Highly Sucessful Spinoff Furiex Pharmaceuticals To Be Acquired By Forest Labs

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Another buyout of a successful spin hit the newswire earlier this week when Forest Laboratories (FRX) announced that it would acquire Furiex Pharmaceuticals (FURX) for $95 per share in cash. Furiex was spun out of PPD (which has since been acquired) back in 2010 and had been on a tear after dropping out of the gate. Most recently, the stock soared after receiving positive top-line results on two Phase III clinical trials for eluxadoline, its drug for treating IBS. Eluxadoline seems to be the basis for the transaction and Forest continues to tout the strategic rationale of strengthening its GI portfolio. Forest is bringing down its effective purchase price by selling Furiex’s royalties on other drugs such as alogliptin and Priligy for ~$415m to Royalty Pharma. Interestingly, Forest is in the process of being acquired by Actavis (ACT) who supports this deal.

In addition to the $95 per share, the Furiex deal also features a possible Contingent Value Right (CVR) worth up to $30 per share depending on the approval and status of eluxadoline. According to the press release:

If eluxadoline receives FDA approval and is not scheduled as a controlled drug by the DEA, holders of the CVR will receive $30 per share or approximately $360 million in the aggregate. If eluxadoline is designated as a Schedule 4 or Schedule 5 controlled drug by the DEA, holders of the CVR will receive $10 per share (approximately $120 million in the aggregate) or $20 per share (approximately $240 million in the aggregate), respectively.

Furiex is currently trading at ~$103 implying there isn’t much optimism regarding the CVR. If I understand this correctly, there are five possible scenarios:

  1. Eluxadoline doesn’t get FDA approval —> CVR = $0
  2. Obtains approval, but only as a strictly controlled drug —> CVR = $0
  3. Obtains approval, but as a Schedule 4 controlled drug —> CVR = $10
  4. Obtains approval, but as a Schedule 5 controlled drug —> CVR = $20
  5. Obtains approval and not schedules as controlled drug —-> CVR = $30

Assuming the deal closes (it’s being funded by cash on hand), the implied returns of each scenario (and at $103 price) would be approximately:

  1. (7.8%)
  2. (7.8%)
  3. +1.9%
  4. +11.7%
  5. +21.3%

I don’t have much experience in the space and I know the FDA is fickle, but I don’t think Scenario 1 is so likely given Forest’s optimism and the positive Phase III trials. Cowen & Co. analyst Edwin Nash seems to agree with that idea, but Cantor Fitzgerald’s Irina Rivkind Koffler thinks eluxadoline is unlikely to gain FDA approval. While I typically don’t get involved in post-merger names and have no experience with drug companies, it might be possible to construct an interesting trade depending on the scenario probability weightings. Of course, Eluxadoline includes the word ‘opioid’ in its description (apparently these tend to be controlled) so…maybe not. Perhaps some of our more knowledgeable readers can weigh in.

Ultimately, the deal is a big win for investors in the spin and for FURX Chairman Fred Eshelman who continued to up his stake in the company as it sold off. The deal is expected to close sometime in Q2 or Q3 of this year.

Disclosure: Author currently holds no position in any stock mentioned.