In late April, biotechnology firm Opko Health Inc. (NYSE:OPK) announced that it would acquire Israeli pharmaceutical start-up PROLOR Biotech Inc (NYSEMKT:PBTH) in a stock-for-stock deal that currently offers a substantial arbitrage premium. Investors have every right to be interested in this deal. In addition to some exciting operational synergies, it offers one of the clearest merger arbitrage opportunities seen in the past 12 months.
However, this proposed merger is not without its risks. For starters, the arbitrage trade is threatened by the vagaries of Opko’s volatile stock price. Perhaps, more importantly, the deal itself faces a slew of threatened legal actions in the U.S. and Israel. In addition, Opko’s chairman is dealing with serious conflict-of-interest allegations that stem from his interest in both companies. Before assessing whether these hurdles will impede the ultimate completion of this deal, it would be wise to compare Opko and PROLOR in greater detail.
A closer look at PROLOR and Opko
PROLOR and Opko Health Inc. (NYSE:OPK) have many functional differences. Among other things, PROLOR is styled as a start-up and lacks a market-ready product. Although some of its compounds are well on their way to FDA approval, it should not be mistaken for an established biotechnology or pharmaceutical firm. In contrast, Opko’s development pipeline is more mature and provides its balance sheet with at least some revenue.
PROLOR remains a much smaller firm than Opko. Its market capitalization of just over $410 million is paltry relative to Opko’s $2.4 billion. In 2012, the company had no substantial revenue and suffered an after-tax loss of nearly $20 million due to development and payroll expenses. In contrast, Opko took in around $70 million and posted a loss of about $57 million.
PROLOR Biotech Inc (NYSEMKT:PBTH) retains about $30 million of its initial cash funding and holds no debt on its books. Opko Health Inc. (NYSE:OPK) has a manageable debt load of $220 million, and an adequate but shrinking cash reserve of $180 million. Unfortunately, PROLOR’s minus $15 million cash flow figure hints that the company will soon require additional funding in the event the proposed merger falls through.
How the deal is structured
This merger is structured as a fairly traditional stock-for-stock deal. Under the terms of the proposal, Opko will provide current PROLOR shareholders with .9951 share of Opko Health Inc. (NYSE:OPK) for every PROLOR share that they hold. At Opko’s current stock price of about $7.10 per share, this values each PROLOR share at roughly $7.06. Relative to PROLOR’s current price of around $6.53 per share, this makes for an arbitrage premium of about 8.1%. The entire transaction is valued at just under $500 million. If the various complications in play do not derail or delay it, it should close by the end of 2013.