Pfizer/ Biohaven 

We are writing up a special situation, Biohaven Pharmaceuticals. Biohaven is a maker of migraine tablets that is being acquired by Pfizer for $11.6 billion ($148.50 per share). Pfizer is also assuming  all of Biohaven's Debt and paying out its redeemable preferred shares. While we think the arb spread alone is reasonable, we also think investors are ascribing zero value to the remaining 0.5 shares of newco that existing Biohaven shareholders will also receive. We will keep the write up brief and to the point. We will quickly give an overview of the evolution of migraine market, what Biohaven did, and then the evolution of the Pfizer deal. We then will describe the specifics of the deal and the mispriced optionality inherent in newco.

Biohaven and Migraine Solutions

The evolution of migraine solutions is that they began with over the counter pain medications, triptans were then introduced in the 1990s in pill form, then cumbersome weekly or monthly injections followed, with most drugs having medium to serious side effects. The injection solutions were primarily preventative in nature - i.e to prevent the outbreak of symptoms rather than address the symptoms once they arose. Given there are estimated to be over 1 billion global migraine sufferers, the market attracted diverse products to help with the disease.

The newest category of migraine drugs were the anti-CGRP (calcitonin gene-related peptide) treatments, which offered a better solution than the predecessors, but were also injectables. These had less side affects than the previous drugs.

Pills were then developed that obviated the need for injections, as part of the CGRP class of drugs, but were only approved for “acute” cases - i.e after symptoms were beginning to be experienced. This is where Biohaven comes in.

In 2020, Biohaven introduced an orally dissolvable tablet - “Nurtec”. The breakthrough was that it worked faster (w/in 15-30 minutes compared to 60-90 minutes+ for alternative solutions) and, most importantly, had no side effects. At first it was approved for “acute” cases before then subsequently also being approved as a “preventative” solution.

Last fall, Pfizer purchased the International distribution rights for Nurtec ODT. They paid $500 million upfront with $150 million in direct cash and $350 million in purchase of Biohaven equity at 25% premium to marketr. Biohaven did retain a royalty stream of roughly 15% of all International Sales. The market had thought Pfizer would buy the whole company and Biohaven equity got torched post - deal.

Pfizer bids for Biohaven

Fast forward to this week, and Pfizer has now announced that it will purchase all of Biohaven's migraine related assets for $148.50 per share in Cash and deal will close in early ‘23. Pfizer has no competing products, less than 0.3x of leverage, and generates $25 billion+ in FCF per year. Consequently, both the regulatory and financing risks of the deal are de minimus. Time (whether earlier or later in 1H of ‘23) is the biggest unknown and risk.

However, what is interesting is that existing Biohaven shareholders also get 0.5 shares of a new company. This newco will be capitalised with $275 million in cash. It will also have all non- migraine related products under development + a royalty of roughly LDD% if/when US based Nortec revenues exceed $5.25 billion per annum (subject to $400 million cap and until 2040).

We are not experts on Biohaven’s existing non-migraine portfolio and do not claim to know if $5.25 billion per annum for Nurtec ODT is possible. However, given the low risk nature of the bid, we find the existing arb spread more than compensates us for the time value. This means the newco is being created for free. Again, this newco will have $275 million in cash. While we understand that this cash will be spent in development where there will be upfront burn and uncertain returns, this must be counterbalanced by (1) management’s strong track record and (2) the royalty stream on Nurtec and 2 Phase 2/3 products. For instance, we know that Biohaven just recently paid $100 million for the Kw7 platform alone and that this will be in newco. All in, we feel very comfortable using a valuation of $375 million as ($275 million in Net cash + $100 million Kw7) for newco. This excludes any value for a substantial portfolio of other Phase 2/3 products as well as the optionality on potential blockbuster Nurtec Sales. This suggests newco floor valuation of $5.25 per share, or roughly $2.625 per share. We expect that newco was a bone of contention between the 2 companies and that there could be material upside there. We look forward to reading the deal documents to see how the deal structure came about.

Assuming 8 months to close, $148.50 in cash and $2.65 in newco value, we get an 11% annualized return. Even in this higher rate environment, this is an equity like return for what we believe is below equity level of risk. Moreover, our valuation of newco is most likely conservative and will be revealed as such once management begins focusing exclusively on its non-migraine assets.

The downside is obviously that Pfizer walks. We think this is extremely unlikely. First, Pfizer has been the international distributor for Nurtec for almost a year. They know the product and what they are buying. If they had concerns, they would have unearthed them by now. Secondly, Pfizer’s entire business model depends on being able to forge relationships with developers of new drugs. Backing out on such a high profile deal would do irreparable damage to Pfizer’s business model. Third, Pfizer’s financial capacity – even if credit markets seized up – is ample and they can finance the bid with gross cash + their recession resistant FCF stream.