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Actionable news in PTX: Pernix Therapeutics Holdings, Inc.,

Speculating On Pernix Therapeutics

Summary

Recent earning results have eroded the stock price by just over -80% YTD.

Active interest by management to explore strategic alternatives, including debt restructuring and potential sale of the company, should give investors solace.

Current price level justifies risk versus reward.

Buyout could be announced in the third or fourth quarter, at a minimum price target of $3.

The past two months have not been good for Pernix Therapeutics (NASDAQ:PTX). After missing fourth quarter earnings by nearly 59 times the estimate, the stock has seen a steady decline from around $2.25 to $0.46 as of the Wednesday, June 1st close. The first quarter numbers didn't help to bolster confidence, as Pernix reported an EPS of ($0.42), compared to the ($0.06) estimate. Looking at the loss year-to-date and recent earnings reports would suggest Pernix Therapeutics is on the road to no return. Nonetheless, there may be a silver bullet - a buyout.

Management

In an 8-K filed on May 11, 2016, it was made public that Douglas Drysdale had resigned from his role as Chairman of the Board of Directors and President and CEO of Pernix Therapeutics on May 9, 2016. This announcement was unexpected, given the press release that Gray Square Pharmaceuticals, LLC was denied a petition for inter-party review by the Patent Trial and Appeal Board (PTAB) two days prior. With Mr. Drysdale's resignation, John Sedor has assumed the role of Interim CEO and Chairman of the Board, while the search for a permanent replacement proceeds.

Mr. Sedor in his own right has brought about speculation as to the future of Pernix Therapeutics. Many of the highlights of his career have been running companies into acquisitions. As a result, this has fueled rumors that Pernix is headed down this path as well. Listed below are some of the past companies that under his direction were acquired:

  • 2014: Cangene: $220 million Sale of the Company (Acquired by Emergent BioSolutions (NYSE:EBS) at a 45% premium)
  • 2011: CPEX: $75 million Sale of the Company (Sold to Footstar at a 142% premium)
  • 2008: Bentley: $375 million Sale of the Company (Acquired by Teva Pharmaceutical Industries (NYSE:TEVA))

John Sedor is not alone in his experience with M&A. Joining Mr. Sedor on the Board of Directors is Steven Elms, whose extensive experience in private equity and investing in life science companies make him a valuable asset in a potential sale.

Mr. Elms is currently a Managing Partner at Aisling Capital, a leading private equity fund investing in life science companies. Previously, he was a senior member of the Life Sciences Investment Banking Group of Hambrecht & Quist and was involved in over 60 financing and M&A transactions, which helped clients raise in excess of $3.3 billion in capital.

Barry Siegel, Senior Vice President and General Counsel, also has past experience with M&A as part of the Private Equity Practice Group of Buchanan Ingersoll & Rooney PC.

From February 2011 to May 2014, he was a Shareholder and Co-Chair of the Private Equity Practice Group of Buchanan Ingersoll & Rooney PC. Before that he was a Partner and Co-Chair of the Corporate Department of Klehr, Harrison, Harvey, Branzburg LLP. He has extensive experience in mergers and acquisitions, securities, financing, corporate governance, sophisticated licensing and other commercial transactions and general corporate counseling.

Taken as a sum, these individuals bring their backgrounds and expertise to a delicate situation that's unfolding for Pernix Therapeutics. All have led successful careers in their respective spaces, and I don't doubt that they are weighing all of the options carefully to maximize shareholder value and restore financial health to the organization.

Technicalities

Let me preface this section by saying that while I firmly believe a buyout of Pernix Therapeutics will occur by the end of the year, there are some challenges that need to be overcome in order for a deal to be reached. The main issue being long-term debt. Note: the following information that's referenced below can be found in the first quarter filing dated May 5, 2016.

The two main outstanding notes are the 4.25% convertible notes and the 12.00% Treximet notes.

4.25% Convertible Notes:

  • Aggregate principal of $130 million ($100 million remaining)
  • Maturity of April 1, 2021
  • Interest payable on April 1 and October 1 of every year
  • Initial conversion rate of 87.2 shares per $1000 of principal, or $11.47 per share.
  • Effective rate, taking into account the bifurcated conversion option derivative, is 9.7%

12.00% Treximet Notes:

  • Aggregate principal of $220 million ($190 million remaining)
  • Maturity of August 1, 2020
  • Interest payable on February 1 and August 1 of every year
  • Premium paid differs depending on redemption period

There are a few important facts that I want to highlight, because the details mean everything if a buyout is to transpire. First, at the end of fiscal year 2015, Pernix retired the 8.00% convertible notes at an aggregate principal amount of $65 million through the issuance of 18.1 million common stock at a price per share of $3.6. The removal of $65 million as a long-term liability allows Pernix to appear more attractive to a potential buyer.

Second, the 4.25% convertible notes cannot be redeemed prior to April 6, 2019. The holders have the option to convert based on the ratio listed above, but at the current conversion ratio that will never happen. Instead, the acquirer would assume responsibility for the interest payments up until the redemption date. After April 6, 2019, has passed, the notes would be redeemed and all unpaid interest and principal would be delivered, unless the acquirer intended to defer principal payment until maturity.

Third, and arguably the most important, the Treximet notes have the ability to be redeemed at any time, but the premium paid depends on the date of redemption:

The Company may redeem the Treximet Secured Notes at its option, in whole at any time or in part from time to time, on any business day, on not less than 30 days nor more than 60 days prior notice provided to each holder's registered address.

If such redemption occurs [i] on or after August 1, 2015, and prior to August 1, 2016, the redemption price will equal 106% of the outstanding principal amount of August Notes being redeemed plus accrued and unpaid interest thereon, [ii] on or after August 1, 2016, and prior to August 1, 2017, the redemption price will equal 103% of the outstanding principal amount of the August Notes being redeemed plus accrued and unpaid interest thereon and [iii] on or after August 1, 2017, the redemption price will equal 100% of the outstanding principal amount of the Treximet Secured Notes being redeemed plus accrued and unpaid interest thereon.

Going off the numbers, a potential buyout doesn't seem likely until the August 1 deadline has passed. The 3% premium difference on $190 million of principal remaining is equivalent to...


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