Good salary, nice bonus — but why did biotech mogul David Hung gam­ble on Ax­o­vant?

David Hung

One day in­to his new job as CEO of Ax­o­vant $AX­ON, you might say that David Hung is earn­ing his pay.

The biotech’s stock end­ed up 23% as in­vestors cheered the re­turn of the leg­endary biotech deal­mak­er, not so long af­ter his crown­ing achieve­ment: A $14 bil­lion buy­out for Medi­va­tion.

That boost added $340 mil­lion to the mar­ket cap, which Ax­o­vant’s Vivek Ra­maswamy — one of the savvi­est play­ers to ever make the leap from hedge fund to biotech — im­me­di­ate­ly sought to cash in on with a $100 mil­lion shelf of­fer­ing.

In re­turn, Hung is in line for a pay pack­age not much out of line with the in­dus­try stan­dard. He’s get­ting a $550,000 salary plus a bonus equiv­a­lent to 60% of that to run a com­pa­ny with a near-term read out from a Phase III Alzheimer’s study. So up to $880,000, pret­ty good for an in-de­vel­op­ment biotech with a cou­ple of as­sets in the clin­ic, but not grandiose ei­ther.

There’s al­so $115,000 to cov­er his re­lo­ca­tion ex­pens­es thrown in, ac­cord­ing to the 8-K. And Hung, who came out of the Medi­va­tion sale with about $354 mil­lion, is buy­ing $10 mil­lion in se­cu­ri­ties.

So where’s the up­side? Look to the op­tions.

There are two op­tions to buy 4 mil­lion shares at $15.13, with each op­tion vest­ing over five years. There’s al­so a third op­tion for 2 mil­lion more shares.

Now, if there’s a change in con­trol, some­one comes in and buys Ax­o­vant or Hung arranges a sale for a big pre­mi­um, then all the op­tions vest im­me­di­ate­ly up­on change of con­trol.

Ax­o­vant is en­gaged in the ul­ti­mate high-wire act in drug R&D. It’s walk­ing the tightrope in a piv­otal stage Alzheimer’s tri­al which looms over bil­lions of dol­lars in wreck­age from the past 14 years of fail­ure. And they’ll know by the end of this year if their shot at 5HT6 worked or not.

If it works, the pay­off will like­ly be in the bil­lions. They don’t call ex­per­i­men­tal Alzheimer’s drugs a gold­en tick­et — a long shot at a for­tune — for noth­ing. The com­pa­ny’s stock would gy­rate up. Hung al­ready knows every big play­er in the field which would look to buy the com­pa­ny. And maybe that’s one good rea­son not to wait un­til af­ter the read­out to take the job, as Ra­maswamy had of­fered to do.

Bri­an Sko­r­ney, Baird an­a­lyst

The im­pli­ca­tions weren’t lost on Baird’s Bri­an Sko­r­ney:

The take­out of Medi­va­tion was the most hot­ly con­test­ed biotech deal last year, pri­mar­i­ly due to Hung’s clear cam­paign­ing to get the high­est price pos­si­ble. We wouldn’t be sur­prised to see the stock run up strong­ly in­to the MIND­SET da­ta to­ward the end of Sep­tem­ber as a suc­cess­ful tri­al, which would be one of the on­ly suc­cess­ful piv­otal tri­als in Alzheimer’s in re­cent mem­o­ry and pos­si­bly the biggest bi­na­ry event of the year, could start a sim­i­lar bid­ding war.

Hung cer­tain­ly isn’t won­der­ing where his next meal will come from. And it’s in­ter­est­ing to see him roll the dice once again on Alzheimer’s, af­ter see­ing Dime­bon go up in smoke at Medi­va­tion.

This is one gam­ble, though, that may not take years to pay off. And the struc­ture of the deal begs a sim­ple ques­tion.

Just how long does Hung plan to stay?

Ax­o­vant shares are up an­oth­er 4% in pre-mar­ket trad­ing this morn­ing.

5AM Ven­tures: Fu­el­ing the Next Gen­er­a­tion of In­no­va­tors

By RBC Capital Markets
With Andy Schwab, Co-Founder and Managing Partner at 5AM Ventures

Key Points

Prescription Digital Therapeutics, cell therapy technologies, and in silico medicines will be a vital part of future treatment modalities.
Unlocking the potential of the microbiome could be the missing link to better disease diagnosis.
Growing links between academia, industry, and venture capital are spinning out more innovative biotech companies.
Biotech is now seen by investors as a growth space as well as a safe haven, fuelling the recent IPO boom.

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