Friday, June 18, 2010

Javelin Pharmaceutical (JAV US) AMEX

I'll do a lengthy write up on a firm I have been following in the US. It will not be in the usual format since this firm is not a buy for operations story but more of market action play.
  • Specialty pharma focusing on pain management 
  • Currently US$1.42 * 67.8m = US$91.99m 
  • 1 marketed product Dyloject in Europe
    • Submitted US New Drug Application (NDA) Dyloject formal review accepted
    • 2 drug candidates in Phase III clinical development: READ HERE 
      • Ereska (intranasal ketamine) and 
      • Rylomine (intranasal morphine)
  • 6 Aug 2009 
    • Unamed European pharma gave prelim interest
    • Stock exchange worth US$2.20 / sh
    • This was not disclosed till 12 Feb 2010
  • 30 Aug 2009
    • Separate firm offered US$2.47 / sh stock swap
    • Revised from previous $2 / sh offered on 7 Aug 2009 
  • 10 Dec 2009 
    • Another firm gave US$ 2 / sh in cash but JAV rejected due to lack of financing facilities and insufficient due diliegence 
  • 18 Dec 2009 
    • Myriad Pharma agrees to takeover JAV (0.282 MYRX sh per JAV)
    • 22% over previous close of US$1.50 
    • Ratio will decrease as the FDA approval date for Dyloject stretches out 
    • US$6m of working capital financing was provided by 1Q2010 by MYRX prior to deal close
  • 3 Mar 2010 
    • Millenium mgmt, owns 7% of JAV reject MYRX offer, JAV price down 
  • 12 Apr 2010 
    • Hospira (HSP) offers US$2.20 / sh in cash 
    • Working capital will be provided by HSC to JAV 
      • US$4.5m for operations 
      • US$8.3m for repayment of working facilities from MYRX 
      • US$4.4m termination fee 
    • Announced 5 day period for MYRX to better the offer, if not to proceed with HSP offer
    • JAV price up 60% to US$2.15 and MYRX up 10% 
  • 19 Apr 2010 
    • Terminate offer with MYRX 
  • 19 May 2010
    • HSP extended offer to June 2 after 79% of shares tendered 
    • extended based on "not all conditions met"
    • UK supply issue for Dyloject was brought up, JAV down 17% 
  • 24 May 2010 
    • White particulate found in Dyloject in Europe, reported to DMRC+MHRA 
    • Stock down another 30% at US$1.26, gross spread at 76% 
  • 3 June 2010
    • JAV filed suit (Delaware) against HSP (to payup for tendered shares and complete the takeover, expediting process for trials) and a US$ 2 mil loan on June 1
    • HSP extened offer from June 3 to 16 
    • HSP counsel mentioned drug recall could result in "Material Adverse Effect" (MAC) defined in the merger agreement since it is the sole product online for the firm. Onus will be for the claimant (HSP) to prove the facts and is not easy to invoke
    • There is a forward-looking element of “reasonably be expected to result” in the closing condition later in the merger agreement. Moreover, there are exclusions to this M.A.C. definition, but none appear applicable
    • The M.A.C. is not defined to include any material adverse change in Javelin’s prospects and only includes a less demanding forward-looking element. READ HERE
  • 4 June 2010 
    •  Court granted the motion to expedite the process 
    • NYSE informed JAV of going concern risks and may violate NYSE rules 
  • 11 June 2010 
    • JAV announced US$2mn loan from HSP extended 

OTHER FACTS (certain facts from Seeking Alpha)
  1. HSP CEO publicly stated he likes the product at the Sanford C. Bernstein's 26th Annual Strategic Decisions Conference 2010 on June 2nd, one day before the second extension
  2. Dyloject on markets since 2007, its a new formulation of an 30 yr old generic drug Dicoflenac. Its a non-steroidal anti-inflammatory drug (NSAID)
    • Favorable alternative to Keterolac, the only NSAID drug out there with a black box warning and US$300m in sales each year. (Source:
  3. HSP core business is in drug delivery and less so of drugs itself 
  4. HSP is buying Dyloject mainly for US and potential pipelines
  5. Issue in Europe is mainly the drug from the JV of Therabel and JAV
  6. JAV insistent of a financing facility shows their weak financial position
  7. Ereska and Rylomine both in favourable phase III trials 
    • Ereska has strong military application with Dept of Defense forking out US$4mn for research 
    • Rylomine put on the backburner to sloe cash burn 
  • As of May 2010, JAV has US$ 1.63 mn cash, total debt of US$ 6.3 mn and equity negative US$13.4mn 
  • Sales revenue of US$4.8mn in 2009 is solely from Europe operations
  • Cash burn ranged from US$30 - 40mn p.a
  • Firm has financed this with raising cash from exercising of stock options
  • Cumulative R&D expense for the 3 drugs Dyloject, Ereska and Rylomine stands at US$111.3mn and  is $61.2, $31.1 and $19.0 mn respectively from the SEC filings HERE
  • Pain management drug market will hit US$40 bn
  • Issue is with distribution, not the drug itself (which is what HSP is buying for - THE DRUG!)
  • The risks are not low. Interesting to look into this one
  • JAV is definitely worth more than the current price of US$91mn but how much more?
    • Downside is limited based on past price ranges, however there is a risk of it going lower due to deterioration of the financial position of JAV
  • I would expect either
    1. HPS walks away from the deal
      • need to prove M.A.C (difficult) and recall of drug is isolated to the Europe delivery and likely not to be the drug issue since it was tested and proven safe
      • JAV likely to chase after HPS 
    2. HPS offers again but lowers price 
      • Depends on JAV reaction, not likely after the immediate legal action by JAV after HPS tried to pull out earlier in June.  Guess JAV management understands the firm is fairly undervalued from the exercising of stock options recently and deferring their compensation
    3. HPS takes the current offer at current price 
      • Proving M.A.C fails and after all HPS needs JAV drugs 
    4. 3rd party comes in with higher offer than HPS
      • Given the efficacy and relative safety of the drug, low cash position, low market cap, late stage pipeline, remoteness of the Europe event
So as one can observe, there still is quite a good chance #3 and #4 will happen and therein lies a considerable amount of upside for JAV. Its price before the whole action started was US$1.50 and now it is US$1.42 and this the historical low of the stock since long time ago, yet current situation of the firm (less the financials) looks very promising.

Disclaimer: No position in JAV



Great stock

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