Merger arbitrage Pharmasset ($VRUS)

Fellow former poker player Kid Dynamite posted an interesting merger arbitrage opportunity on his blog. Merger arbitrage is traditionally a very dangerous field. It is commonly likened to picking up pennies in front of a bulldozer.

In this case it the bulldozer is there but it's moving slow and the penny looks more like a silver dollar..

"Gilead ($GILD) is buying Pharmasset ($VRUS) for $137 per share. VRUS’s main asset is an experimental drug that hopes to treat/cure Hepatitis C. The merger is being enacted by a tender offer, which was launched yesterday, and will expire January 12th, 2012, pending regulatory antitrust approval under HSR."

Kid lists a few reasons why the gap is so wide (why people aren't taking advantage of this opportunity) and these are some of the most compelling ones to me:

1. Biotech scares traders, it's notoriously hard to evaluate chances in drugs trials and approvals. (not enough of a reason in itself)
2. Gilead has committed to the deal unless antitrust approval doesn't come trough (more on that later) or if there goes something wrong in the drug's trials. Which seems unlikely so far and does not necessarily mean the deal doesn't go through but in the worst case scenario, the entire investments becames nearly worthless.
3. Because of the year end rapidly approaching, many risk arbitrage funds are unwilling to possibly blow up their YTD results and forego 2 - 20% type of payouts on huge sums of money. They might as well shift that risk to early januari.

more on reason nr.2
From bloomberg(dec 6 article):
Inhibitex Inc. (INHX) said last week that its INX-189 drug, a hepatitis C treatment similar to the one Pharmasset makes, showed a “significant increase in antiviral activity” when used in combination with ribavirin. The positive results mean that Inhibitex may be able to “truly” compete with Pharmasset, Brian Skorney, an analyst at Brean Murray Carret & Co., said in a note to clients Nov. 29.

How is this a positive thing you might think? Well, i'm not an expert in antitrust issues, it seems likely this decreases the chances of antitrust problems souring the deal..

furthermore:

This is a quote about the merger arbitrage situation from an interview by Bloomberg(dec 6):
“It’s a real fat spread,” Keith Moore, an event-driven strategist at Stamford, Connecticut-based MKM Partners, said in a telephone interview. “If there’s negative news Gilead can walk away from the deal. But the likelihood of that happening is very low.”

Category: arbitrage , gilead , merger , merger arbitrage , pharmasset