MannKind is acquiring DKI portfolio position scPharmaceuticals ($SCPH) for $5.35/share in cash plus a contingent value right (CVR) worth up to $1.00/share. The full value represents a 31% premium to Friday’s closing price. MannKind has the necessary financing from Blackstone.
This is the second DKI healthcare device portfolio company acquired in the past two years and the third portfolio company acquired for a large premium in the past four years.
As I write this, $SCPH is trading at $5.50. The deal should close in approximately three months, has no obvious regulatory issues, and as noted above MannKind has financing. Ignoring the non-zero possibility of a higher competing bid from Johnson & Johnson, Boston Scientific, or Medtronic, a reasonable merger arbitrage spread should be about 2%. That means without the CVR, the stock should trade at $5.24. The market is implying a value of $.26 for the CVR. Let’s go through the terms of the CVR…
The CVR will pay up to $1.00/share based on two factors:
- FDA approval of the autoinjector on or before September 30th, 2026 results in a payment of $.75. Approval after September 30th, 2026, but on or before December 31st, 2026, results in a payment of $.50. If the approval comes after December 31st, 2026, but on or before June 30th, 2027, the payment will be $.25/share.
- If revenue from $SCPH products is $120MM or more in any 12-month period ending December 31st, 2026, the CVR holder receives $.25. If the highest 12-month trailing revenue in that time period is $110MM, the CVR holder receives $.10. If the amount is between $110MM – $120MM, the payment will be a straight-line calculation between $.10 – $.25. For example, if the appropriate revenue number was halfway between at $115MM, then the CVR payment would be halfway between at $.175.
scPharma has said on multiple occasions it intends to submit the sNDA to the FDA by the end of this quarter. To get the maximum payment, they’d need the FDA to approve the autoinjector within 1 year (or slightly more if they submit the sNDA before the end of the quarter). In general, I don’t like making binary bets on government agencies to do something, but in this case, I think the FDA has ample incentive to approve a product that improves patient care and compliance at a lower cost and with greater safety. I further think that a year is plenty of time for that approval. My conclusion is CVR holders are likely to collect the full $.75 on this part of the deal.
The current analyst estimate for scPHarma’s 2026 calendar year is $134MM. While the company doesn’t provide specific guidance, they do nudge analysts in the right direction, and in general, they’ve been reasonably accurate. That $134MM assumes that revenue growth falls from > 100% to about 80%. In addition, scPharma could miss by more than 10% and STILL make the required $120MM minimum for the full payment. Finally, the company has added to its sales force, is just now seeing new prescriptions for CKD, and Class IV CHF sales began earlier this year. I think it’s likely we see the full $.25 from this part of the CVR as well.
With the stock here, you’re effectively paying about $.25 cents for the possibility of making up to $1.00 in the next 13-16 months (or less in the next 22 months). I think the probability of getting the full $1.00 is likely meaning a return of 300% in 5 quarters. I’m going to hold onto my stock for now on the probability that the CVR is being undervalued and the low probability of a higher offer from a larger company.
The CVR payment is non-transferrable so if you’re holding $SCPH when the deal closes next quarter, you shouldn’t expect to be able to sell it later. Any decision you make today, you can reverse tomorrow, but if you own the CVR at closing, you will own it until the above conditions are satisfied or fail.
I’d like to compliment DKI Board Member and Cardiologist, Dr. Paul Thompson who originally suggested buying this profitable position and who was on research calls with me to ensure we understood the technology and market opportunity.
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