Pharma Deals, Contingent Value Rights & Activist Investors

The Contingent Value Right as Activist Goal

Ongoing consolidation of the biomedical and pharmaceutical industries, driven in large part by the tortuous nature of the research-to-market pipeline in those fields, has created a demand for tradeable Contingent Value Rights ("CVR").  These CVRs are very much on the minds of activist investors.

For example, in July 2008, ViroPharma Inc., (VPHM) a company perhaps best known for oral Vancocin, an antibiotic often used as a treatment of last resort for bacterial infections,  agreed to buy Lev Pharmaceuticals for $442.9 million, payable in the form of (a) $2.25 per share in cash, plus (b) $0.50 per share in VPHM stock, subject to a collar.  In addition, Lev Pharma stockholders would receive two $0.50 a share CVR payments in the event of either of two contingencies.

One CVR offered was the prospect that Lev’s leading drug candidate would receive a favorable FDA ruling. The other was the possibility that within ten years it would achieve cumulative net sales of at least $600 million. The net present value of the contingent consideration was valued around $174.6 million. 

Lev’s leading drug candidate was Cinryze, a treatment for hereditary angioedema.  The stockholders didn’t have long to wait before one of the expected contingencies came to pass. The FDA approved Cinryze that October. 

Also that October, a lawyer with Kaye Scholer, commenting on the Viro/Lev deal and others, suggested that CVRs “may be the leading edge of more deals … as industry players become more comfortable with the use of this type of consideration.” 

However, as useful as CVRs can be, especially in the Pharmaceutical industry, they do have their drawbacks.  Under certain circumstances, for example, they may be deemed securities subject to registration requirements under the Securities Act of 1933, an act which (if it does apply) can impose significant costs and disclosure requirements.  Other CVRs may be subject to the Trust Indenture Act of 1938, and if that is the case, there will have to be a trustee to look after the holders, and a written indenture between the issuer/acquirer on the one hand and the trustee on the other. 

Despite these sand traps, CVRs are popular as a way of assuring shareholders receive maximum value, important given the very speculative nature of any pharma-world merger, and they are becoming more so.   

Activist Investors Are Now Demanding CVRs  

In August 2010, the French pharma giant Sanofi launched a takeover bid for Genzyme at $69 a share.  It was at first met without enthusiasm from the Genzyme board and later recast as a hostile bid by October.   As investors made it clear that they thought this was a low-ball bid, Sanofi had to ante up CVRs in January 2011.  A deal closed in April 2011.

Meanwhile, in March 2011, Quest Diagnostics Inc. announced that it had agreed to acquire Celera Corp. through a simple all-cash offer, $8 a share, without either stock swapping or any CVR.  Again, the offer encountered resistance, and again stockholders in the target company proposed CVRs as a way of overcoming that resistance without increasing the up-front component of the consideration.  Activist investor Starboard Value & Opportunity Fund (formerly Ramius) focused especially on Celera ownership of a royalty associated with Odanacatib, a drug for the treatment of osteoporosis. 

“It does not appear that [Celera] fully evaluated opportunities to monetize the value of the Company’s royalty interest” in agreeing to the deal with Quest, Starboard said in a April 7, 2011 letter to Celera’s board. 

Mark Lampert, on behalf of his activist fund, Biotechnology Value Fund, was more direct in making the pro-CVR case.  Lampert wrote Quest on March 30, telling it that the drug royalties Celera owns, including Odanacatib, “are extraordinarily valuable, are not of strategic significance to Quest, and are not at all reflected in the purchase price.”   

(For more information on BVF's activist position in Celera you can read HFS's May 13, 2011 weekly activist investing report)

Despite such resistance, this deal went through.  On May 17 Quest announced that it had successfully completed its cash tender offer for all outstanding common shares of Celera Corp. through a wholly owned subsidiary.

Quest’s success without offering CVRs as an element of consideration seems at this time a one-off exception within a continuing trend: CVRs will recur, despite the regulatory pitfalls mentioned above, because they simply make too much sense, especially as a tie-breaker for a wavering investor.  And investors will learn that it makes sense to continue to ‘waver’ so long as CVRs are not yet on the table.   

Contributed by Christopher Faille. 

Image captured from BioJobBlog.com

May 24th Webinar on the "New Age of Shareholder Activism"

Alliance Advisors, a leading proxy solicitor, and Blank Rome, a leading law firm, are hosting a 90-minute long webinar on May 24th to discuss the "New Age of Shareholder Activism".

Topics explored include:

• The agenda and "modus operandi" of activist shareholders
• The tools and tactics of activist shareholders including white papers, fight letters, media campaigns, stockholder proposals, proxy contests and consent solicitations
• How to assess your company's vulnerability to activist shareholders
• The early warning signs that your company may be a target of an activist shareholder
• Why you should understand your shareholder profile
• How to lessen your company's vulnerability to activist shareholders through the use of charter and bylaw amendments
• How to lessen your company's vulnerability to activist shareholders through pro-active engagement with the proxy advisory firms
• How to respond when you become aware that your company is the target of an activist shareholder
• Why you should form a "rapid response team" now

Click here for more.

Posted by David Schatz

Supporting a Great Cause: The Sohn Investment Idea Contest

The Ira Sohn Conference Foundation is hosting a contest to help benefit children with cancer. They are looking for a set of talented applicants to submit investment ideas that will help further their cause.

The conference will bring together a group of highly-successful investors to exchange investment ideas while raising money to fund a mission to treat and cure pediatric cancer. The event takes place on May 25, 2011, and will give one applicant with a compelling analysis the opportunity to present a ten-minute investment presentation at the renowned Sohn Investment Conference.

Successful activist and value investors Michael Price, Bill Ackman, Seth Klarman, David Einhorn, and Joel Greenblatt, among others, will judge the investment ideas submitted and select the winner. Investment ideas must concern a marketable security from a company that has a market capitalization of over one billion dollars.

With more than $20 million already raised for an important cause, the event presents a great opportunity for successful investors to make a difference.

The deadline to submit the online application and investment idea is 5pm EST on Friday, May 20, 2011.

Click here for more information!

Posted by David Schatz

Elliott's European Strategic Activism Gets Heated

European shareholder activist Elliott Advisors is currently in the heat of two proxy fights between two very different mid-cap companies: one a Swiss biotech company; the other, a British transport company. While the firms are in completely different markets, Elliott Advisors is, interestingly, still employing the same type of activism on both. Namely, the activist has been pressuring both companies to explore strategic alternatives--an initiative that the managements of both targets claim put a quick profit over long-term value creation. At the same time, a major part of Elliott's activism has focused on addressing how the companies should expand in respect to either entering new markets or refocusing R&D. Below are summaries about Elliott's proxy contests at these two companies.

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Actelion Ltd. (ATLN.VX)

Annual Meeting: May 5

Elliott Advisors is seeking a controlling position on the board of Actelion after the Swiss biotech company had a series of product failures. The activist, which owns more than 5% of the company, has nominated 6 independent individuals to the 9-member board. To no avail, management has currently made several concessions to Elliott--like repurchasing 800 million CHF worth of shares and nominating replacements for the aging Chairman and CEO--in order to avert a proxy fight. The annual meeting, scheduled for May 5, will be particularly momentous as the current board's agenda is essentially diametrically opposed to that of Elliott.

The activist has been critical of the firm's strategy and research pipeline--which it has called "high-risk", "runaway", "unfocused", and "unsuccessful"--as well as the firm's management oversight, which it claims is "destroying value for all stakeholders". In particular, the nominees of Elliott aim to slash R&D and explore a sale. Elliott has asked that the biotech company make public previous offers it received, claiming: "In our recent meetings with shareholders the overwhelming response continues to be that the current board of Actelion and its founders are not willing to have an open and comprehensive discussion about the company's strategic alternatives". The hedge fund also took aim at the company's management structure, arguing that "the company's decision-making process is too centralized" with too many executives reporting to the CEO.

Many had expected that, following the release of failed products, Actelion would receive a buyout offer as high as 9 billion francs, which values the firm at more than 30% premium to its current market cap of 6.9 billion CHF. The company's board, however, states that it has never received a bid and was never interested in receiving one. Rather, the board is focused on just the opposite--expanding the firm through acquisitions and releasing new products. On April 19, ISS questioned whether this "is the right strategy anymore" for the company to take and subsequently recommended a vote against the chairman and for three Elliott nominees and the activist's proposal to eliminate restriction on size of board (although the recommendation was essentially split). On the other hand, proxy advisors IVOX, Glass Lewis, and Ethos, have supported all of Actelion's nominees. Further, the company has also received backing from shareholders Rudolf Maag and BB Biotech, which together own 10% of the company. By contrast, Elliott--as the largest shareholder--owns roughly more than 5% and is expected to have the backing of the other shares owned by hedge funds, which amount to 15%. Analysis conducted by Georgeson expects approximately 50-55 percent of shareholders to vote their shares and that "Elliott has confirmations from 20 percent of shareholders and the likely support of another 15 percent from subscribers of ISS".

National Express (LON:NEX)

Annual Meeting: May 10

Elliott Advisors is also rattling cages at National Express. The hedge fund, which owns approximately 17.5% of the bus and rail company, has nominated three individuals to the 9-member board. Like Actelion, National Express has also argued that Elliott is waging a proxy fight in order to pressure the company into a sale, which management claims will ultimately be to the detriment of long-term value. Alternatively, the activist claims it is aiming to get the company to pursue aggressive growth in new markets and explore strategic alternatives that may value the company at around a 55% premium to its current market cap of $1.3 billion. The transport group, Elliott claims, will face significant challenges in the years ahead due to consolidation and liberalization in European mass transit, and that it is therefore "critical" that the company refocus investments in America and explore selling off assets elsewhere. Mark Levine, Elliott's manager in charge of the National Express investment, argues that the transport company is "trading at a big discount to the sum of [its] parts" and that its "composition of... non-executive board members has not changed since 2007"According to Bloomberg, the hedge fund is unlikely to receive support from 13% owner M&G Investment Management. However, Elliott states that it has support from Spain's Cosmen family, which owns 17.5% of the company, and only needs 15.2% more backing in order to prevail in its proxy fight. With that said, both ISS and Glass Lewis have disclosed support for management.

Posted by David Schatz