Description

Investment Thesis:

STDY is being acquired by UTHR for $4.46/share cash, and a $2.63 CVR milestone that may pay out within five years. As the CVR milestone has a reasonable chance of being met, STDY is a compelling long at its current price of $4.60/share. The merger is expected to close in Q3, and as any risk to its closing is minimal, one can effectively acquire the CVR for $0.14 at that time.

The reason for the acquisition is that STDY has been developing Trevyent, a subcutaneous pump that delivers treprosinil for treating pulmonary arterial hypertension (PAH), which would have represented direct competition to UTHR’s Remodulin pump systems (which use a branded version of treprostinil, and represent ~38% of revenue). When the STDY product ran into difficulties at the FDA, management opted to sell out.

The details of the CVR

Since that’s the key part of the thesis, here’s the exact language:

  “The CVR Consideration will be payable if, within five years of the Effective Time [at deal close], and following receipt of the first approval by the FDA of a "New Drug Application" (as defined in the CVR Agreement) for the Trevyent® product combining the Company's PatchPump® delivery device with treprostinil for treatment of pulmonary arterial hypertension (the "Product"), a total of 3,000 "Initial Treatment Visits" (as defined in the following paragraph) have occurred in the United States (the "Milestone").

       "Initial Treatment Visits" are visits by a member of the clinical staff of a specialty pharmacy to a patient to whom the Product has been prescribed, during which the initial treatment of such patient with the Product is administered (but excluding patients receiving the Product as part of a clinical trial or free of charge via an expanded access program, a patient assistance program or any other program).

       If the Milestone is not achieved on or prior to the fifth anniversary of the Effective Time, no payments will be made in respect of the CVRs.”

https://www.sec.gov/Archives/edgar/data/1619087/000104746918004332/a2235927zprem14a.htm

The Two Hurdles to the CVR

Gaining FDA approval seems straightforward. The only remaining requirements are things like a repeat of in vitro Design Verification, and STDY management has said that no new clinical trials are required, and that they expect FDA acceptance before the end of 2018. I think this is all but guaranteed to happen.

The 3,000 “Initial Treatment Visits” within five years after deal close is harder to assess, but seems like a good possibility.  A 2017 STDY presentation estimates while there are only ~3,000 patients currently on UTHR’s Remodulin, ~24,000 patients are on subcutaneous or IV treprostinil and are therefore possible users of Trevyent.

http://ir.steadymed.com/static-files/ed6656d3-52bb-4c40-ba03-39bf5564d954

Over the next five years, it’s very possible to see 3K patients trying Trevyent, especially as they age and move from milder oral treatments for PAH to subcutaneous/IV treatments.

This view is bolstered by a recent Slingshots Insight interview (1/26/18) with a doctor who treats ~300 PAH patients and thinks the new generation of subcutaneous pumps will improve quality of life due to their smaller size compared to current models and the ability to swim or shower without having to worry about contaminating an IV line.

He goes on to mention that the STDY Trevyent pump may be less painful as well, that “…pain is the big issue. It is the big issue of subcutaneous Remoludin.”, and that “I’m definitely very excited about the implantable pump, but I think we have a bunch of patients who have been waiting for it forever, and again, if the subcutaneous...claims are true, I think that’s awesome.”

Having an industry expert use language like that certainly sounds promising for the second part of the CVR to pay out, but I don’t want to get too caught up in the details or overweight a single source. Far more important is trying to ascertain the motives behind the deal. Why is STDY willing to sell a system with some technical advantages, and how motivated will UTHR actually be to sell it?

Can buyers and sells both be winners?

The most important thing here is that the overall PAH market is becoming increasingly competitive. Oral dosing from drugs like Uptravi are expected to extend treatment durations to ~20 months from the roughly 12 months duration today. Even worse for STDY’s Trevyent and UTHR’s Remodulin, generic competition is coming as early as this month, with companies like Teva, Dr. Reddy’s, and Par launching by YE.

In this environment, STDY was facing an uphill battle as an independent company after its setback at the FDA. In the most recent 10-Q, STDY was listed as a ‘going concern,’ and would have had to raise substantial additional capital to compete. One can see why the UTHR acquisition with the CVR is an attractive escape hatch for them.

UTHR, meanwhile, has been well aware of the approaching generic threat, and has been actively attempting to bolster their Remoludin franchise with a new generation of pumps, but this effort has been marred with setbacks and delays. As an example (from UTHR’s 10-K), a partnership with MDT providing the pumps has badly stalled:

“Medtronic has informed us that it has fewer than 100 pumps available for initial launch following approval, and that it will be unable to manufacture additional pumps until the FDA approves a next-generation system incorporating a variety of quality enhancements, which is anticipated in late 2019 but may take longer.”

Given these issues, buying out a weakened competitor in STDY makes a great deal of sense. This gives UTHR another pump system to fend off the generics, and allows them to avoid paying royalties to MDT and other pump partners.

Interestingly, UTHR earlier attempted to buy out STDY in February 2017 (prior to the negative FDA ruling) for $125mn cash and a $75mn earn-out, a sum remarkably similar to the final agreed-upon acquisition.  

https://www.sec.gov/Archives/edgar/data/1619087/000104746918004332/a2235927zprem14a.htm

Conclusion

This long-standing interest in STDY by UTHR, along with the competitive PAH space, and the bungled pump approvals by both companies, appear to have created a situation where both sides are motivated to do the deal, and importantly, UTHR is extremely motivated to try and trigger the CVR. With Remodulin representing ~37% of their total $1.4bn 2018 revenue, the rewards of a successful Trevyent providing differentiation vs. generics far outweigh the $75mn cost of the CVR payout. For the individual investor, this dynamic, as well as the risk/reward of the 2.63 payout against the $0.14 cost makes STDY a good long here.

Risks:

-The FDA does not approve Trevyent

-UTHR does not successfully market the pump

Catalyst

The CVR pays off for an 18-bagger (albeit many years from now).