The Allergan Option Effect on Trevena

I am long TRVN

While TRV130, now known as Oliceridine, thrust Trevena into the spotlight of the investment community, TRV027 could cement the company’s G-Protein Coupled Receptor Technology as one that is both highly productive in turning out viable late-stage candidates and capable of drawing outside investment interest.  Now the focal point of the Phase 2b BLAST-AHF trial, TRV027 is set to readout prior to Saturday, May 21st.  Whether or not the composite endpoint proves to be clinically significant or not is anyone’s guess.  TRV027 demonstrated in preclinical studies the ability to do what other angiotensin type II receptor molecules could do without decreasing cardiac contractility.  In fact, TRV027 increased the strength of blood flow to and from the heart.  This latter feature is what drove Allergan PLC (AGN), then Forest Labs, to take a flier on TRV027 in 2013 by way of a partnership option with a $30M stake in the company.  It should also be noted that while Trevena has shouldered the cost of the Phase-2b endeavor, Allergan recently chose to pay Trevena $10M to increase the size of the 5 mg trial cohort that was deemed to be the best performing of the three doses on offer.  I viewed this material interest as compelling.

I’ve recently done some research on Trevena’s partnership option with Allergan by digging through some archived SEC forms.  What we all know now is fairly straightforward.  Should this trial succeed, an unlikely proposition in a therapeutic space littered with failure, Trevena will receive a $65m upfront payment; $365m in regulatory and sales milestones; and 10 – 20% of sales royalties – the higher of those 2 percentages coming from within the United States.  Now some things you may not know.

Allergan must negotiate with Trevena in good faith to market TRV027 themselves in the United States.  And this is important because Trevena is now establishing itself as an emergent care therapy enterprise.  Oliceridine would likely be sold to the same emergent care therapy providers as TRV027 when and if it should become commercially available.

Allergan has 2-weeks following a press release by Trevena on the BLAST-AHF trial results to exercise its option.  This time frame was an unknown up until recently when it was addressed in a question and answer session that followed a corporate presentation.  I believe that notice will accompany the press release if the data is good and possibly be delayed if it is less than stellar.  I predicted recently that results would be posted on Friday, May 20th and a conference call and webcast be made available on Monday, May 23rd.  We’ll see if I’m proven correct.

Allergan is wobbling badly since the failed inversion acquisition of Pfizer (PFE).  Allergan is now under the same rigorous scrutiny as other growth oriented pharma companies such as Valeant Pharmaceuticals (VRX).  It has been reported that the sale of its generic division to TEVA (TEVA) is now in jeopardy.  I’m less inclined to believe that rumor but, suffice it to say, Allergan is in the midst of a sector-wide public relations nightmare.  Bloggers are questioning the value of Allergan’s Research and Development pipeline even though the following slide from a recent corporate presentation highlights 70 mid-to-late stage assets.  You’ll note TRV027 in the bottom right-hand corner of the picture.  All red lines and circles are mine.  A quote from CEO Brent Saunders follows.

TRV027 and CNS Portfolio Highlighted in Red
TRV027 and CNS Portfolio Highlighted in Red

“It’s important to look back at what we presented last November that I know many of our investors were impressed by.  We have a very strong pipeline and, I would argue, best in class.  And strength is divided over all our therapeutic areas.  And we are confident that this pipeline – that we will continue to add to through future science acquisitions, will deliver our long-term growth profile.”

Allergan CEO Brent Saunders – Allergan Business Update – April 6, 2016

The pressure on Allergan to persuade the public that asset development is central to its growth aspirations could ensure an early exercise of the TRV027 option.  Trial results will have to be compelling, but Allergan will be incentivized to add TRV027 to its late-stage asset portfolio if only to reinforce its own arguments.  This despite the fact that there are currently 2 Acute Heart Failure compounds in Phase-3 development – Novartis’ (NVS) Serelaxin and privately held CardioRentis’ Ularitide.  Conversely, if the TEVA deal falls through, Allergan might not be in a position to take TRV027 through to commercialization even if BLAST-AHF results are outstanding.  And if they did so, there’s no guarantee that this is the best path forward for Trevena’s acute heart failure therapeutic given Allergan’s tenuous state of affairs.

Trevena could easily be acquired by Allergan instead.  I’ve highlighted the 9 late-stage assets in Allergan’s CNS segment for a reason.  Trevena’s wholly owned CNS portfolio which includes a potential blockbuster in Oliceridine would boost that number to 10 and provide yet another 2 early-stage assets.  And in a recent article quoting Michael Higgins of Roth Capital Partners LLC, the idea of a cash rich Allergan, assuming that the TEVA deal is consummated, purchasing Synergy Pharmaceuticals (SGYP) or, alternatively, Trevena was discussed.  The amounts of $1bn referenced for both companies were woefully low by my estimates – especially where Trevena is concerned on a value basis, and where Synergy is concerned given its bloated financial structure.  My fair value consideration for both companies starts at $1.8bn each.

The After-Effects of BLAST-AHF success are many.  We all recognize what an exercise of the Allergan option will mean to Trevena which will then have 2 GPCR platform candidates in Phase-3 development and an embarrassment of riches on hand to drive future expansion.  Additionally, all forward looking clinical costs of TRV027 will be shifted to Allergan.  What investors fail to realize is the ripple-effect that such events will likely stimulate.  TRV027, like Oliceridine, could be granted Breakthrough Therapy status by the FDA as Novartis’ seralaxin was in 2013.  A partnership of Trevena’s side-effect diminished, moderate-to-severe pain oral therapeutic – TRV734 with terms similar to the Allergan arrangement could be struck.  And any announcement of new compounds entering the clinic would be met with a heretofore unexperienced enthusiasm.

What to do in the event of mixed or failed marks in the BLAST-AHF study?  Obviously, Trevena’s technology platform would take its first public relations hit in that eventuality.  Allergan would likely walk away.  And CEO Maxine Gowen would be placed in the unenviable position of defining a path forward for TRV027 through self-stewardship; the seeking of another partner; or by shelving the compound in perpetuity.  How all of that is handled will be key to how quickly the stock price recovers.  That said, Oliceridine will advance through Phase-3 clinical trials with a haste unknown to other treatment spaces with data expected in 2017.  That should be the only elixir wounded equity holders will need to recover a positive temperament and interim losses.

Always be well…

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