The DPRX/PLXP Transaction
I'll start with a very high level overview of the parties to the merger and the merger terms.
Dipexium Pharmaceuticals, Inc. (NASDAQ:DPRX) is a late-stage pharmaceutical company focused on the development and commercialization of Locilex® (pexiganan cream 0.8%), a novel, broad-spectrum, topical antibiotic peptide, which recently announced that Locilex® failed to meet the primary and secondary endpoints in its OneStep-1 and OneStep-2 Phase 3 clinical trials.
PLx Pharma Inc. (NASDAQ:PLXP) is a late-stage specialty pharmaceutical company initially focused on developing its clinically validated and patent-protected PLxGuardTM delivery system to provide safer and more effective aspirin products. PLXP's FDA-approved lead product, Aspertec 325 mg, is a novel formulation of aspirin that utilizes the PLxGuard delivery system to reduce acute GI side effects while providing superior antiplatelet effectiveness for cardiovascular disease prevention as compared with the current standard of care, enteric coated aspirin. A companion 81 mg dose of the same novel formulation - Aspertec 81 mg - is in late-stage development and will be the subject of a sNDA leveraging the already approved status of Aspertec 325 mg.
On December 22, 2016, PLXP and DPRX announced a merger of the companies. Under the terms of the agreement, based upon the number of shares of DPRX common stock to be issued in the merger, current DPRX stockholders received approximately 23.25% of the combined organization and PLXP stockholders received approximately 76.75%.
The merger closed on April 19, 2017. In connection with the completion of the merger, DPRX effected a reverse stock split of its issued and outstanding shares of common stock at a ratio of 1-for-8. Immediately following the merger, there were 6,037,824 shares of common stock of the combined company outstanding.
Before diving more into PLXP and the recently closed merger, I'd like to level set on reverse mergers for those that may not be familiar.
A "reverse merger" is a merger between a public and private company that allows the private company to go "public" while avoiding a long, expensive traditional IPO process. Among other costs, a reverse merger avoids the hefty underwriting fees that come with an IPO - often assessed as a % of gross proceeds. A reverse merger typically consists of a publicly traded shell company and a private company seeking easier access to capital via public equity markets.
The reverse merger process has been abused, as private, at times fraudulent companies seek to avoid the disclosure and due diligence that comes from a traditional IPO process. There are many instances, particularly in China, in which this has been the case. Reverse mergers shouldn't be painted with a broad, negative brush, but in these situations, extra caution and diligence is warranted.
Taking our case study specifically, PLXP and DPRX fall in line with a typical reverse merger. PLXP was a private company seeking to commercialize Aspertec, an FDA-approved alternative OTC aspirin. PLXP determined that a traditional IPO would not have been successful. The filings also disclosed under $2 million in combined 2016 and 2017 transaction related expenses, which likely was not exclusively related to the merger and still significantly less than expected expenses in an IPO.
The S-4 Filing: Fairness Opinion
The S-4 filing with the SEC is used to detail any material information related to a merger. The form is also used to detail exchange offers.
For DPRX/PLXP specifically, the details of this filing were relatively disregarded by the market (volume and volatility). There were, however, a few aspects of this particular filing that are worth additional consideration.
DPRX's financial advisor, Raymond James, published a fairness opinion at the discretion of the DPRX BoD and on behalf of the DPRX shareholders, and this opinion, as well as any fairness opinion expressed in any S-4, should be taken with a grain of salt. One intention of the proxy materials is to solicit shareholder approval of the transaction, and the company has no incentive to publish a fairness opinion that is highly conservative and suggests that shareholders should hold out for a better outcome. Any valuation comes at a distance and with qualifiers, and DPRX's S-4 filing is no exception with these disclosures starting on page 77 of the final, amended filing.
All that said, the difference between Raymond James' S-4 filing fairness opinion and the current market capitalization of pro forma PLXP is significant, with no new information to suggest the investment prospects of PLXP have changed since the initial filing. At a stock price as of close 4/24/2017 at $7.60 and a disclosed share count of 6,037,824, PLXP's market cap sits at ~$46 million without anticipated dilution. The S-4 fairness opinion of DPRX's advisor yielded very different results across all of the valuation methodologies presented:
The lowest end of the range of the most conservative valuation methodology implies over 200% upside against the current stock price? Another valuation methodology, a traditional DCF based on management's own projections, suggests even greater upside. Management's projections certainly may not be realized, but as a conservative hypothetical, if we assess an 80% likelihood on a value of $0 and 20% likelihood of management's case, we're still 400%+ above the current market cap?
Primarily, I view this as evidence to admonish DPRX's S-4 fairness opinion. We're not even in the same ballpark from where the stock trades today, and we don't have any evidence to suggest the investment thesis has changed since the valuation was published. Most S-4 fairness opinions are going to have a certain level of optimism, as described previously, but this is completely off the mark. If DPRX's financial advisor really stands behind this valuation, then I assume, where applicable/appropriate, they are really pounding the table to load client portfolios up with PLXP stock. Somehow I doubt this is actually the case. If the fairness opinion is going to be many multiples off from realized market value, then what's the point?
On the other side, management's disclosed projections do suggest that PLXP is an attractive lotto ticket. A discussion of valuation wouldn't be complete without an extensive analysis of PLXP's FDA-approved asset Aspertec, which I'll save for another article, but management's view on timing and overall sales don't appear to be unrealistic assuming they execute well. That execution is by no means a guarantee. A modestly improved version of aspirin isn't going to set the world on fire, but doesn't strike me as worthless either. The market currently leans heavily toward the latter.
The S-4 Filing: PLx Pharma's History
The S-4 also describes some other interesting information about the company's history:
"In October of 2015, PLx filed a Registration Statement on Form S-1 with the SEC to register shares of common stock in an underwritten initial public offering to be underwritten by Raymond James. By March of 2016, PLx's efforts to complete an initial public offering had not been successful, and PLx's board of directors and management determined that it was not in the best interest of PLx and its stockholders to continue with the initial public offering... ...PLx's board of directors and management determined that a private financing was the best option available to PLx. To initiate the process in March of 2016, PLx's investment bankers made introductions to a broad range of institutional investors for potential private placements of equity, while PLx's management team initiated contact with numerous other potential investors. Together, discussions were held with more than 50 potential investors, with several participating in active diligence. But, despite considerable efforts, significant interest, and the cooperation of existing investors, by November of 2016, a private financing had still not been completed, when, as described above, PLx was approached by Dipexium as a possible merger partner."
So a botched IPO process and private placement within a one year timeframe? Ouch. Seems as though investors with access to better information than is currently publicly available concluded decisively that PLx Pharma is a pass. However, there isn't enough information to draw definitive conclusion either way. The details of the terms of the equity raise are unclear and may be significantly different than the common stock available today.
The significant sell-off in PLXP post-merger is not supported by any change in the fundamentals of the company. Nothing has been published that would suggest the valuation of the pro forma company would be any different than the implied pre-close valuation of DPRX. If anything, the value should have increased following merger close, as uncertainty regarding the merger's execution is now gone. A failed merger was clearly a worse alternative, as it would have left DPRX with less cash and worse prospects for shareholders.
This article does not address all of the material investment considerations for PLXP - much more can/should be written. However, given the information presented in the pre-merger DPRX filings, the potential of its assets, and current depressed stock price - PLXP is a compelling risk/reward with plenty of risk.
PLPX valuation range: $19 to $29 per share
Disclosure: I am/we are long PLXP.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.