Instead of a licensing agreement, BioNTech should just buy out Matinas

On April 11th, BioNTech and Matinas BioPharma announced an exclusive research combination to explore the combination of mRNA vaccines and Matinas’ LNC delivery technology.

The “exclusive” part means that while both companies are working together, Matinas isn’t going to be shopping their LNC technology to companies Moderna, Johnson & Johnson, or AstraZeneca.

The CEO of Matinas later said they are exploring a licensing agreement with BioNTech, which could be signed in 90-120 days.

Licensing agreements for unproven drugs take many forms but the most common example is cash + milestone payments (biobucks) + royalty fees.

A deal might look like this:

Company Alpha wants to license one of Company Beta’s drugs that’s in development. Beta has done some lab work, but hasn’t started clinical trials. This drug will take years to develop. Alpha buys 10% of Beta’s stock at a premium. Alpha pays Beta a $50 million-dollar upfront fee. They also offer biobucks. Milestone payments that trigger at certain intervals. $100 million for starting a Phase 2 trial. 200 million for Phase 3. $400 million for an FDA approval and product launch. Then they might also pay royalties. These could be as low as 1% or as high as 20%. Every drug is different. Every deal is different.

The best deal for Alpha is load as much risk into the milestone payments. If Beta’s drug flops in a phase 1 trial, then Alpha hasn’t lost much money. They’re out $50 million + some of their equity investment. (This is only smart if Alpha thinks the chance of success is low.)

Ever since the announcement from BioNTech and Matinas, investors have been wondering what their licensing deal might look like. When asked on the latest conference call, the CEO referenced deals that took the form of one outlined above.

On various Matinas stock message boards, people are guessing at upfront payments that range from $50 million to $300 million, plus up to a billion more in milestone payments and royalties.

I think these numbers are too low. If BioNTech and Matinas sign a licensing agreement it should be the largest in the history of biotech. Not could or will, but should. It might not, but I think that almost everyone throwing around numbers probably hasn’t thought enough about the expected value of the business combination. If successful, an mRNA LNC Covid-19 vaccine could put Moderna out of business.

Most drugs are flops

A licensing agreement for a pre-clinical drug is a very risky deal. Most drugs fail. They never make it out of the lab and into humans. Even if they do reach phase 2/3 trials, most drugs fail to meet their primary endpoint. This can result in catastrophic losses to the company. It happens to small companies just as often as big companies. Roche, Gilead, etc.

The chance that a random pre-clinical drug is approved and licensed is about 4%.

Pre-clinical drugs are a gamble.

And that’s what makes the BioNTech/Matinas deal unique. We’re not talking about a new drug here. We’re not even talking about a theoretical delivery system. The Pfizer vaccine has gone through plenty of trials. They’ve administered billions of doses. People lined up for hours to get it. And for good reason. There’s an avalanche of data that proves you’re far better off to get an mRNA Covid-19 vaccine than not.

The drug that BioNTech/Matinas are aiming to create isn’t new. One half of the equation has already been solved. We know that Comirnaty is effective.

This agreement isn’t for a new drug, it’s for a combination of a 100% reliable product, with a novel delivery system (LNC) whose reliability is less proven than the vaccine. But LNC isn’t untested. It’s been in development for years. LNC amphotericin B appears to work, LNC remdesivir appears to work, and LNC also amikacin appears to work.

Last year, Roche (Genentech) was evaluating LNC formulations for two drugs. This year they added a third. Do you think that’s because LNC doesn’t work? Probably not. That would be like sending a third child to private school when the first two came back dead.

What’s at stake here?

Moderna’s vaccine sales in 2021 were 18.5 billion. They project 21 billion in 2022.

Johnson and Johnson’s vaccine sales in 2021 were 2.4 billion. They pulled their guidance for 2022 because mRNA vaccines are higher in demand. They also appear to provide more protection.

AstraZeneca’s vaccine sales in 2021 were 3.9 billion.

Pfizer’s vaccine sales in 2021 were 36.7 billion.

Going forward, the market for Covid-19 vaccines could be worth about 64 billion a year. Pfizer and BioNTech are only capturing about 57% of that. But if they convert their vaccine to oral, while also possibly increasing the efficacy and reducing the side-effects, it’s possible they could capture more than 90% of the market.

Why not 100%? Well, there’s always maximum production issues. There’s a lot of people on this planet. It’s unlikely Pfizer and BioNTech can produce 8 billion doses next year. If they do create an oral, more effective vaccine, this will reduce the demand of other vaccines, forcing them to drastically lower prices. Poorer countries will buy these since a second-tier vaccine is better than no vaccine. Or rich countries might buy them and donate them. South Korea, for example, could buy up some of Moderna’s mRNA vaccine supply for cheap, and donate it to North Korea.

It's still an arms race for the best vaccine. Other companies are still trying to develop superior products. Pfizer and BioNTech can’t sit around doing nothing and raking in 37 billion dollars a year until the sun goes out. Somewhere out there right now people are arguing how to tackle this problem. “How do we create a better vaccine than Pfizer’s?”

The answer is simple. They need to create a vaccine that provides more utility to the end user. Which is exactly why BioNTech is working with Matinas.

Matinas’ LNC technology was designed to convert toxic intravenous drugs to safer oral versions, like a gel capsule or an inhaler.

If this combination works the way we all hope, then in the fall of 2023 your Covid-19 booster could be a pill. It could provide you with even more protection against symptomatic and serious disease. It might not even have any side effects. LNC was designed to do all of these things. And it appears to be working perfectly in the LNC amphotericin B trials.

This shouldn’t come as a shock to people. If someone spends 20 years designing a flying car, at some point they’re probably going to get it off the ground. People are obsessed with the status quo which is why breaking news is so popular.

“Did you hear that blah blah blah?”

“Oh my god I didn’t think it was possible!”

We like things the way they are, so we underestimate the odds of change.

Wall Street knows that pre-clinical drug research is a risky business. You know the expression “Don’t throw the baby out with the bathwater?” The biotech sector is the bathwater, and Matinas is the baby. Matinas is being unfairly punished for a sector that had too many junky IPOs in the past few years.

Whatever BioNTech ends up paying Matinas to license their LNC technology, it’ll be the deal of the lifetime.

How often are you presented with an opportunity to take a gamble on 64 billion dollars a year in sales? Almost never. In fact, if you thought the percentage chance that an LNC mRNA product would be successful was 1%, and the market was 64 billion/year, you could pay a licensing fee of 639 million and you’d still make money if you did 100,000 of these deals.

Because the expected value of such a drug is 640 million.

That’s per year. Every year until you get dethroned or lose patent protection.

This is why even a $300 million upfront payment for BioNTech to license Matinas’ LNC technology is ridiculously low. This would imply that the chance of success is less than 1%. Less than 0.5%. And even then, you’re assuming that the LNC mRNA Covid-19 vaccine only gets one year of sales.

Too many variables have been eliminated to say it has a 0.5% chance of success. The BioNTech vaccine works. We know this. LNC tech probably works. We know this.

This is like trying to ship Fabergé eggs in a new type of shipping container. One that’s already been tested shipping six other equally fragile products. Testing is on-going, but nothing has broken yet.

Can LNC tech work with mRNA? Probably. Because it was designed to.

Again: We know the Pfizer vaccine is safe and effective.

We know that LNCs are safe and almost certainly effective.

The only question is the combination at least as effective as the original? Because it doesn’t even have to provide superior efficacy. All it needs is to elicit the same response as the intravenous vaccine. Having a shelf-stable, oral Covid-19 vaccine would demand FDA approval. It’s just too useful. Especially in lower income areas without access to cold storage refrigeration.

The chance of success for LNC mRNA higher than 4%. It could be 50%. It could be 99.9%. But it’s not 0.05%. That’s ridiculous.

That would be like someone saying, “Okay we’re designing a pizza. We’ll add cheese and a crust, which 100% of our customers ask for. Then we’ll add mushrooms, bacon, and this brand-new plant-based pepperoni. We’ve tested it on three other pizzas and people seem to like it. The numbers aren’t in yet, but nobody complained, and everyone finished their pizza. They all said it was tasty. We estimate the chance that people like this new pizza we’re designing is 4%.”

Like, what? How does that sense?

The chance that an LNC mRNA Covid-19 vaccine works is a lot higher than 4%. Which is why BioNTech should be fine paying a large upfront payment. They know their product works. Matinas knows their product works. They should just get married already and focus on the honeymoon.

If both companies think the chance of an mRNA vaccine being successful are closer to 50%, then royalty fees and milestone payments should be in the billions. How much would you pay for the chance to secure a market worth 64 billion? If you’re only willing to offer between $50 and $300 million, then you’re at a big risk of someone offering a lot more.

There are lots of companies that would love to dominate the Covid-19 vaccine market. But there is only company with the patents to LNC technology.

A large upfront payment, however, could ruffle some feathers. It might cause problems with the board of directors at BioNTech.

“This Matinas company is only worth $150 million. Why are we offering to pay them $2 billion? That’s 13 times their market cap!”

Which would make sense if you a think their market cap has anything other than to do with current sentiment.

Market cap is just the outstanding shares times the share price. It’s a number that’s pointed to and referenced a lot, but it’s somewhat arbitrary. Stock prices go up and stock prices go down. Often for bizarre reasons that only a genie would understand. Market cap is a candle that flickers in the dark. Sometimes bright, sometimes dim. The strength of the flame can have nothing to do with the quality of the candle. It might simply reflect how much oxygen is in the room.

Biotech is in a bear market. XBI has lost 45% of its value in the last year. Almost every large investment fund has pulled out of the biotech investments. Not because the companies failed a trial, but because the sector has no support. These large funds know they can dump their shares on small investors during liquidity events, often at a premium to the current share price, and buy back in later. Big funds have big patience. “Many small biotech firms will need to raise money in the next year. So why not let their share price collapse? When they sell us 10% of the company to keep the lights on, it’ll cost us 3 million instead of 25.”

Basically, what I’m saying is, whatever number BioNTech offers as an upfront payment is likely to be low. Because keep in mind, the figures mentioned above for the Covid-19 vaccine market is the potential benefit for just that one drug.

Take a look at the BioNTech’s pipeline. They’re not stopping at just mRNA Covid-19 vaccines. They’re working on influenza, shingles, malaria, tuberculosis, HIV, and more.

The market for oral vaccines for these illnesses and diseases is in the hundreds of billions.

So, I’ve concluded that it doesn’t make sense for BioNTech and Matinas to do a licensing agreement at all. There are just too many indications and markets to examine. Too many other things they might want to do in the future. Too many headaches. At this point, while Matinas is still small, it makes more sense to just buy them out.

BioNTech is sitting on 15 billion euros in cash. Each quarter their cash pile goes up by another 2-4 billion. BioNTech has a market cap of 38.7 billion. Their market cap moves up and down by a couple billion every day. Compared to Matinas, they’re rich. LNC tech could make them even richer. LNC could put Moderna out of business. LNC could steal the HIV market from Gilead. LNC has so much potential, and it blows my mind how many funds and small investors are sleeping on this.

If mRNA LNC vaccines are successful, BioNTech could end up paying billions, or hundreds of billions in licensing fees over the next 20 years. There’s more expected value for BioNTech to buy out Matinas today than risk a licensing agreement.

That’s right. The licensing agreement is actually riskier for BioNTech because the expected value is lower. How often do you see that?

Once in a blue moon.

If BioNTech goes down the licensing path, they risk paying 5 to 20% royalties on a 64B market. Even if the royalty fee is 5% and Pfizer somehow doesn’t increase their market share with an oral shelf-stable vaccine (borderline impossible), then BioNTech is still paying $1.8 billion a year in licensing fees. That’s the low end of the spectrum. At the high end they’re paying $12.8 billion per year for a single drug.

Just buy out Matinas, Mr. Şahin. It’s cheaper. It doesn’t matter what you pay, it’s going to be cheaper than a long-term licensing agreement. And paying a monster premium is not without precedent.

Never in my life have I seen a better opportunity. If I was BioNTech I would absolutely try to buy out Matinas. And I would pay whatever they wanted. Five billion? Ten billion? It’s a drop in the bucket compared to the upside potential of mRNA LNC products. It’s also peanuts compared to decades of royalty fees.

In 2006, Google bought YouTube for $1.65 billion in a stock-for-stock transaction. In 2021, YouTube brought in 28.84 billion U.S. dollars.

That’s the power of buying out a small company as early as possible.

If BioNTech buys out Matinas this year, it might go down as the greatest acquisition in the history of finance.

This would be a win for both parties. Even though the upside potential of Matinas is galactic. If investors accepted a buyout between $2-10 billion, today, they could redeploy their capital and take advantage of the next bull run in biotech. It’s an especially good time to entertain a buyout offer because a lot of stocks have been massacred in the last few months.

A billion-dollar buyout would be a great business deal for both companies.

Left alone, Matinas won’t be generating revenue for a while. Their market cap is likely to tread water until the MAT2203 Cohort 4 data comes in. This will provide irrefutable proof that LNC is the future of drug delivery systems.

A licensing agreement between Matinas and BioNTech just seems like a waste of time. It also becomes tremendously expensive later on to merge the two companies.

Given the slaughter in biotech over the last year, and the growing cash piles of big pharma, now is the perfect time for BioNTech make a generous offer.

I would tender my MTNB shares today for anything over $10. Not because I think the company is only worth 2.2 billion, but due to the state of the market. If in six months, if biotech is hot again and the Cohort 4 data is great, I would vote no on $10.

I might even vote no on $20 or $30. At a certain point I’d vote no on almost anything. If Matinas decides to go down the licensing route, then it turns into a cashflow machine and I’ll probably just never sell it because the tax bill would be tremendous.

Matinas’ LNC oral amphotericin B is poised to steal $800 million a year from Gilead.

LNC oral amikacin is poised to steal $220 million a year from Insmed.

And that’s just the current market. The intravenous versions of amphotericin B and amikacin are highly toxic. LNC versions of those two drugs could have significantly larger markets. The drug could also be used for longer since toxicity isn’t an issue.

What I’m saying to you is this:

Even if BioNTech buys Matinas and every single mRNA LNC combination is a flop, they still might come out ahead after a few years, because Matinas has two fantastic drugs in their pipeline.

It’s insane that nobody has pulled the trigger on this. Matinas is either going to be raking in a ton of cash in licensing fees or get bought out for billions. Cash cow or buyout. That’s how the Matinas BioPharma story ends.

Yes, given that the market cap of Matinas is only $143 million, a buyout with a premium of 1,500% might seem radical. But it’s not. If you look at the expected value of the business combination, based on the chance of LNC mRNA success then 1,500% is actually a steal.

Even a premium of 3,500% is still a great deal because BioNTech gets everything for $5 billion. Which is what Matinas will be worth in a few years anyway with their own drugs.

If this were two years from now, then even at a 3,500% buyout premium, the mRNA LNC combination isn’t being factored in. It’s like BioNTech just gets that for free.

It reminds me of the time my parents were shopping for a house. They found two near identical homes around the same price. There was only one major difference. Above the detached garage of one house, the owners had built a nanny suite. They were renting it out to a long-term tenant for $1000/month. My parents’ mortgage would have only been $1,600/month.

I tried to explain to my parents that the house with the tenant was worth significantly more because it came with a low-risk asset that paid a dividend of $12,000/year. It would have reduced their housing expenses by 63%. They passed on it because they didn’t want to be landlords. Someone else bought it and flipped it for more than double a year later.

It was a unique opportunity that I don’t expect to ever see again.

Same with Matinas.

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