Let Them Eat Crab Cakes
It was hot — the middle of summer. And Humid. This was Maryland, so, not surprising. We stood and sweated and kept standing. Waiting with our fellow shellfish-enthusiasts. Hoping that maybe soon we'd reach our prize: all-you-can-eat free crab!
While in DC for a wedding a few (many) years ago, I questionably decided to attend a Maryland Crab festival. It billed the fete as "all-you-can-eat Maryland crab." You just had to pay the entrance fee. It lived up to billing in the most excruciating way possible. Heat. Long lines. Slow service. Warm beer. No other food alternatives.
We did get "free crab…" eventually. The experience was not what I expected. The crab was fine, I guess, but what I remember is the excruciating saga to get it.
The crab wasn't really "free," either. The organizers bundled the "free" crab with the entrance fee. And then did a budget job of organizing, so we suckers also paid for it with our time and sweat. I've talked about bundling before. In hindsight, I'd have skipped the entrance fee, skipped the lines, skipped the festival and gone to a regular restaurant and ordered crab, like all the other good people of Maryland. That seems easier.
You get what you pay for. Usually.
But, what if you could just get the free crab without the drama? What if you could unbundle it?
The Main Course
Bristol Meyers Squibb recently announced that it would buy Mirati Therapeutics, a biotech outfit that sells and develops cancer therapies. The deal is mostly vanilla. BMS will get Mirati's business. Mirati shareholders will get $58 per share cash from BMS. Shareholders also get another piece of paper, an IOU with strings attached — a Contingent Value Right.
Each CVRs will pay shareholders from BMS an additional $12 if the FDA approves one of the therapies that Mirati is developing — MRTX 1719 — within seven years of the deal closing.
I'm not a scientist. I'm not a doctor. I have no idea whether MRTX 1719 will be approved by the FDA within seven years. There are a million ways that it might not. But, if it's unbundled — if I don't have to pay for it — I don't really care that much.
BMS is buying Mirati for $58. Mirati share trade for a bit under $56, so less than the cash price. The deal will probably close, so you'd get a small return just buying the shares, but then you'd also receive the $12 IOU if the FDA approves Mirati's new therapy. This piece of paper isn't taking up your capital. If the deal closes you already got your money back. It's just upside.
How much is that paper worth? Probably nothing. But what are you paying for it? Also nothing. That’s a good deal. LCM will happily pay nothing for the vanishingly small chance of something every chance it gets.
Disclaimer: None of this is investment advice. It's meant to illustrate ways LCM thinks about investing. Things that LCM decides are good investments for LCM clients are based on many criteria, not all of which are covered here. Some or all of LCM's ideas may not be suitable for other investors. LCM does not recommend investing either long or short any position mentioned. LCM may own positions in some of the companies mentioned. Some of its ideas will lose money — investing entails risk. See full disclaimer here.