Why Tobira Therapeutics Inc Was an Overnight Octuple

By Brian OrelliMarketsFool.com

Image source: Getty Images.

Continue Reading Below

What happened

Tobira Therapeutics (NASDAQ: TBRA) is up more than 700% today after Allergan (NYSE: AGN) announced that the big biotech was purchasing its smaller brethren.

"Minute" brethren might be a better description. Before today, Tobira Therapeutics had a market cap of less than $100 million. You're excused if you've never heard of the company before.

More From Fool.com

So what?

Nevertheless, Allergan liked what it saw. Tobira Therapeutics is developing drugs for non-alcoholic steatohepatitis (NASH), a hot, new area of liver disease where inflammation of the liver causes fibrosis that can eventually lead to liver failure.

Allergan is paying Tobira's shareholders $28.35 per share, in cash, and giving them Contingent Value Rights (CVRs) that could pay up to $49.84 per share if "certain development, regulatory and commercial milestones" are met. Investors are already factoring in the potential for some of those payouts, with Tobira Therapeutics trading about $10 higher than the cash payment.

Now what?

Tobira Therapeutics' investors are arguably getting a great deal, here, but that doesn't necessarily mean Allergan is overpaying.

Investors had left Tobira Therapeutics for dead after one of the company's drugs, cenicriviroc, missed its primary endpoint in a phase 2 clinical trial in July. Tobira still planned on running a phase 3 trial with cenicriviroc and has another drug in its pipeline, but digging out of that hole would have been costly to investors. Tobira ended June with $41 million in the bank, so when valuing the company, investors had to factor in additional capital raises, which would have substantially diluted shareholders.

Allergan is only paying about $533 million in cash for rights to the drugs, which doesn't seem too outrageous. The price tag goes up to about $1.7 billion if Tobira's drugs are successful, but Intercept Pharmaceuticals, which is much further along with its NASH drug, obeticholic acid, is a $4 billion company. Seems like a decent return on investment if Allergan is right about the drugs' potential.

A secret billion-dollar stock opportunity The world's biggest tech company forgot to show you something, but a few Wall Street analysts and the Fool didn't miss a beat: There's a small company that's powering their brand-new gadgets and the coming revolution in technology. And we think its stock price has nearly unlimited room to run for early, in-the-know investors! To be one of them, just click here.

Brian Orelli and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.