F-star Therapeutics: Running Into A National Security Roadblock (NASDAQ:FSTX)

Regulatory approval of F-star Therapeutics, Inc.’s (NASDAQ:FSTX) merger is not looking good. The company, which agreed to go-private in June, is currently facing significant resistance from the United States Committee on Foreign Investment (“CFIUS”) and the U.K. National Security and Investment Act (“NSIA”). Given the level of scrutiny, it is highly speculative the deal closes under current terms. If the deal succeeds, then there is a ~21% upside; but if it breaks, the FSTX’s stock could plummet more than 35%. Given the risk/reward of this transaction, it is probably best to avoid FSTX.

The Transaction

FSTX, a cancer-focused clinical-stage biopharmaceutical company headquartered in the U.K. and incorporated in Delaware, agreed to be taken private by invoX Pharma, a wholly owned subsidiary of Sino Biopharm, a Chinese pharmaceutical conglomerate. The parties agreed to a $7.12/sh in cash sale price, which values FSTX at ~$161m. Overall, this is a relatively small transaction.

Other than national security risks, there are no glaring concerns that might derail the transaction. The HSR Act has already expired and the transaction does not rely on financing. Furthermore, a vote is not required because this transaction is structured as a tender offer. The parties have already received greater than 50% of shares tendered, which is enough to consummate the transaction.

National Security Review

Both CFIUS and NSIA have extended their respective investigations into the transaction. On September 15, FSTX filed a notice with the SEC updating the public that CFIUS’ review “will continue for an additional forty-five (45) calendar days” and NSIA required “an additional review period of thirty (30) working days” in order to assess the transactions. Moreover, both agencies left the door open for further investigation beyond stated periods.

What is driving increased scrutiny from the security agencies is classified, but it is safe to assume that it is because the acquirer is Chinese. Since 2018, the U.S. and other western democracies began eschewing Chinese advances in emerging technologies via global acquisitions. To this end, the U.S. legislature empowered CFIUS through The Foreign Risk Review Modernization Act of 2018 (“FIRRMA”) to increase scrutiny of transactions like the FSTX-Sino Pharm deal.

It is rare that deals are formally prohibited on national security grounds. In the U.S., an executive order issued by the president is required to block a CFIUS-related transaction. What is more likely is for the company’s to withdraw the transaction if the parties cannot satisfy security concerns.

Timeline

CFIUS and NSIA only has a finite amount of time to review a transaction. For CFIUS, the 45-day investigation period that was recently announced is the final phase before either: a) CFIUS approves the transaction; b) the parties decide to withdraw and restructure the deal; c) the parties abandon the transaction; or d) it is sent to the president for his decision within 15 days.

There is an Outside date in the contract of November 19, 2022 which gives enough time for the national security reviews to run their course.

Conclusion

Because of the inherent uncertainty surrounding the probable outcome of this transaction, it is best to avoid FSTX.