Description

Fusion trades at $21.4 

AstraZeneca is buying Fusion Pharmaceuticals for $21 in cash and a $3 CVR.

The deal was announced March 19 24' 

 AstraZeneca had a collaboration agreement with Fusion since 2020. 

As a part of their ongoing collaboration, from time to time, members of Fusion’s senior management and representatives of AstraZeneca, including Dr. Susan Galbraith, Executive Vice President, Oncology Research & Development, have discussed the collaboration and more generally non-confidential aspects of Fusion’s and AstraZeneca’s respective businesses.

Fusion presented preliminary results of its phase II trial on April 9.

Poster here:

https://fusionpharma.com/wp-content/uploads/2024/04/AACR-2024-TATCIST-Study-Poster_040524_corrected.pdf

My generalist view is that the sample size seems rather small, but the data is promising, and I especially liked that the poster said:

• Safety signals were consistent with the literature, where higher grades of hematologic toxicity were observed mainly in participants with superscan or who had received multiple lines of chemotherapy

I'm still in the early stages of learning about biotech. Earlier results have been reported by European academic institutions with treatments that are similar. Some of these are described here:

Advances in targeted alpha therapy for prostate cancer - PubMed

First Clinical Results for PSMA-Targeted α-Therapy Using 225Ac-PSMA-I&T in Advanced-mCRPC Patients - PubMed

• The company states a registration-enabling phase 2/3 trial will further evaluate the efficacy/safety of FPI-2265

HSR expired (filed expediently on March 22 2024)

It was just obtained on Apr 23 2024.

There are a number of specialist biotech advisors that hold shares like Orbimed Advisors LLC and Perceptive Advisors LLC. 

When does the $3 CVR hit: 

Each CVR represents the right to receive $3.00, in cash, without interest, subject to any applicable withholding taxes, with such payment conditioned upon the achievement of the following milestone on or prior to August 31, 2029: (1) the submission of an NDA that, if approved, would grant the right to market, distribute and sell the Product for the treatment of metastatic castration resistant prostate cancer in the United States and (2) the FDA’s confirmation of acceptance of the filing of such NDA, in each case of clauses (1) and (2), in accordance with 21 C.F.R., Part 314.101 or 21 C.F.R. Section 601.2 (as applicable).

AstraZeneca has to exert commercially reasonable efforts which is a common but not particularly demanding standard. However, the CVR is relatively small to what they're laying out here. It makes sense for AstraZeneca to see this through and execute well. 

The deadline of August 31, 2029 should be achievable. The phase II study was initiated 2021-12-16. It is scheduled to be completed 2024-12-31 but primary completion is expected at 2024-12-31. Interim results are in. Admittedly, it doesn't appear to leave a lot of room for significant setbacks. 

When I look at CVR values I usually use baseline trial success rates from this paper. 

The baseline for oncology treatments is a 33% success rate for phase II trials and a 47% success rate for phase III trials. 

To hit the CVR we need to attain both. The baselines suggest a combined 15% success rate. 

The baseline for prostrate cancer treatments is even worse at 20% and 56% for phase II and phase III trials, respectively. This compounds into an 11% overall success rate. 

It is possible to argue even with these low baseline figures, the CVR is attractive when it is picked up around $0.40. 

However, it seems highly likely to me, given the positive interim data, that the phase II trial will be successful. Especially given the company's language regarding a "registration enabling trial". This "interpretation" greatly impacts the probability of succes because especially the phase II baseline success rates are extremely low. I don't want to say the phase II trial is 100% in the bag, but for the sake of simplicity, let's assume it is. Suddenly, we are looking at a ~51% chance of hitting the $3 CVR. Even having to wait 5 years that's suddenly an attractive prospect. 

Then there is the fact that AstraZeneca, a long-time collaborator, bought out the company just ahead of this latest data readout. I don't have data on this, but I'm inclined to believe that biotechs acquired by partners have a higher than baseline percentage chance of completing whatever trial their lead compound is in. 

The existing data on effectiveness and safety that predates this clinical trial is also a good reason the baseline success rates underplay the odds of success here. 

It is not impossible for a competing bid to materialize before this closes. The company engaged with 5 other companies in the sales process. I would describe the interest as somewhat lackluster. None except AstraZeneca submitted a real proposal. However, there was one party that seemed more enthusiastic but that was kind of brushed off:

also reported that Party B would require certain data in advance of making a preliminary acquisition proposal. The Board discussed the commercial risks of sharing such data with Party B and the regulatory risks of a potential acquisition transaction with Party B and based on this information, determined not to proceed further in discussions with Party B.

I guess that it isn't a big pharma but a closer competitor. The data requested could be related to the April data readout. Now, all these parties have access to this favorable dataset and it is easier to justify an overbid here. However, none has materialized so far and every day the odds decline. 

I'm also more inclined to believe the market is overlooking something here because the stock traded at $21.20 right after the deal announcement and has bounced around but is still only at $21.40. Meanwhile, the HSR and phase II preliminary readout have been positive. Potentially, both were priced in, but given the unpredictability of trial readouts, that seems unlikely. 

This deal will likely close in the next 30-60 days. It ties up significant capital until the deal closes. Canadian regulators still need to greenlight but I do not expect problems. Afterward, it ties up only $0.40 to potentially make a 7.5x return on the locked up capital (the CVR isn't tradeable).

The odds of success are somewhere between 15% and 50%. If you go by pure baseline estimates, it's not a great bet. The 15% chance of success translates into an expected ~8% annualized r, return. A more optimistic assessment of the odds (30%) translates into an expected 14% annualized return. Assuming the odds of success are 50% (likely too high), the expected annualized return is in the 35%-36% range. The price for a potentially high annualized return is illiquidity and a binary outcome (i.e extreme volatility).   

Catalyst

Overbid (unlikely but possible) 

BLA submission