Kalvista Pharmaceuticals Inc (NASDAQ:KALV) is a midweek runner in the biotechnology space this week.
The company was trading in and around $15 share at the Monday open and, a couple of minutes into the session on Tuesday, had run up to intraday highs at $19 a piece. By session close, this had dipped to around $18 a share and premarket activity on Wednesday has brought the stock down a percentage point or two further to $15.50 flat.
Here is what’s driving the move and our take on what comes next.
The catalyst behind the run is relatively simple – healthcare behemoth Merck & Co., Inc. (NYSE:MRK) has picked up a close to 10% stake in Kalvista through the acquisition of 1.07 million shares of the latter for a total payment of $9.1 million.
That, and the fact that the two companies are now working together on the development of one of Kalvista’s lead development assets in a potential blockbuster indication.
The former, the 10% stake, is good for shareholders as it aligns Merck’s interests with that of Kalvista. However, near term, it’s the collaboration deal that we think is going to be the real value driver for the company.
For those not familiar with Kalvista, it has been developing a drug called KVD001 in a target indication of what’s called diabetic macular edema. Diabetic patients naturally have low blood sugar and this causes the weakening of blood vessels in the eye. This weakening leads to the macular edema in question and can have long-term vision implications and – in many cases – can eventually lead to blindness.
KVD001 is what’s called an Intravitreal plasma kallikrein inhibitor and it works by essentially reversing the process that leads to the weakening of the blood vessels in the eye. This, theoretically, should help to mitigate the symptoms of the disease and slow progression in patients.
The point at which Merck has come on board is just ahead of a phase 2 proof of concept trial, so it is still early days, but even at this stage, Merck has offered a $37 million upfront fee and up to $715 million in future milestone payments, for the rightsto acquire the drug after the proof of concept study completes.
There is also an option to acquire a couple of oral versions of the asset (KVD001 is an injectable formulation right now) tied to the deal, but we don’t see these as pivotal as things stand.
So what is next?
Well, now it is all about the phase 2 study.
The $37 million is in the bag but the real money comes when the drug gets some proof of concept data under its belt and progresses into pivotal trials. As such, the successful completion of the phase 2 investigation is a major upside catalyst for Kalvista if and when it plays out that way.
There is also a speculative but interesting way to look at this sort of deal.
When a big pharma like Merck strikes a collaboration deal with a small company like Kalvista, it’s a pretty common linkup. When the former also takes a 10% stake in the latter, however, it can signal that there is some interest in acquisition longer-term.
if the phase 2 completes successfully, then, and Merck exercises its option to pick up the two oral formulation assets as well as the injectable one, it’s not too far of a stretch to suggest that Merck may look at acquiring the platform outright and, in doing so, save itself any potential future milestone payments on long-term success.
Capital shouldn’t be a problem near-term with the $37 million upfront payment adding to the $30 million already on hand (as of the end of June) to provide a pretty decent 12 to 18-month runway.
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Image courtesy of randychiu via Flickr
Disclosure: We have no position in KALV and have not been compensated for this article.