Solskin
Alimera Sciences, Inc. (NASDAQ:ALIM) is being acquired for $5.50 per share by ANI Pharmaceuticals (ANIP). This is a ~$430 million deal, which is large given the acquirer's $1.16 billion market cap. The deal also includes a contingent value right that is ultimately either worth $0 per share, $0.25 per share or $0.50 per share depending on whether certain post-acquisition targets are met.
This deal could have been closed by now. Ostensibly, requirements have been met and shareholders have voted in favor. The stock was hammered, however, when Alimera issued a press release yesterday that it is suing ANI to close the deal. The stock quickly fell from ~$5.55 to $4.41 at the lows.
This could mean plenty of different things. Generally, though, it isn’t great for a deal when the acquirer needs to be sued. Good mergers are ones where nothing happens. The market didn’t take it as a sure deal failure because then it would likely have traded around ~$3, but it was viewed as a highly negative development.
Surprisingly, the acquirer quickly followed up with its press release that said the following:
ANI Pharmaceuticals, Inc. (“ANI” or “the Company”) (ANIP) today provided an update on the status of the completion of its previously announced acquisition of Alimera Sciences, Inc. (“Alimera”) (ALIM).
We note the Alimera press release issued today. The Company continues to work in good faith toward closing of the acquisition. Any delay is a result of discussions regarding closing conditions, which the Company expects to resolve promptly.
This is an excellent sign because it seems to indicate that the acquirer is still interested in closing. It takes off the table numerous scenarios where the acquirer changed its mind and will try to get out of the deal. After the initial drop, I looked at ALIM’s earnings and both companies' most recent earnings calls. What stood out to me is that ANI still appeared highly interested in closing this deal on its latest call, which was held on August 9 after ALIM’s latest earnings that were reported on August 6. From the earnings call (emphasis added):
In June, we delivered a major milestone in our growth strategy with announcing the proposed acquisition of Alimera Sciences. This highly synergistic transaction will add two commercial assets in ophthalmology to our rare disease portfolio and more than $100 million in highly durable branded revenue annually. The acquisition is aligned with the M&A strategy we laid out over the past several quarters.
Specifically, this transaction will expand the scope and scale of our rare disease business and strengthen one of our priority therapeutic areas of ophthalmology, which is also a key specialty for our lead rare disease asset, Cortrophin gel, and the overall ACTH market.
The deal will provide ANI two durable assets with double-digit growth. With Alimera, ANI's rare disease segment would account for approximately 45% of the total company revenues on a pro forma 2024 basis. And we expect rare disease to be the largest driver of the company's future growth.
From a financial perspective, we expect high single-digit to low double-digit accretion in adjusted non-GAAP EPF in 2025, with substantial accretion thereafter. Integration planning is well underway, and the transaction remains on track to close later this quarter.
I highlighted the fact that the companies are already planning integration (you are not allowed to start integration) which I take as a good sign there is a clear commitment to closing at that time. The remarks about the deal show no indication of second thoughts about the deal because of unanticipated adversity in the business. The PR is in line with that.
ANIP initially let us know that the hold-up is being caused by discussions about the closing conditions. This morning the companies have issued a PR where they agree to close on Monday, September 16 and the stock almost fully recovered. As is, I still think ALIM is very attractive here at $5.54.
At closing, you get $5.50. That means you’re currently laying out $0.04 to get two CVR’s (contingent value rights) each possibly paying out up to $0.25.
These CVRs are structured according to a sliding scale related to fiscal 2026 and fiscal 2027 sales targets. I’ve rarely seen a structure like this employed. The CVR payout on the 2026 one, goes from $0 to $0.25 per share as ILUVIEN and YUTIQ revenue go from $140 to $150 million. The 2027 milestone goes from $0 — $0.25 per share as sales range between $160 and $175 million.
This means it is hard to miss the first one and hit the second one. If the company hits the first one, it is likely it will hit the 2nd one to an extent. It is a very granular and detailed payout structure. One of the advantages of this structure is that there is very little incentive for the acquirer to try to dodge the payout. In general, it can be quite risky to manipulate growth to avoid CVR payouts. It is even less attractive to dodge sliding scale payouts. The entire CVR related payout isn’t that large compared to the deal size anyway.
Just before all this upheaval, the stock traded around $5.55. If it can be had for around $5.55 or $5.56 pre-market. I think that’s an excellent price. Closing is now more certain than ever. Meanwhile, the CVR is still trading $0.01 from where it traded before all the upheaval.
Granted, the CVR’s are not a sure thing. The whole reason for these instruments is to bridge a gap between what the seller and acquirer believe to be reasonable assumptions. Here the wrangling seems to be about a relatively small difference in revenue expectation. Both the seller and the buyer view these as double-digit growth assets.
The seller has been spending meaningful amounts through 2024 to build out the sales base and has been iterating on approaches to sell these products. This process has not been “solved.”
The buyer also has ideas on how to drive sales and increase the efficiency of the process. Alimera guided towards over $105 million in sales for 2024. If this is barely hit, it requires a further 16% annual growth rate to hit the 1st milestone. To hit the 2nd milestone, revenue growth would need to be around 15% per year. I recommend Long Term Capital’s article for a more in-depth investigation of drivers that could help revenue hit this level. I think it will be challenging to meet the milestones, but it is possible. If they are hit, the sliding scale makes breaking even on the CVR relatively straightforward. Then there is significant room to make a multiple on the CVR as it trades at around $0.04 — $0.05 and the payout could get up to $0.50.
Given the relatively short timeframe involved, that is a highly attractive multiplier. Consequently, I added some Alimera Sciences, Inc. shares in the pre-market after the companies communicated they would close Monday.
