Cempra and Melinta’s lesson in value destruction

Analysis

“If you want to be a millionaire start with a billion dollars and launch a new airline,” the entrepreneur Richard Branson once said. The aphorism can often be applied to biotech too, and one demonstration of this type of value destruction came yesterday courtesy of a merger between Cempra and Melinta.

The deal is an attempt to prop one weak company up with another, which in itself says a lot about the difficulty of making money from antibiotics. But one detail should not go unnoticed: Cempra and Melinta have together taken $1.1bn of investor money, and turned that into an asset valued at under $400m (see table below).

And much of that $400m is accounted for by cash – Cempra had $187m in the bank at the end of June – so the implied enterprise value of the combined business is lower still. The $400m estimate is derived from the proposed number of new Cempra shares to be issued to Melinta holders, and Cempra’s $190m pre-merger market cap.

Equals?

On the face of it the deal looks like a reverse merger by which the privately held Melinta gains Cempra’s Nasdaq listing. But, while Melinta holders will own 52% of a merged entity that will carry the Melinta name, management will be split 50/50, with a new chief executive, and Cempra’s assets remain part of its pipeline.

Not that this counts for much. Cempra had suffered a double whammy of setbacks with its lead antibiotic, solithromycin, which received a US complete response letter for community-acquired bacterial pneumonia and failed in a pivotal trial in gonorrhoea (Another crash snuffs out the Cempra rally, March 1, 2017).

The future of solithromycin now rests on a massive, 9,000-patient trial that the FDA has requested to address a liver injury signal. The merger announcement is notable for its vagueness on this, saying only that partners are being sought “to identify non-dilutive funding” to finance the study.

As such the group’s focus will be on Melinta’s Baxdela, a drug that recently secured US approval at last for acute bacterial skin and skin structure infections. Armed with Cempra’s cash the combined entity should at least be able to give Baxdela’s commercialisation a decent shot.

Melinta's financing history
Date   Financing round   Amount raised ($m)   Investors  
Jun 2017 Debt & equity 90.0 Oberland Capital
Jun 2015 Series 4 67.0 Malin Corporation & other existing investors, including Vatera Healthcare Partners
Feb 2015 Debt 30.0 Hercules Technology Growth Capital
Feb 2014   Series G   70.0 Vatera, Falcon Flight  
Nov 2012   Series F   67.5 Vatera, Warburg Pincus, ABS Ventures, Vox Equity   
Jan 2011   Series E   20.0 Warburg Pincus  
Jan 2009   Series D   25.0 Warburg Pincus, ABS Ventures, Axiom Ventures, Cardinal Partners, EuclidSR Partners, Oxford Bioscience Partners, SR One, MedImmune Ventures,Vox Equity   
Jun 2006   Series C   50.0 Warburg Pincus, ABS Ventures, Axiom Ventures, Cardinal Partners, EuclidSR Partners, Oxford Bioscience Partners, SR One, Zero Stage Capital,MedImmune Ventures, Radius Ventures   
May 2003   Series B   63.5 Warburg Pincus, Axiom Ventures, Cardinal Partners,Connecticut  Innovations, EuclidSR Partners, Oxford Bioscience Partners, SR One, Zero Stage Capital   
Jan 2002   Series A   22.0 SR One Limited/Euclid SR Partners, Oxford Bioscience Partners, ABS Ventures, Axiom Ventures, Cardinal Partners, Connecticut  Innovations, Zero Stag Capital   
Total raised 505.0
Source: Company announcements.

By this point Melinta must have pretty much run out of all other financing options, having raised a massive $500m-plus over 15 years, initially from venture capitalists in the usual fashion, before turning to debt. Cempra had tapped numerous other sources to raise even more, with little to show for it.

Cempra's financing history
Year ending Type of investment Amount raised ($m)  
2016 Secondary, ATM, debt 164.9
2015 Secondary, options & warrants, debt 142.5
2014 ATM, debt 51.8
2013 Secondary, debt 59.0
2012 IPO, private placement 77.6
2011 Debt, options 13.9
2010 Class C preferred stock offering 66.5
2009 Class C preferred stock offering 25.5
Total raised 601.7
Source: SEC filings.

It is particularly surprising that the privately held Melinta is in effect selling out at such a steep discount to its invested capital.

VC financiers are notoriously reluctant to raise money at a discount to a prior valuation, so the fact that they accepted a price that could result in an immediate loss being recognised on their books speaks volumes about the merger.

Neither will it go unnoticed that, the resistance crisis notwithstanding, antibiotics is proving to be an extremely difficult area. Barring Merck & Co’s $9.5bn takeout of Cubist the field has been mired in doubts about pricing and existential questions over whether it is even commercially viable.

Stifel analysts wrote yesterday that commercial prospects for Baxdela, a next-generation fluoroquinolone, are limited in scope. Yet this is precisely the prospect for new investors who see the current valuation of a merged Melinta as appetising.

Those who have been in Cempra and/or Melinta for years, of course, will just have to grin and bear it.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobPlieth on Twitter

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