top of page

MacroGenics and TerSera: A Strategic Acquisition with Significant Risks

Oct 24, 20245 min read

Summary:


  • On October 22, 2024, MacroGenics announced an agreement with TerSera Therapeutics for the acquisition of global rights to MARGENZA (margetuximab-cmkb), with TerSera set to pay MGNX $40 million upfront, plus potential additional sales milestone payments of up to $35 million, expected to close in Q4 2024.

  • In the base case, the adjusted market capitalization is $122.74 million with a post-transaction share price estimate of $1.96 (50% downside), while in the aggressive scenario, assuming the total offer value is lost, the implied market capitalization drops to $47.74 million, resulting in a share price estimate of $0.76.

  • We are issuing a 'strong sell' recommendation with a price target of $1.96, which reflects a potential downside of 49.7%


Catalyst:


On October 22, 2024, MacroGenics (NASDAQ: MGNX), a biopharmaceutical company focused on discovering, developing, manufacturing, and commercializing antibody-based therapeutics for the treatment of cancer, and TerSera Therapeutics LLC, a privately held biopharmaceutical company specializing in oncology and non-opioid pain management, announced that they have entered into an agreement in which TerSera will acquire global rights to MARGENZA (margetuximab-cmkb) [1].


MARGENZA was approved by the FDA on December 16, 2020, in combination with chemotherapy for the treatment of adult patients with metastatic HER2-positive breast cancer who have received two or more prior anti-HER2 regimens, at least one of which was for metastatic disease [1].


Pursuant to the terms of the agreement, TerSera will pay MGNX $40 million at closing. MGNX may receive additional sales milestone payments of up to an aggregate of $35 million [1]. The transaction is expected to close in Q4 of 2024, subject to customary closing conditions [1].


Analytical Framework Outline


First, we take a historical approach to assess the potential value of MARGENZA, focusing on the share price movement before and after the approval dates. This analysis is based on the rationale that, with the sale of global rights to an FDA-approved product in their pipeline, the company forfeits any future benefit or value derived from this asset. To quantify this, we subtract the total value created post-FDA approval from the company's market capitalization, using the latest closing price prior to the announcement as our reference point, effectively removing any expectations formed by the market.


Secondly, we incorporate the total benefits of the product sale into the FDA-adjusted market capitalization. In our base case scenario, we assume the two offers, totaling $40 million and $35 million, are considered at full face value, without accounting for any potential return from additional capital raised. The future application of these capital proceeds is factored into a more aggressive scenario, which builds on our original base case model.


FDA Impact


Given that FDA approval for MARGENZA occurred on December 16, 2020, we analyze the t-1 and t+1 share prices to gauge the total market capitalization impact on MGNX following the product's approval. The share price discrepancy between these two dates was $3.46 per share, translating to approximately $194 million based on the relevant share count. To capture the full range of implied value and market expectations of future benefits, we used the intraday high price for t+1 and the intraday low price for t-1, rather than the closing prices. This approach ensures a more comprehensive range of the approval's impact on the share price.


Using the reference market capitalization of $242.11 million (based on the market capitalization as of October 21, 2024, the latest closing price prior to the disclosure), we adjust for the full impact of the FDA approval, consistent with the assumptions outlined earlier. After accounting for the $194 million impact from the FDA approval, the resulting implied market capitalization for MGNX is $47.74 million, reflecting a significant deterioration in the company's market value.


Adjustments for Total Offer Value


In our base case, we add the total offer value of $75 million at face value to the FDA-adjusted market capitalization. The underlying assumption is that the full offer amount will materialize and create value for shareholders at face value. This approach reflects the expectation that the entire offer will be realized without any discounting or consideration of potential capital inefficiencies.


However, a historical review of the company's operating history, particularly through the lens of return on equity (ROE%), indicates that assuming the full face value of the offer will materialize is rather aggressive. As shown below, the company's past ROE performance suggests that the full realization of this value may be optimistic, given the company's ability to generate returns on its equity capital.



Putting it All Together


In our base case, we add the full offer value to the FDA-adjusted market capitalization, resulting in an adjusted market capitalization of $122.74 million. Based on MGNX's current share count, this implies a post-transaction price estimate of $1.96 per share, reflecting approximately 50% downside from the current trading price as of our analysis.


In a more aggressive scenario, we assume the total offer value is entirely lost, implying a future ROE of -100%. Under this assumption, the outlook worsens significantly, with the implied post-transaction market capitalization dropping to the FDA-adjusted value of $47.74 million. Given the current number of shares outstanding, this results in a post-transaction implied share price of $0.76.



Other Considerations


Before concluding our research, it is important to highlight several key assumptions embedded in our model. First, the primary driver of the deteriorated value comes from our approach to calculating the impact of FDA approval, which relies heavily on a subjective interpretation of the timeline in which FDA approval was factored into the share price. Given that the share price has struggled to sustain the levels achieved immediately post-approval over a longer-term horizon, we believe that while this estimate is subjective, it is also relatively conservative.


The second key assumption is that we include the additional sale offer value as potential value added to the share price, alongside the direct $40 million payout for the global rights. If the additional sale offer does not materialize, our base case model would need to be adjusted accordingly. Under this scenario, the absence of the additional sale would reduce the total value assumption, resulting in a lower implied market capitalization and share price estimate.



Financial Distress


Furthermore, the upward trend in financial distress, as indicated by the historical Altman-Z score—our preferred metric for assessing business stability—should be acknowledged, as it raises significant concerns beyond the implications of the press release. This trend suggests underlying challenges that could further jeopardize the company's financial health and stability. The materialization of the information disclosed in the press release may potentailly serve as a catalyst that exacerbates this momentum, further impacting investor confidence and the company's market position.


Sources:

Comments

bottom of page