It is clear that biotech investor exuberance has already turned 2020 into an outstanding year for flotations and share price performance. Perhaps less well appreciated is the scope that this has provided for financial engineering, affording companies – and their investment banking advisors – two shots at making money.
The latest example came courtesy of Bridgebio Pharma, which today decided to buy back the 36% of Eidos it did not already own; it had floated off the minority interest just two years ago. This follows Illumina’s move to spend $8bn reacquiring Grail and Ionis buying back Akcea, both of which had been spun out five years previously.
Of course, these moves are often driven by U-turns in management thinking. Ionis, for instance, had been buying back stakes in Akcea over several years, and the subsidiary was bought back fully only after a boardroom clearout (Ionis gives a lesson in financial engineering, March 16, 2018).
If at first
Today’s move by Bridgebio comes after an earlier attempt to reaquire Eidos was terminated last year. That initially comprised 1.3 Bridgebio shares for each Eidos share, but despite being sweetened twice – the final offer was 1.5 Bridgebio shares plus an option to receive part of this in cash – the parties could not agree on a suitable price.
They now seem to have found one: 1.85 Bridgebio shares, equivalent today to about $70, or alternatively $73.26 in cash up to a maximum total of $175m. Eidos ended last week at $51.92 per share, and today shot up 32% to just under the Bridgebio offer price.
How did Eidos get to this stage? The company, primarily focused on the transthyretin amyloid cardiomyopathy project AG10, had raised $106m in its June 2018 IPO at a valuation of about $625m. Before Bridgebio’s move today it had reached a market cap of $2bn, largely on the promise of AG10.
At the time the minority stake was floated Bridgebio was still privately held, but a year later it too listed its stock, becoming the biggest biotech IPO of 2019 when it brought in $349m.
One way to understand Bridgebio’s actions over Eidos is to see the stock markets as a vehicle that the parent company has used to have an asset it owned independently valued. It seems highly unlikely that Bridgebio would have achieved such recognition for AG10 had this asset been internally held, and it might have struggled to close such a big IPO.
True, it can be criticised for letting go for $106m a stake that it is now having to pay $980m to reacquire. But, crucially, the whole time that Eidos stock was surging so was the implied value of the 64% majority stake that Bridgebio still owned – without Bridgebio having to lift a finger.
The added cost of investment banking fees pales into insignificance at a time when cash can be raised cheaply, and when an asset you already mostly own has tripled in value. The parent company, investors in it and in the subsidiary, and advisors all win.
In the meantime Bridgebio has had two bites at the valuation cherry: once for an independent Eidos and a second time for itself as Eidos’s majority owner. The risk around AG10, its pivotal study design and the need to compete against Pfizer all become problems for another day.