The Japanese Love Scotland. Could That Seal A Higher Deal For ProStrakan?

The little party assembling around Scotland-based spec pharma ProStrakan just got a bit more lively. The company's got one leg in the bed with Kyowa Hakko Kirin, as we reported here, even though the Japanese firm's cash offer for the group, at 130p per share, was generally seen as rather stingy.

But the deal isn't sealed: conditions of the offer, which has been agreed only by 47% or so of ProStrakan's (jaded) shareholders, are voided if a counterbid worth 140p or more materializes. The consensus yesterday was that a counterbid was unlikely; after all, ProStrakan has been up for sale since November 2010, having seen two major regulatory snafus and a manufacturing problem in the U.S, and booted out its CEO in September. This was a company unashamedly on the block. If no one else had bid by now, why would they start?

Well in fact someone had bid before now: private Norgine. The quiet, pan-European specialty pharma firm, registered in Holland, on the prowl for some more products. It had offered ProStrakan £1 per share, but that offer (after consideration) was rejected. In fact, it was this that prompted ProStrakan to put itself publicly up for sale, to try to garner a better deal. Meanwhile Norgine decided to somewhat sneakily buy Sanofi's stake in ProStrakan, notching up a 13% holding at 95p. That purchase has already made the company a tidy windfall, if not brought it any products.

It now seems Norgine wants some more of that, thank you: the company this week increased its holding to 14.4%, buying shares at 129p and 129.75p. Why? If it's about an opportunitistic investment, it's unlikely to make money coming in at this level.

More likely, perhaps, is that Norgine is mopping up whatever shares it can at today's price, ahead of making a counter-bid for the group -- which would have to be priced at 140p at least, to invalidate the Kyowa deal.

If that is the plan, it won't be a friendly deal: unlike Kyowa, for whom ProStrakan will provide a first foothold in Europe, Norgine already has a European infrastructure. The company apparently doesn't want activities in the U.S, either. So it would,we speculate, be a slash-and-burn job.

Kyowa, in contrast, has said it will maintain ProStrakan's management and staff. The deal is, arguably, far more valuable to the Japanese group, which is seeking a commercial outlet for its pipeline products in the West, and which already markets ProStrakan's Abstral and Sancuso in Japan and some Asian markets.

So Norgine, if it's going to gatecrash this party, will need to entertain the notion of a higher bid from Kyowa (which according to ProStrakan acting-CEO Peter Allen was the one to initially suggest the 130p per share price, so it probably didn't have to negotiate too hard first time around). All the more reason for Norgine to mop up shares now -- a move that "has all the hallmarks of a company about to go hostile," according to Singer Capital Markets analyst Shawn Manning.

But a Norgine counterbid, were it to be made (and few analysts, even now, are saying it's likely) would come up against not only Kyowa's funding muscle (the company had sales of $5 billion in 2010, versus Norgine's $400 million) but also another, softer factor, according to Manning: the Japanese's love for Scotland and all things Scottish. Whether it's the whisky, the bagpipes or the Highlands, who knows. It could even be the Japanese-corporate-style dedication to the job that ProStrakan employees allegedly show (since there are few other biopharma employers in the Galashiels area).

Tartan and shortcake, then, may yet seal for ProStrakan's patient shareholders a rather more valuable exit than a good chunk of them appeared resigned to on Feb. 21.

image by flikrer BoSoxBrent used under a creative commons license

Deals of the Week: Beyond Vytoringate

The sky is falling! The sky is falling! It sure seems that way this January Friday morning. Global markets slid early in the week thanks to a certain R-word and its association with the US economy. Meanwhile, in pharma land the brouhaha over Vytorin data--or lack thereof--has officially morphed into a scandal, with the addition of the "gate" suffix. (Take our poll!)

As of Thursday, both houses of Congress had initiated investigations, pressing Merck and Schering-Plough for information on the timing of executive stock sales in the wake of the delayed release of results from the so-called ENHANCE trial. Adding to the bad news, comes this New York Times report, which draws the American Heart Association--remember, the group came to the defense of Vytorin just last week--into the scandal thanks to financial ties to both companies.

In the wake of such scrutiny, it's not surprising that Vytorin prescriptions have fallen. Any doubt that these two pharmas have a serious image problem should be erased by this spoof from YouTube, where the omniscient narrator voices, "Nobody knows if Vytorin is safe or effective, but with enough scientific fraud, we can sure make it look like it is."

2008 is off to a great start. Thank goodness for Deals of the Week, where we promise not to mention Vytorin, Merck, or Schering Plough again--at least in this edition.



Teva/Cogenesys: On Tuesday, the Israeli generic drugs company announced it's acquisition of Cogenesys, the albumin fusion technology play spun out of Human Genome Sciences in 2006, for $400 million. Yet again, proof of a trend we've detailed several times: pharmaceutical firms continue to bulk up their large molecule capabilities. But for generics giant Teva, this deal is as much about deepening its stake in the ill-defined, yet surely valuable, follow-on biologics arena as is it about biologics capabilities per se. And that got us thinking. How much different is this deal, really, than Glaxo's take-out of Domantis, BMS's buy-out of Adnexus, or Wyeth's acquisition of Haptogen? Pharma's made a tremendous amount of money on next-generation (or me-too) small molecules. Stands to reason that as these firms jump into biologics, this might be just the space to play in--after all, new technologies allow the pharmas the opportunity to create IP-protected versions of existing large molecules that have largely been derisked. (Note: It's probably a good thing for Cogenesys that Teva inked the deal Tuesday not Wednesday. On Wednesday came news that HGS's own albumin-fusion protein, Albuferon for the treatment of Hepatitis C, may have adverse lung-related side-effects when dosed at the 1200 microgram level. HGS says it will shift patients in the Phase III trial to a 900 microgram dose biweekly and still expects to have late-stage data on the drug by spring 2009, with a marketing application to follow later that year.)

Roche/Ventana: Requited love--isn't it romantic? On Tuesday,came the news that after attempting to pledge its troth five times--and upping its share price to $89.50--Roche finally won Ventana's hand. We advised Ventana to take the outsized $75-a-share price late last summer, as $3 billion for a company with no near-term products seemed an outrageous return. Looks like we were wrong. That extra few months of wrangling won Ventana shareholders an extra $400 million in value, with the purchase price coming very close to the $90-per-share target Ventana CEO Gleeson had been gunning for all along. But even this happy news hasn't quelled the on-going rumor-mill. Forbes is reporting that although Ventana’s board has approved the deal it was over the objections of Chairman Jack Schuler and Vice Chairman John Patience. Neither have agreed to sell their shares to Roche. That’s 12% against the deal. Larry Feinberg, manager of the $1 billion Oracle Partners hedge fund owns another 8% of Ventana’s stock. He started buying in 1999 and tells Forbes: “My strategy has been to go along with those guys.”

Estee Lauder/Allergan: Last week the self-help guide "How Not to Look Old” made its debut on the New York Times best-seller list at No. 8 in the advice and how-to category, proof that the quest for eternal youth remains a constant in our society. This week comes news that Estee Lauder Cos' Clinique Laboratories is teaming up with Allergan to develop and market a new up-scale skin care line that will only be available from physicians. The new line will be priced at a premium compared to both Clinique's retail products and Allergan's physican dispensed offerings, which include Prevage MD and Forte. "The big idea here was: How do we become a leader in skin care?" says Allergan's CEO David Pyott. Allergan, is of course, the company that brought the world Botox, and has been a leader in showing the world how lucrative it can be to blend cosmetics with aesthetic medicine.

Forest/Novexel: Forest Laboratories plans to shell out $109.5 million in up-front fees to license North American rights to Novexel's preclinical intravenous beta-lactamase inhibitor, NXL104, which is being developed in combination with Forest's ceftaroline. (For those who don't remember, Forest acquired that product as a result of its 2006 acquisition of Cerexa.) If development work bears fruit--the combination is scheduled to enter the clinic in 2009--Forest will owe an additional $109.5 million. In addition, Forest also won first negotiation rights on another combination antibiotic--NXL104 plus ceftazidime, another cephalosporin with a slightly different activity spectrum compared to ceftaroline. This is the seventh major in-licensing deal for Forest in the last two years. While other pharmas have looked to biologics and other novel technologies to rejuvenate their pipelines, Forest is proving it has the know-how to license and succeed with primary care products, from anti-infectives to hypertension medicines such as Daiichi Sankyo's Azor to irritable bowel syndrom drugs such as Microbia's linaclotide. In other words, this spec pharma is proving it can succeed in big pharma's sandbox. For more on Forest's efforts in the primary care space check out this article from the December issue of The RPM Report.

Ventana Accepts $3.4 Billion

Roche finally nabs its man. Or in this case, its diagnostics company. All it took was an extra $14.50 per share. From the companies' press release:

This offer represents a premium of 4.9% to Ventana's closing price on January 18, 2008, a 19.3% premium to Roche's initial offer on June 27, 2007, and a 72.3% premium to Ventana's closing price on June 22, 2007 (the last trading day prior to the announcement of Roche's initial offer). The acquisition of Ventana, a leader in the fast-growing histopathology (tissue-based diagnostics) segment, will allow Roche to broaden its diagnostic offerings and complement its world leadership in both in-vitro diagnostic systems and oncology therapies.

Here's a recap: Roche spent most of 2007 getting turned down by Ventana, which played down the pharma's $3 billion offer multiple times. First they said please, then highlighted its belief in the importance of its diagnostics business by promoting its dx head Severin Schwann to CEO of the whole Roche Group. We suggested soon thereafter that Ventana should do the deal (this is why we are not CEOs, we suppose), and in late November they agreed to let Roche behind the curtain with an eye toward a more equitable arrangement (ka-ching!). Roche again extended its offer for the company earlier this month, and that brings us to this morning's $89.50 per-share-deal announcement.

We've outlined the rationale for this deal before (follow several of the links above). Roche clearly believes that personalized medicine is the future, and is sure that Ventana will help them get there. $3.4 billion sure.

Take The Money and Run

On Tuesday August 21, this IN VIVO reporter had the opportunity to interview Christopher Gleeson, CEO of Ventana Medical Systems. It was an interview arranged by an outside public relations firm, ostensibly to talk about the growing importance of companion diagnostics. But there was a Swiss elephant in the room: Roche, whose $3 billion hostile offer for the diagnostic company was set to expire in a couple of days.

Gleeson confirmed his company has had no conversations with Roche since the end of June. "We would prefer not to comment on this matter," says Gleeson. But he maintains, "We continue to look at every way possible to maximize value to our shareholders." Forgive my confusion, but it seems like an odd time to seek out a meeting with a reporter and then dodge the most pressing issue facing the company.

Instead, Gleeson presented the broad case for molecular diagnostic content, invoking Genomic Health's success with Oncotype Dx, and his belief that valuable tests of this ilk can command premium price tags. Frankly, we at IN VIVO have been hearing this argument for a while now--with little formal movement.

Gleeson himself acknowledged that, to date, the relationships Ventana has developed with pharmas are primarily fee-for-service contracts for assay development using the drug company's own proprietary biomarkers. In other words, those pharmas haven't been willing to part with any kind of royalty in exchange for having a diagnostic co-listed on the drug label.

So why even bother speaking to IN VIVO at all? To convince me that a company with 2006 revenues of $260 million is worth more than Roche's $75-a-share offer?

Now, I know that the market for in vitro diagnostics is hot. A quick search through Windhover's Strategic Transactions Database shows 22 IVD acquisitions this year alone, and none of these take-outs have been cheap.

Remember Biosite? Beckman Coulter tried to buy the company for $1.44 billion, only to be out-bid by Inverness Medical. (See here for Windhover's coverage.) Especially in the over-heated molecular diagnostics arena, acquisition targets are commanding stunning multiples. Qiagen bought Digene, for instance, for $1.42 billion, a 9.3x multiple on the HPV-test maker's annual revenues.

But Roche's $3 billion offer for Ventana exceeds even that--assuming the Swiss drug maker doesn't sweeten its deal, it's nearly a 12x multiple on Ventana's 2006 sales. Said one industry insider who's been following the saga, "The price is scary."

I give Gleeson a lot of credit. He's playing a tricky game of brinkmanship. It's clear Roche wants this company badly--Ventana's cell-based assays fit with the company's professed long-term strategy to entwine drug development and personalized medicine. And the company spent 6 months pursuing Ventana privately before launching its hostile bid. When Roche finally went "hostile," it opted for a rich price, seemingly designed to frighten off competitors. As the summer wanes and the hostile bid gets extended yet again, it seems less and less likely that a white knight will appear to rescue Ventana.

Roche may decide to sweeten its offer in order to get the deal done, but that seems less likely after yesterday, when an Arizona court ruling granted a motion preventing Ventana from using a state anti-takeover position. (A ruling to prevent Ventana from issuing new shares to block the proposed deal--a so-called "poison-pill"--is still pending.) That's okay. Gleeson has done his job for shareholders: $3 billion is a rich price for a diagnostic company, especially one that isn't likely to be launching significant numbers of new companion diagnostic tests until 2011.

Seems like now is the time to take the money and run.