Acer Therapeutics (NASDAQ: ACER) stock is up 109% on the news of a takeover from Zevra. Valuing ACER stock really depends upon what we think the value of the contingent rights is. Which is something that can righteously be disputed of course. Sometimes, just sometimes, the market can make this decision very simple for us - unfortunately it isn’t here.
As to what’s done at Acer: “Acer Therapeutics Inc., a pharmaceutical company, focuses on the acquisition, development, and commercialization of therapies for serious rare and life-threatening diseases. The company’s pipeline includes four clinical-stage candidates comprising EDSIVO for the treatment of vascular Ehlers-Danlos Syndrome in patients with a confirmed type III collagen mutation; ACER-801 for the treatment of induced Vasomotor Symptoms, post-traumatic stress disorder, and prostate cancer; and OLPRUVA,” etc and so on. The problem with a takeover of a company at this development stage is that there is some hope value to the future - possible - success of those potential treatments. So, how can we value those if the company is to be taken over?
The answer is in contingent rights: “The acquisition is expected to be worth up to $91m in stock and cash payments, of which $76m is contingent upon milestone-based payments for Olpruva and celiprolol. Additionally, Zerva purchased Acer’s secured debt at a discounted value of $35.3m from its creditor, Nantahala Capital.”
Acer Therapeutics stock price from Google Finance
The immediate price being paid for Acer is around the market capitalisation before the deal was announced. The premium - that 109% - is the value being ascribed to those contingent payments that will arrive if the drugs actually work.
So, the value we could or should ascribe to ACER stock here depends upon what we think those contingents are worth. Something rather beyond most of our calculation abilities. It’s also worth noting that the contingents will not be traded anywhere, they’ll be entirely illiquid.
Sometimes the markets do us a favour and make the option clear. There have been examples of pharma takeovers where the stock settles at the offer price - the contingents coming for free or nearly so. There the decision is obvious - but the stock, sell into the offer and leave the contingents be at the back of the portfolio and see what happens. Here, where the net present value is around the $15 million mark, well, it’s a heck of a speculation into an illiquid position. Sure, it might work, but it’ll take some years to find out.
A significant fall back in the Acer Therapeutics stock price, making those contingents cheaper, might tempt some into that long term speculation. But for anyone tempted, really, do note that this would be long term illiquid.
