Yesterday Mallinckrodt officially launched the tender offer for Ocera Therapeutics with a deadline on the 8th of December while the merger should be concluded shortly after. Concurrently with the tender offer document Ocera also filed a “solicitation/recommendation statement” that has some interesting information that can be used to value the CVR. The document contains some tables with managements estimates of the probabilities of passing the various hurdles that need to be taken to commercialize OCR-002, and what kind of revenue it expect to generate. Management’s estimates of the probabilities are as follows:

The two most important milestones for the CVRs are those related to successfully starting Phase 3 trials. As you might remember from my previous post, I estimated a 80% probability for an intravenously version of the drug entering Phase 3 trials and a 20% probability for the oral version. It’s nice to see that as a total pharma nitwit I managed to guesstimate something in the right direction. Ocera management is going with 75% and 35.7% respectively. This would value the first two milestones at $0.43/share, pretty close to the number I was getting.

There is a big difference between my estimate of the probability of commercial success versus Ocera’s, but since my estimate was a super low 1%, that’s not really a surprise. They estimate a 34.6% probability of getting FDA approval combined with a 60% probability of commercial succes which implies a 20.8% probability of hitting the last CVR with just the intravenously version. How this probability increases with adding the oral version to the mix is a bit unclear. Presumably all outcomes here are highly correlated with each other, and adding the oral version to the mix will not meaningfully increase the probability of hitting the last milestone. Hitting it stand alone has a 16.5% times 80% probability of success which is a 13.2% probability, and presumably most of the outcomes overlap with those in the 20.8% pie of hitting commercial succes with the intravenously version. If we simply go for the 20.8% probability the third milestone is worth $0.34/share, although this number does need to be discounted significantly. Payment will not only be very far away in the future, a Mallinckrodt receivable might also carry a significant amount of credit risk

The tables with projected revenues also give some hints with regards to the timing of the various milestones. With the intravenously version possibly hitting the market in 2022 and the oral version possibly hitting the market in 2023 I guess we should expect the milestones related to entering Phase 3 trials to payout relatively soon. That good, not just because of the time value of money, but also so we don’t have to worry too much about credit risk since most of Mallinckrodt $5.9 billion in debt is due between 2022 and 2025.

Clear is that we don’t have to expect a quick payment on the last milestone. Using these projections cumulatieve revenue would hit the $500 million somewhere in 2027 while the oral formulation only hits it in 2030. And we shouldn’t forget the reason why this deal is partly financed using a CVR: presumably Mallinckrodt didn’t agree with all those projections and they certainly could be too optimistic. On the other hand a CVR can also simply be a way to share risk and borrow money. Given the highly leveraged nature of Mallinckrodt not spending too much hard cash on a deal must be attractive to them.

# Disclosure

Author is long Ocera Therapeutics