Get a free CVR in the Aratana Therapeutics acquisition

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.


Author is long Aratana

7 thoughts on “Get a free CVR in the Aratana Therapeutics acquisition

  1. John

    Have you ever had tax issues with a CVR? I owned Steadymed (STYD) in an Interactive Brokers account and they screwed up the tax treatment and now it’s a huge headache for me. STDY was acquired last year for $4.46/share in cash and a $2.63/share CVR that will pay out if milestones are met in future years. The stock price was $4.72/share right before closing. Interactive Brokers subtracted the $2.63 from the basis and treated it as a capital gain. So if you paid $4.46/share for STDY, they said your basis was $1.83/share and you owed a $2.63/share ST capital gain. This seems bizarre. The company said the treatment should be that you pay a capital gain on the $0.26 market price of the CVR implied by the closing, and then pay any gain on the rest ($2.63 – $0.26 = $2.37) if the CVR pays out in a few years, which seems logical. Thanks.

    1. Alpha Vulture Post author

      I’m not based in the US, so don’t have to deal with capital gains taxes. But (and for the record, this is not legal and/or tax advice!) as far as I know no-one is forcing you to use IB’s (wrong) numbers when reporting your taxes.

  2. John

    Thanks. 1099-B forms are sent directly to the IRS as well as to individuals, so my guess is that if there is a significant difference between them and what you file, it greatly increases the chances of an audit.

  3. B

    ENTYCE sales were $1.3M per quarter for the last 3 quarters of 2018, post ramp-up from 2017Q4-2018Q1. The product is approved for dogs only, and they are in the process of seeking approval for cats. Let’s say they get the cat approval and those sales match dog sales – at current run rate that would get them to 18 month sales of $15.6M, so they would need to grow sales a further 60% to meet the $25M milestone. Despite some chirpy optimistic talk from management sales have been flat now for three quarters, so it seems like quite a stretch to me.


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