Will Cubist's Acquisition of Adolor Continue Run of Successes?

Earlier this week, Cubist Pharmaceuticals announced that they would acquire Adolor Corp for $4.25/share. The deal carried an interested provision, in which Adolor's shareholders who tendered their shares could receive a Contingent Payment Right coupon for each share, which could pay out an additional $4.50 per based on the company's ability to receive FDA approval and reach safety and efficacy milestones for its drug ADL5945 by July 2019. The market has priced these coupons at roughly $0.20-0.30 each given trading activity after the acquisition was announced. These coupons have several attainable milestones. Shareholders will receive $1.25 per CPR if ADL5945 receives FDA approval on or before July 1, 2019 and an additional $0.50 if it receives EU approval on or before the same date. Holders could also obtain $1.75 if ADL5945 reaches certain safety and efficacy milestones, and $1.00 if those same milestones are reached in the EU. Lastly, $1.00 will be paid out if certain commercial milestones are reached. ADL5945 has completed Phase 2 trials that observed the treatment of opioid induced constipation and met both primary and secondary endpoints in the study. The market for ADL5945 is potentially lucrative, as nearly 35 million people suffer from opioid induced constipation. Given a projected cost of $7/day for opioid induced treatment, the potential market for ADL5945 could come out to nearly $2 billion. "It broadens their commercial footprint," stated Leerink Swann analyst Howard Liang. "From a pipeline perspective, it adds another asset in clinical trials." Adolor also has a drug on the market called Entereg, a gastrointestinal therapy that accelerates the time to recovery following bowel resection surgery. The drug has been on the market for nearly three years and generated more than $25 million of sales in 2010. Cubist hopes that the drug's eventually peak at $100 million annually. In their conference call, Cubist executives stated that they believed that Entereg could generate more revenue given the company's hospital-focused sales team. "The hospital market might seem too small for a Big Pharma player, but it looks just right for Cubist. Inpatient is the piece that's always been interesting to us," added Cubist CEO Michael Bonney. Investors with interest in the Adolor CPR can purchases ADLR shares in the open market, and then tender them to Cubist. Adolor is currently trading at $4.50, a $0.25 premium for each CPR. Cubist shares have also nearly doubled in 2011, and could push higher if ADLR5945 reaches its full sales potential. Unfortunately, the drug is an extremely long term play given the 2019 deadline dates listed for the CPR milestones. Investors with long term aspirations will likely focus on the CPR, as success for ADLR5945 could mean big rewards. Neither Benzinga nor its staff recommend that you buy, sell, or hold any security. We do not offer investment advice, personalized or otherwise. Benzinga recommends that you conduct your own due diligence and consult a certified financial professional for personalized advice about your financial situation.