SpringWorks Therapeutics (SWTX): A Compelling Biotech Buyout Thesis with Limited Downside

Is a buyout now imminent?

SpringWorks Therapeutics represents a highly attractive risk-reward opportunity with substantial upside potential from an imminent acquisition. The company is currently in play with confirmed acquisition talks and multiple signs pointing to a transaction at a significant premium to current levels.

Current price: $50, Target price: $70-85, representing approximately 50% upside with limited downside risk.

There are also a variety of options strategies to consider if you believe this will happen.

Investment Thesis Summary

SpringWorks Therapeutics (SWTX) is a commercial-stage biopharmaceutical company with two FDA-approved oncology therapies.

The company is currently in advanced acquisition talks, initially confirmed with Merck KGaA (German Merck), with compelling evidence suggesting an acquisition announcement could be imminent.

While the stock has already moved from pre-announcement levels of approximately $40 to current levels around $50, analysis of the company's approved drugs, commercial potential, and comparable transactions suggests a fair acquisition value of $70-85 per share, offering additional upside with minimal downside given the company's standalone value following recent FDA approval.

Company Background & Situation

SpringWorks was founded in 2017 as a spinout from Pfizer focused on developing promising oncology therapies. The company has successfully brought two drugs to market:

1. Ogsiveo - Approved in November 2023 as the first FDA-approved therapy for desmoid tumors. Currently generating $250 million in run-rate sales and growing at approximately 25% quarter-over-quarter.

2. Gomekli - Approved on February 11, 2025, as the only treatment for NF1-PN, a rare genetic disease with an estimated 40,000 patient population in the US. Commercial launch expected later this year.

On February 10, 2025, Reuters reported that Merck KGaA was in advanced acquisition talks with SpringWorks, causing the stock to jump from $40 to approximately $60.

Later that day, Merck KGaA issued a statement confirming the advanced talks but noting that "critical conditions" had not yet been met, which caused the stock to settle around $50 to $55.

The following day, SpringWorks received FDA approval for Gomekli, two weeks ahead of the expected PDUFA date of February 28.

This approval further strengthened SpringWorks' position and likely its valuation in any negotiation.

Evidence of Imminent Transaction

Several key developments strongly suggest that acquisition talks remain active and a transaction is likely imminent:

1. Canceled Earnings Call: SpringWorks reported Q4 results on February 20, 2025, but took the unusual step of canceling its earnings conference call. This is particularly striking given that the company had just received FDA approval for Gomekli - a moment when most pharmaceutical companies would actively engage with investors to discuss the commercial opportunity.

2. Canceled Conference Presentations: The company has subsequently canceled appearances at multiple investor conferences, including the Barclays Healthcare Conference. This pattern of avoiding public commentary strongly suggests ongoing sensitive negotiations.

3. German Disclosure Requirements: Under German securities regulations, Merck KGaA would be required to update the market if acquisition talks were terminated. The absence of such an announcement suggests discussions remain active.

4. Options Market Signals: March and April options are pricing in significant moves.

5. Insider Trading Plans: Several executives have sold shares recently under pre-established plans that were put in place in early 2024, well before any acquisition talks would have begun. These sales do not indicate lack of confidence in a deal, as they were pre-programmed transactions.

Recent Developments and Analysis

A recent development came on Merck KGaA's earnings call, where management made the following statement below:

"And so we will continue to do -- to drive business development and we're looking at business development in a full range, always with science being the leading question. But if we can see value and a tie in to our strategy where science intersects, we will be willing to move. And it will still be in that -- $0 to $15 billion range is our sweet spot, but obviously, open to looking at deals. And as we've also said, we're open to commercialized assets as well, if they fit the overall profile I laid out of science and value.”

These statements, coupled with SpringWorks' immediate cancellation of upcoming conference appearances, strongly suggest:

1. Merck KGaA is still an active bidder

2. The acquisition process remains ongoing but potentially with a different acquirer

3. SpringWorks is intentionally maintaining radio silence during negotiations

Valuation Analysis

SpringWorks' valuation in an acquisition scenario is supported by the commercial potential of its two approved therapies:

1. Ogsiveo: Currently generating $250 million in run-rate sales with 25% quarter-over-quarter growth. Peak sales estimates range from $500-$1,000 million. The drug is approved in the US with EU approval expected this year and UK/Japan applications in process.

2. Gomekli: As the only treatment for NF1-PN, analysts estimate peak sales potential of approximately $1 billion. The drug targets a substantial adult population (3x the size of the pediatric population) and has superior efficacy and safety compared to competitors.

Combined peak sales potential of $1.5-2.0 billion provides a strong foundation for valuation using industry-standard multiples for oncology assets of 3-5X peak sales.

This range represents a large multiple over current stock prices.

Risks and Mitigations

The primary risk is that acquisition talks collapse with no transaction materializing. However, several factors mitigate this risk:

1. Limited Downside: Even without a transaction, SpringWorks has two approved commercial products with substantial revenue potential. The true unaffected price (post-FDA approval), would be in the high 30’s.

2. Multiple Potential Acquirers: If Merck KGaA has indeed been outbid, this confirms interest from multiple parties, increasing the likelihood of a transaction.

3. Management Incentives: The CEO, a former investment banking managing director has strong incentives to maximize shareholder value through a transaction. It is also unlikely he would cancel multiple opportunities to crow about his success if there weren’t serious deal negotiations taking place.

4. Timing: The options market suggests a high probability of resolution within the next few weeks.

Trading Strategy

Given the asymmetric risk-reward profile, I recommend the following approaches:

1. Direct Long Position: A substantial position in common shares provides full upside exposure with limited downside risk. You can sell covered calls with this.

2. Spreads: I have sold short dated OTM puts to fund long dated calls. As an example, you can sell an April 17 $45 Put and buying a May or June 50/55 call. The risk of this is you are stuck owning the stock below $45.

3. Selling Puts: Selling out of the money puts which either get paid in full if there is an acquisition or if the deal falls through resulting in a cheaper entry into this stock. This was a much better deal last week when you could have gotten paid a 14% premium for 10 days.

Conclusion

SpringWorks Therapeutics presents a compelling risk-reward opportunity with strong evidence of an imminent acquisition at a significant premium to current levels. The combination of two approved commercial products, a favorable competitive landscape, and clear signals of advanced acquisition talks creates an attractive setup for investors. While biotech investments always carry risk, the asymmetric payoff profile here makes this an unusually attractive opportunity for investors willing to accept modest downside risk for substantial potential upside.

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PS, If this trade interests you, I suggest you check out this Gentlemen’s Youtube page or subscribe to Special Situation Investments.

Both have written about this opportunity and are excellent resources.

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