Several biotech mergers/tenders with CVR - contingent value rights - have just closed or are about to wrap up. The good news is that there are still several biotech mergers with CVR involved that are ongoing. One I haven't written about publicly, but recently covered at The Special Situations Report, is the acquisition of Neovasc (NVCN) by Shockwave (SWAV). Neovasc is a $100 million market cap company, while Shockwave has a market cap of around $7 billion. Shockwave went down about 8.7% when it announced the transaction on January 17, 2023. That seemed like a bit of an overreaction for such a small acquisition.
Shockwave Medical is acquiring all outstanding Neovasc shares for an upfront cash payment of $27.25. Neovasc shareholders also get a non-tradable contingent value right that can pay out up to $12 per share in cash if certain regulatory milestones are met.
Neovasc is currently trading at $29.65 in the pre-market and shareholders of Neovasc have just approved the merger. The scheme of arrangement goes to court March 6 to obtain approval, and I expect this merger to wrap up in the next two weeks. Potentially very soon.
The current trading price implies a value of $2.45 per contingent value right. I usually disagree with the market about the value of CVR and often think they're not given enough credit. I still like it here but admit that it was more attractive just a few days ago.
In this case, the milestone is tied to final FDA premarket approval to market the Neovasc Reducer in the United States for the treatment of angina.
Depending on how fast FDA premarket approval is obtained the milestone will pay out between $4 and $12.
-US$12.00 if the Milestone is achieved on or before June 30, 2026
-US$8.00 if the Milestone is achieved during the period beginning on July 1, 2026, and ending on December 31, 2026
-US$4.00 if the Milestone is achieved in 2027.
To put the timeline into context, I turned to the most recent earnings call where management commented on the progress on its COSIRA-II trial that, if successful, should lead to another trial and ultimately to meeting the above milestone(emphasis by me):
The second pillar of our value creation strategy is advancing acceptance and use of the Reducer in the key U.S. market, where the COSIRA-II clinical trial has been progressing following initial enrollment at the beginning of 2022. We currently have 48 patients enrolled and 25 randomized at 16 sites of the targeted 380 patients across 50 sites.
As a reminder, the COSIRA-II trial is pivotal to our efforts for a full PMA submission to the FDA for the Reducer potential clearance in the United States. The Reducer has coding, coverage and payment status from the Centers for Medicare and Medicaid Services, CMS, and is reimbursable in the study which is contributing to our top line. Revenues from trial devices comprised 6% of total revenues in the quarter. Revenue creation in a placebo-controlled US clinical study is rarely accomplished, and Neovasc not only achieved it, we also pioneered a novel way to accomplish it without putting the blinding of the study at risk.
Later on in the call, management also commented on when an initial data readout should be expected:
In July 2022, we announced that the COSIRA-II trial received approval to expand in scope as the FDA had approved a protocol supplement to the trial. The supplement importantly allows for us to study patients with non-obstructive coronary artery disease, or a NOCA, and includes the addition of two previously planned imaging sub studies as part of the trial designed to provide insights into the safety and mechanism of action of the Reducer.
Site activation of the COSIRA-II trial is proceeding, although at a slightly slower pace than we had initially hoped due to the administrative burdens and personnel shortages present throughout many large organizations in the United States. We expect enrollment to be complete in the first half of 2024, and expect an initial data readout from COSIRA-II in the second half of 2024.
Unfortunately, the initial data readout will come only in the 2nd half of 2024. Enrollment to readout seems to take at least 1.5 years. I imagine some things can move a little faster for a phase 3 trial because some of the same patients can be rolled over. However, it is probably also a larger trial. On balance, I'm guessing it takes at least another 1.5-2 years. It can easily take longer if the data isn't overwhelmingly positive. The trial and how it is set up can be reviewed on clinicaltrials.gov
Hitting the $12 milestone appears achievable but in an everything-goes-right scenario. The $8 milestone leaves a bit more room for error. The $4 milestone is what's left if the studies are successful but experienced several major hiccups along the way.
The tricky part is that the treatment still has to prove itself in a phase 2 and 3 trial. That's typically quite a major hurdle, especially for a cardiovascular treatment. The baseline odds look something like 20% chance of success and 80% chance of failure.
However, I suspect the odds are very different in this case.
It appears to me that this treatment involves the placement of a "stent-like" device in the right place. Placing a device like a stent is an entirely different beast from providing patients with pharmaceutical compounds. The way I look at it, the body is a complex system.
The problem with complex and complex adaptive systems is that if you take action A under seemingly similar conditions, the result or output is not always the same or predictable. Sometimes there is even a huge range of outcomes. The simpler the interaction is, the better it is. Most drugs have very complex pathways to effectiveness. An operation that places a small device in a bloodstream (while no mean feat) is likely more stable regarding the results the same procedure yields.
The company collected clinical evidence links on this page:
There are two studies with quite promising results out:
and this one from the New England Journal of Medicine.
Sometimes I canvas the internet for clues whether something seems to be working and in this case there are some interesting videos related to the treatment available on YouTube.
If I understand it correctly, this U.K. doctor is talking about the proposed therapy - which he's apparently been implementing - and he says most patients will see improvements in their symptoms (in the FDA trial, it tests patients' ability to perform some controlled exercise as well as tracking adverse outcomes).
In another video, a doctor reviews - note he has some affiliations with Neovasc - the several hundred implants in Europe.
At this point I'd like to refer back to the most recent earnings call:
In addition to the COSIRA-2 trial, we have made great strides to generate additional clinical data supporting the Reducer. In September 2022, we attended the Transcatheter Cardiovascular Therapeutics Conference hosted by the Cardiovascular Research Foundation in Boston.
At the event, we presented preliminary data in a patient population suffering from ANOCA. This is a different patient cohort from the randomized arm of the COSIRA-2 trial, which focuses on obstructed patients.
This was the first time the company highlighted data on the impact of the Reducer on the objective measurement of coronary flow reserve, CFR, a measure of the heart's ability to provide more oxygenated blood to the heart muscle during exercise or activity in patients that have angina chest pain without blocked coronary arteries. The outcomes here in this initial study were positive, which indicates that an even larger pool of potential patients might benefit from the Reducer therapy.
Take not that they're talking about a different set of patients here but the results were positive. It is not a guarantee but it adds another piece to the Mozaic indicating this is a lot more likely to successfully get through the trials ahead than the baseline 20%.
Post transaction
Post-transaction, there has been news that the German hospital remuneration system has awarded the Neovasc reducer a favorable designation:
Neovasc, Inc. ("Neovasc" or "the Company") (NASDAQ , TSX : NVCN) today announced the German Institute for the Hospital Remuneration System ("InEK") has awarded the Neovasc Reducer™ ("Reducer"), a CE-Marked medical device for the treatment of refractory angina, NUB Status 1 designation for 2023.
New examination and treatment methods (NUBs) are comprised of novel and innovative medicines, medical products and procedures that can be utilized by hospitals before reaching full reimbursem*nt eligibility. The NUB process opens the path for negotiations between hospitals and health insurers for the reimbursem*nt of new medical treatments in the German healthcare system. InEK is responsible for prioritizing new therapies in Germany through the NUB process.
Reducer has been granted Status 1, the highest priority designation available. The NUB decision is valid for one year and can be renewed annually. For 2023, 329 German hospitals applied for the Reducer NUB, up from 256 in 2022, and they can now negotiate full reimbursem*nt coverage for the Reducer therapy.
"Once again, our team has been successful in securing positive reimbursem*nt in Germany," commented Fred Colen, Chief Executive Officer of Neovasc. "Obtaining NUB Status 1 for 2023 from the German reimbursem*nt authorities is a vital component of our overall strategy of making the Reducer available to more patients suffering from an often-debilitating disease. It is particularly gratifying to see the number of German hospitals applying for Reducer NUB increase at such a rapid pace."
What stood out to me is that the number of hospitals that applied to be able to implement the method significantly increased. This seems unofficial but positive sign practitioners see value in practice.
Pessimistic scenario: If we could only hit the $4 payout and we used the 20% chance of successfully navigating the phase 2 and 3 trial the correct value would be approximately $0.80 (further discounted for volatility and time)
Base case scenario: If the trials fail 50% of the time. If the payout is on average $8 (sometimes lucky and sometimes getting unlucky) then the value should be around $4. You can discount it for volatility in results (sometimes a zero, sometimes a big win) and on time and illiquidity because it will take approximately 4 years to achieve the milestone. Picking the CVR up for $2.45 seems attractive enough in this scenario. Paying $1.50 would be a lot better but that seems unlikely at this time.
Meanwhile, I would not be surprised if the trial is highly unlikely to fail, given the data that is already out there, the method, and the lack of other options for patients. Suppose I'm right that makes the CVR that much more attractive. I believe I have to put in highly egregious assumptions as I did in the pessimistic scenario to turn this into a terrible CVR.
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