MSTX At 15c Is Significantly Undervalued Based On Savara's Blockbuster Potential.
Jan. 12, 2017 3:27 AM ET
Investment Highlights:
Per the merger agreement, Mast shareholders will own 24% of the combined company. The initial market cap of the new entity was estimated to be $151.5M.
The combined company will be named Savara Inc. and will be led by Savara's current management team. Savara will trade under a new NYSE symbol upon completion of the merger.
Savara brings to the table AeroVanc, and Molgradex, both holding orphan drug designation. Mast, on the other hand, will contribute its AIR001 drug and cash.
A pre-requisite for the deal to close is for Mast to execute a reverse stock split of its outstanding shares to fulfill NYSE's listing requirements.
The deal is expected to close during the second quarter of 2017. Mast shareholders will receive an adjustment based on the amount of cash Mast will bring at closing.
Discussion:
On January 7, 2017, Mast Therapeutics, Inc. (NYSEMKT:MSTX) and Savara Inc. (Savara), a privately-held emerging specialty pharmaceutical company focused on the treatment of rare respiratory diseases, announced that the two companies have entered into a definitive merger agreement, under which the stockholders of Savara would become the majority owners of Mast, and the operations of Mast and Savara would be combined.
In my December 7, 2016, article, "Mast Therapeutics: Increasing Shareholder Value," I discussed Mast's efforts to find ways to maximize shareholder value. One of the options mentioned in the company's November 21, 2016 update, was the possibility of a reverse merger. It did not take long, and here we are a month later with news of the merger with Savara Pharmaceuticals.
The surviving entity will be named Savara Inc. It will be based in Austin, Texas, and will be led by Savara's current management team. The board of the new company will have seven members, including five from Savara's board and two from Mast's current board.
Under the terms of the agreement, Savara stockholders will own around 76% of the combined entity, while Mast stockholders will own the remaining 24%. The merger is expected to close in the second quarter. The new company will get listed on the NYSE with a new ticker symbol. A pre-requisite for the deal to close is for Mast to execute a reverse stock split of its outstanding shares to fulfill NYSE's listing requirements.
The combined pipeline will consist of three novel inhalation therapies for the treatment of diseases with significant unmet medical needs. Savara brings to the table AeroVanc, and Molgradex, both holding orphan drug designation. Mast, on the other hand, will contribute its AIR001 drug currently in four Phase 2 clinical trials addressing treatment needs of lung and heart-failure patients.
The merger press release described the pipeline as follows:
AeroVanc, an inhaled dry-powder vancomycin to treat chronic methicillin-resistant Staphylococcus aureus (MRSA) pulmonary infection in cystic fibrosis (NYSE:CF) in preparation for a pivotal Phase 3 study
Molgradex, an inhaled nebulized GM-CSF to treat pulmonary alveolar proteinosis (PAP) currently in Phase 2/3 development
AIR001, an inhaled nebulized sodium nitrite solution to treat heart failure with preserved ejection fraction (HFpEF) currently in Phase 2 development
Brian M. Culley, current CEO and Director of Mast Therapeutics commented:
"Following an extensive review of strategic alternatives and a thorough process, the Mast Board of Directors chose to combine with Savara because we believe the proposed merger provides an attractive opportunity for our shareholders to obtain value appreciation from a diversified pipeline and positions the company for more rapid short- and long-term growth via a triad of late-stage clinical assets with important forthcoming milestones."
"We are excited for the prospects of the combined company and believe that Savara's management team is well equipped to advance the pipeline toward regulatory approvals and commercialization in the US and EU."
Rob Neville, Chairman and CEO of Savara added,
"This merger is transformative for Savara and marks our second transaction in a year, each expanding Savara's pipeline of inhaled therapies for serious and life-threatening diseases. AeroVanc and Molgradex are orphan-designated product candidates in late-stage development, and we see Mast's AIR001 program potentially adding significant value to our pipeline with a modest capital outlay in 2017. We believe the favorable risk profile of our product candidates combined with their market potential provides a unique opportunity for Savara to become the next breakout company in orphan pulmonary diseases."
Th merger press release also highlighted key upcoming pipeline milestones as follows:
Initiate a pivotal Phase 3 study of AeroVanc for the treatment of MRSA in CF patients in Q3/2017.
Announce top-line results from a registration-enabling Phase 2/3 study of Molgradex for the treatment of PAP currently ongoing for Europe and Japan in Q1/2018.
Complete negotiations with the U.S. Food and Drug Administration (FDA) on the requirements for a pivotal clinical study of Molgradex in the U.S. in Q3/2017.
Announce results from an ongoing 100-patient Phase 2 study of AIR001 for the treatment of HFpEF being conducted by the Heart Failure Clinical Research Network in Q1/2018.
The January 9, 2017 conference call discussing the deal added nothing new except that Savara intends to submit a form S-4 to the SEC in mid-February detailing its financial condition. Also in the CC, Mast CEO Brian Culley stated that they will send the reverse split proxy documents in two to three weeks containing more details about the merger.
I was hoping to hear about the Vepoloxamer (vepo) asset in the CC since it was not mentioned in the press release. I was disappointed that the three analysts on the call did not ask about it either. Later in this article I will discuss more about this important Mast asset being completely ignored in the merger.
My take
The biggest winners in this deal are Savara's stockholders because they are getting AIR001, and vepo if it was included in the deal, for a fraction of what is worth.
To give you an idea about AIR001's potential, back in 2010, Aires Pharma, the then owner of the technology entered a $250M collaboration agreement with Novartis to advance the program through clinical trials. In 2012 Novartis was forced to walk out of the deal because of internal restructuring, and not because the drug had failed. Since then, Mast has advanced AIR001 to Phase 2 stage in four different lung/heart related indications with addressable markets with over one million patients in the US and several million globally.
Obtaining AIR001, a potentially multi-billion dollar drug, and the vepo asset which in itself is worth several million dollars for only $36.5M is a steal.
I believe it is Mast's management fiduciary duty to get some value for the vepo asset to increase Mast's stake in the merged company of vepo is not included in the $36.5M. Mast's CEO Bryan Culley stated in his November 21, 2016 update that they "continue to explore ways to strategically monetize its vepo assets, including through licensing transactions." In the 3Q 2016 CC, CEO Culley stated that they were in discussions with at least two pharma companies about the sale of the EPIC (failed Phase 3 vepo sickle cell clinical trial) database. Furthermore, not long ago Vepo was being advanced to address ischemic stroke, chronic heart failure, and other indications. In my December 7, 2017 article on Mast I estimated that the value of the vepo asset is about $10M.
Mast shareholders are also winners because: 1) they are getting a significant premium for their shares, 2) the new company has a strong and respected management team, and 3) the upside of the combined company is huge relative to the proposed initial merger valuation.
I know that the words "reverse split" scare many investors. But this is not a typical reverse split. This reverse split is to break away from the old losing Mast enterprise and to board a new one with real upside. Recent reverse mergers have fared very well post-merger. As an example, Apollo Endosurgery Inc. (NASDAQ:APEN) which resulted from a recently closed merger with Lpath had a pre-merger consensus price of $11 but it has traded as high as $20 post merger.
I would not be surprised if Savara's market cap reaches over $300M within a year. This is about twice as much as the estimated Savara/Mast market cap. I say this because of the high intrinsic value of the combined pipeline; and Savara's management, vision, and execution prowess. I believe institutions will be highly motivated to invest in Savara's shares when the new symbol begins trading in the NYSE.
My Take On Savara's Contribution To The Merger
To be honest, I've never heard about Savara until this weekend. The following are key takeaways from my research into Savara:
Strong management team
Savars's management team is highly regarded in the industry. As an example, Randy Williams, founder and CEO of Keiretsu Forum, a global investment community of accredited private equity angel investors, venture capitalists, and corporate/institutional investors, and one of Savara's early investors, had this to say about the company:
"The opportunity to invest in Savara Pharmaceuticals attracted many of our accredited investors, who are deeply committed to supporting products and technologies with the potential to positively impact people's lives."
"With a solid business plan for developing an innovative and much-needed product, Savara exemplifies the type of company Keiretsu Forum members are seeking to identify and support. We are proud to have made our largest single investment to date in Savara, and look forward to working with our members and entrepreneurs in funding other exciting enterprises."
Robert Neville, CEO of Savara Pharmaceuticals commented:
"The Keiretsu Forum takes a disciplined approach to deal screening, in-depth due diligence and investing, enabling companies to access a large group of sophisticated investors and enabling its members to access pre-qualified deal flow."
"The enthusiasm Savara received has been tremendous, and we are delighted for the Keiretsu support as we work to advance our lead program through Phase II clinical development."
Savara appears to be making all the right moves to increase holder value
In June 2016, Savara acquired Serendex Pharmaceuticals for an undisclosed amount of stock upfront-with additional cash milestone payments upon approval of the lead assets.
The main asset that Savara was after was Molgradex, an inhaled form of granulocyte-macrophage colony-stimulating factor (GM-CSF) that's in Phase II/III testing in Europe and Japan to treat autoimmune pulmonary alveolar proteinosis (PAP). The other asset which was not disclosed in the merger press release is a preclinical inhaled form of Factor VIIa (FVIIa) to treat diffuse alveolar hemorrhage (NYSEMKT:DAH).
These assets are synergistic with the company's lead drug, AeroVanc, which is the first dry-powder, inhaled formulation of the antibiotic vancomycin being developed for the treatment of persistent MRSA infection in cystic fibrosis patients. AeroVanc received fast track and orphan drug designations.
On May 12, 2016, Savara announced that it had signed license agreement with Japanese Nobelpharma Co. Ltd for future commercialisation of Molgrade in Japan.
According to the press release Savara will receive up to $10.5 million in milestone payments and entitle the company to royalties on future sales in Japan. Per the agreement, Nobelpharma becomes the license holder of Molgrade for the treatment of PAP in Japan.
I would like to share the thoughts of an existing Savara shareholder about Molgradex and management:
"The Cystic Fibrosis Foundation (CFF) has an excellent working relationship with Savara management and has provided one grant and is expected to provide Savara with another grant for it's lead orphan-drug status program, for CF patients having MRSA in the lungs. The treatment is, of course, usable on any patient with MRSA in the lungs and this population was simply deemed an opportunistic target small enough for FDA orphan drug approval, yet with a strong lobby. Aerovanc, being simply an inhaled solid form of vancomycin, may also have application for other bugs in the lungs."
"I can also say that whenever Savara has come forward with a capital raise, it has been oversubscribed."
Fast forward to today, and Savara has found the way to execute an inexpensive and fast IPO, while acquiring a potentially a blockbuster asset in AIR001 for a fraction of what it would cost if Mast was in a stronger bargaining position.
Savara's management is making all the right moves to increase shareholder value. The acquisitions of Serendex Pharma and Mast Therapeutics in less than a year have created a force in the lung/respiratory area with several orphan drug candidates at various stages of development. Their ability to identify synergistic assets and to negotiate favorable deals for the company's stockholders bode well for those who are considering Savara as a long-term investment.
The examples I cited above give me confidence that investing in Savara provides me with an opportunity to own a stake in a high-growth, highly-respected enterprise with potentially blockbuster potential. This reminds me of my investment in Protalix (NYSEMKT:PLX) which is another potentially big winner in the industry.
What Mast Therapeutics Brings To The Table
Since AIR001 was the key asset that attracted Savara to enter a merger agreement with Mast, I will discuss only AIR001 in this article. In my December 7, 2017 article I arrived to a value of at least $100M for AIR001 - a value that is not reflected in the proposed merger agreement.
According to HFN, the Heart Failure Clinical Research Network:
Heart failure is an important public health problem, and one of the leading causes of hospitalization in the United States. With the increasingly aging population, the scope and cost to society associated with this condition will progressively rise.
AIR001 Potential
I understand that there are over a million heart failure hospitalizations each year in the U.S., about half of which involve patients with HFpEF. There are currently no proven effective therapeutic agents available for this large patient population.
The following slide from the October 19, 2016 company presentation shows that the incidence of heart failure in the US alone will increase from about 5.2M to in 2016 to over 7M patients in 2034 as the population ages and because of sedentary habits. The global heart-failure population is about 15M today. Certainly, this is a significantly larger market opportunity for Mast than vepoloxamer in SCD. I am sure that just about everyone reading this article knows someone with this condition, and that includes me:
(click to enlarge)
