Ocera Therapeutics, Inc. (NASDAQ:OCRX) Just Announced A Buyout

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Ocera Therapeutics, Inc. (NASDAQ:OCRX) is a big mover at the end of this week, with the company running on the back of an announcement that it’s set to be acquired by Mallinckrodt plc (NYSE:MNK).

The deal is favorable for shareholders in that it serves up a considerable premium on the company’s per-share valuation (pre-announcement), with the buyout valuing Ocera at somewhere in the region of $1.52 per share, or approximately $42 million.

Prior to the announcement, Ocera was trading for in and around $1 a share. Subsequent to the company’s announcement that it’s in line for a buyout, the company ran up to $1.72, a close to 70% appreciation on the news. Pre-market activity on Friday morning has brought this down a little bit, tapering the run to set the company up for a $1.62 open, but that’s still a premium to the per share buyout price and it’s a considerable run for any Ocera shareholders that didn’t sell out at the above discussed Thursday close top.

So what does Mallinckrodt get out of the deal?

Ocera is a mid-stage development company and – as is generally the case with these sorts of acquisitions – there’s a primary asset that Mallinckrodt is in line to pick up when the deal closes; a primary asset that (unofficially) accounts for the majority of the total $42 headline valuation.

In this instance, the asset in question is called OCR-002 and it’s targeting an indication of hepatic encephalopathy (HE), which is a neuropsychiatric syndrome associated with hyperammonemia (excess ammonia in the blood) that occurs as complications of certain liver diseases, such as cirrhosis.

It’s a large population, with circa 200,000 hospitalizations in the US alone from this condition and somewhere in the region of 1.5-2 million patients being at risk from the disease.

With an average of $30,000 to $60,000 per hospital stay, the total acute and recurrent HE market potential comes in at somewhere between $5 billion and $7 billion. So that’s plenty of real-world potential for revenue generation for OCR-002 if and when it hits markets, and that’s why Mallinckrodt is willing to stump up the $42 million in upfront cash to acquire the asset at its mid-stage development phase.

So what are the chances of approval?

Well, pretty good.

Data has been strong to date from an efficacy perspective and there’s not been too much in the way of adverse events that might spook the FDA into turning the asset down as and when it comes up for review. Couple this with the fact that these patients really need a fresh treatment option on shelves in the US and there’s a strong argument for approval.

Of course, just because a drug is needed doesn’t mean it gets a green light from the FDA, so if the acquisition closes out and Ocera hands over the development of OCR-002 to Mallinckrodt, the latter is going to have to chaperone the drug the the later stages of development in the US.

So what comes next?

Well, before anyone can start looking at what and when Mallinckrodt needs to do to get this drug from its current stage of development through to commercialization, the buyout needs to close out to everybody’s satisfaction.

There are a couple of terms associated with the transaction that have the potential to derail it, but in all likelihood, things are going to run smoothly. Specifically, shareholders of Mallinckrodt need to approve the fact that the transaction needs to include one Contingent Value Right to receive one or more payments in cash of up to $2.58 per share (up to approximately $75 million) based on the successful completion of certain development and sales milestones.

This adds a considerable amount to the total deal price so it has the potential to be a bone of contention to any Mallinckrodt shareholders that are on the fence about the acquisition in its current format.

With that said, we don’t expect the transaction to come to a halt and the companies expect that (assuming everything runs smoothly between now and close time) that Ocera will officially become a part of Mallinckrodt at some point during the final quarter of 2017 and that it will start to affect adjusted earnings per share by $0.25 to $0.35 beginning in 2018.

We’ll keep an eye on things as they mature towards completion.

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