Last Friday Aratana Therapeutics (NASDAQ:PETX) announced that it would be acquired by Elanco Animal Health (NYSE:ELAN). Elanco will pay 0.1481 shares of common stock – worth $4.85 at current market prices – while Aratana is trading at $4.79 for a spread of just 1.2%. While it’s a low-risk deal that should close soon, that’s not enough to get excited about. It gets interesting because Elanco will also issue a contingent value rights that will payout $0.25/share if certain sales milestones are reached before the end of 2021:

Each CVR will entitle its Holder to receive $0.25 in cash if Aratana, Elanco or their respective affiliates achieve cumulative net sales of an animal health product that contains capromorelin as an active pharmaceutical ingredient equal to or exceeding (a) $25,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2020, or (b) $50,000,000 during the period beginning on July 1, 2019 and ending on December 31, 2021.  Elanco has agreed to use “Diligent Efforts” (as defined in the CVR Agreement) to achieve the foregoing milestone.

How likely it is that they manage to hit either the $25 million milestone before 2020 or the $50 million milestone before 2021? I don’t really know. It doesn’t sound like a crazy high hurdle to me, but then again, who knows what the market is for a drug that apparently is used to stimulate the appetite in dogs… If we assume that the CVR is worth something like $0.10/share today, the spread increases from 1.2% to 3.3%. Not spectacular, but for a deal that should close in roughly two or three months time that isn’t too bad. Couldn’t resist buying some shares.

Disclosure

Author is long Aratana