Wednesday, February 3, 2016

[U] "Our" Merck Now Holds More Than 7.7% Of Newly Public BeiGene, Ltd. (An Immuno-Oncology Bet)

UPDATED: 02.03.2016 @ 5 PM EST -- Based on tonight's closing NASDAQ price of $28.32 (first full day of trading on the NASDAQ, for BeiGene, Ltd. American Depositary Shares), I calculate the 23.6 million shares that Merck affiliates now hold (when converted, 13 for one, to ordinary shares), as being worth well over $50 million. Of course, this is a paper gain at the moment, but not bad -- for an initial pair of $10 million loans, bearing 8 per cent simple annual interest, over four years (or around $29 million originally owed to the MSD affiliate, from BeiGene, if settled in cash). Not bad, at all. Well done, Kenilworth!

Friday Update: the final prospectus puts Merck's holdings at 7.7 per cent (see page 230) of all BeiGene's outstandings --- because the underwriters exercised a so-called Green Shoe option (for a long departed company!), and up-sized the offering. Now you know. [End updated portion.]

Ahem. We will back our way into this story: Back in February of 2011 (just four years ago, yesterday, in fact), an overseas affiliate of Merck made an initial $10 million loan to BeiGene, in China. The terms of that note have been restructured, increased and renegotiated a few times (with MSD-lent principal increasing to some $23 million), over the ensuing four years, and those terms now provide a convertible feature -- into a specified number of BeiGene's American Depositary Shares (i.e., freely trading) as of the time the IPO priced, but indeterminent, until then.

Overnight, that IPO was priced, and led by Goldman Sachs & Co., and Morgan Stanley. So, as of this morning, Merck is entitled to acquire well over 10 per cent of BeiGene, without making any additional payment, under the revised note terms, as of January 26, 2016.

We won't know until the IPO closes, and related SEC filings are made -- just how much of BeiGene the Merck affiliates own -- but this SEC Form 3 (also filed overnight) means that it will definitively be over 10 per cent. We will update, when that figure is known with certainty.

In the mean time, here is what BeiGene says it does, via its IPO prospectus -- ". . .[BeiGene is] a globally focused biopharmaceutical company dedicated to becoming a leader in the discovery and development of innovative, molecularly targeted and immuno-oncology drugs for the treatment of cancer. We believe the next generation of cancer treatment will utilize therapeutics both as monotherapy and in combination to attack multiple underlying mechanisms of cancer cell growth and survival. We further believe that discovery of next-generation cancer therapies requires new research tools. To that end, we have developed a proprietary cancer biology platform that addresses the importance of tumor-immune system interactions and the value of primary biopsies in developing new models to support our drug discovery effort. Our strategy is to advance a pipeline of drug candidates with the potential to be best-in-class monotherapies and also important components of multiple-agent combination regimens. Over the last five years, using our cancer biology platform, we have developed clinical-stage drug candidates that inhibit the important oncology targets Bruton's tyrosine kinase, or BTK, RAF dimer protein complex and PARP family of proteins, and an immuno-oncology agent that inhibits the immune checkpoint protein receptor PD-1 [emphasis supplied]. . . ." Well, that seems a close-fit with Merck's Keytruda program, no?

In passing, and in a footnote form, fraught with complications -- I will note that BeiGene ALSO has extensive relationships with the German Merck (Merck KGaA -- no relation). If I feel ambitious tonight, I may detail those -- but I will confidently guarantee that MSM outlets are going to confuse the one that owns shares (i.e., ours) with the one (i.e., German -- Merck KGaA) that is primarily conducting research collaborations with BeiGene. I didn't see anything that indicated Merck KGaA owned a substantial number of shares. But it might. Yikes! These folks need to solve that name confusion -- pronto.

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