and questionable efficacy. It's clear that they were interested in pursuing some sort of strategic agreement with Concert, regardless of the state of their pipeline.

Today the company has multiple other studies underway in CF today;

1) A phase 2a study of corrector GLPG-2222 on its own

2) A phase 1 study of a second potentiator being tested for both once daily and twice daily dosing, GLPG-2451, where it expects an interim readout in the first half of 2017

3) A phase 1 study of a third potentiator, GLPG-3067, which began earlier this week

The interim readout for GLPG-2451 is of interest to me because it could change the level of interest Galapagos & AbbVie have in CTP-656. I do want to reiterate that Galapagos may not have been in a rush to analyze CTP-656, but it was interested enough to look into the drug. And, regardless of any developments in their pipeline, because Vertex was adamant that a shareholder vote was needed to close the transaction with Concert we have a deal that is not quite closed (and won't be for a good 8 months). Whether or not the risk that there could be issues in the development of GLPG-2451 (or '3067 for that matter) is real, Galapagos and AbbVie should be fervently researching and discussing the opportunity to buy a candidate in the middle of a phase 2 clinical test (CTP-656 right now). They should be very interested in acquiring the only known deuterated version of Kalydeco that is the same exact chemical structure, and the only Phase 2 potentiator with the expectation of a once daily dosing regimen. I could go as far as to argue that Vertex's interest in fully acquiring CTP-656 and not pursuing licensing agreements says that it could see CTP-656 as being something that could threaten its current CF monopoly, which they would counterbid handsomely to protect.

So where do we go from here?

Today we have a company with roughly $260mn in cash (forward calculation by adding in $160mn from Vertex) with a market capitalization of $400mn. With AVP-786 data coming out mid-2018 (phase 3!) and CTP-543 a potential blockbuster that deserves its own article, both based on a powerful and validated DCE platform, I'm happy holding on to my shares for the years to come. In the meantime, however, I wouldn't be taken back if some surprise bidding erupts for CTP-656 that results in some pleasant and unexpected near-term upside for current shareholders.

Disclosure: I am/we are long CNCE.

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.

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