As it happened: A bidding war for an antibiotic maker in a market that has ravaged its peers
In a bewildering twist to the long-suffering market for antibiotics — there has actually been a bidding war for an antibiotic company: Tetraphase.
It all started back in March, when the maker of Xerava (an FDA approved therapy for complicated intra-abdominal infections) said it had received an offer from AcelRx for an all-stock deal valued at $14.4 million.
The offer was well-timed. Xerava was approved in 2018, four years after Tetraphase posted its first batch of pivotal trial data, and sales were nowhere near where they needed to be in order for the company to keep its head above water.
In the field of antibiotics, approval is only the first hurdle, the bigger obstacle is always going to be reaping returns in the ‘broken’ market for these life-saving drugs. The long, arduous and expensive path to antibiotic approval typically offers little financial gain as treatments are typically priced cheaply and doctors — confined by hospital budgets — are steered into using older generics in their first response, reserving fresh, more targeted alternatives for acute cases.
After a healthy 49% sequential growth in sales the last quarter of 2019, in the following quarter, Xerava sales grew a healthy 20% to $1.8 million, but the company continued to report a loss. Given the trajectory of the drug’s expected uptake, and the experience of other small antibiotic makers (i.e. a litany of bankruptcies), the road to profitability was more of a pipe dream than a matter of patience.
And so, like a knight in shining armor, AcelRx made its bid, to rescue Tetraphase from the firesale that most of its peers were eventually subjected to. Tetraphase agreed to the merger.
The deal made theoretical sense, AcelRx sells a painkiller that is administered in healthcare settings such as hospitals, and Xerava is an intravenous antibiotic also prescribed in hospital settings. “By combining DSUVIA and XERAVA net product sales under one streamlined cost structure, we believe the combined company may realize both revenue synergies (access to more areas across the hospital to promote both products) as well as more obvious cost synergies by removing duplication across operations, especially in sales and marketing,” H.C. Wainwright analyst Ed Arce wrote in a March note.
Then, in early May, another drugmaker appeared to be courting Tetraphase: La Jolla Pharmaceuticals submitted a non-binding proposal to swallow Tetraphase for $22 million.
Like AcelRx, the deal included offering Tetraphase stockholders one contingent value right (CVR), which would entitle the holders to receive aggregate payments of up to $12.5 million for Xerava in net sales milestones starting in 2021.
The incentive with the offer from La Jolla, which has an approved drug for septic or other distributive shock and another therapy under FDA review for malaria, was the roughly $2 extra million in cash upfront versus AcelRx’s offer.
The AcelRx offer in March was an all-stock deal. But Tetraphases’ share $TTPH price had grown from $1.03 on March 13, the closing price the weekday before the AcelRx deal was made public, to $1.45 on May 7 when La Jolla’s offer was unveiled.
But Tetraphase had already effectively gotten engaged to AcelRx — according to filings, the company would be on the hook for a termination fee of $810,000 and/or reimburse AcelRx for certain expenses up to $200,000. “We do not believe La Jolla’s unsolicited competing bid is sufficiently compelling to Tetraphase to pull the company away from the current proposed transaction, especially given the amount of commitment and pre-close integration with AcelRx to date,” Arce wrote in May.
And then, the plot thickened. Weeks later, Melinta — a fellow antibiotic maker freshly restructured under Chapter 11 and now privately owned by Deerfield — offered to buy Tetraphase for $27 million. And so the game began — AcelRx upping its offer prompting Melinta to do the same, and rinse and repeat. On Thursday, AcelRx bowed out of the mess, making a sweet $1.8 million as a break-up fee, and retaining the co-promotion agreement for Xerava and Dsuvia as a keepsake.
Given the way each deal was structured, AcelRx’s last offer worked out to about a $35.3 million upfront deal, while the Melinta bid was in the region of $39 million, according to calculations by Arce who called the final deal “more than fair” for Tetraphase shareholders.
And fair it was — Tetraphase shareholders cheered as the stock jumped about 23% to $2.61 in Friday morning trading.
Melinta should commence a tender offer for all Tetraphase shares by Monday, June 15 — and once the deal is consummated add a fifth antibiotic to its drug arsenal.
As it stands, the antibiotic market is cursed — it harbors the stink of multiple bankruptcies, a dearth of innovation and is consequently barely whetting the voracious appetites of major pharmaceutical companies and most venture capitalists. The Tetraphase deal comes months after bankrupt antibiotic company Aradigm turned to old partner/investor Grifols for a final $3 million fire sale. Melinta itself filed for bankruptcy in late 2019, only to be swallowed by its lender Deerfield.