Intercell takeout unlikely

Analysis

In a market where the credit crunch has curtailed most corporate activity, in the absence of real deals the only thing left to do is speculate. The latest rumour doing the rounds is that Intercell could be a take over target.

But it is unlikely that the Austrian biotechnology group, which is forecast to see its profits rocket as licensing deals with big pharma move closer to market, is about to give up its independence.

Intercell is certainly attractive. The group’s shares have flourished thanks to its rich early-stage pipeline and focus on vaccines, a formerly neglected area that has become one of the hotspots for big pharma interest 

At the moment the company looks relatively cheap. All of Intercell's value is tied to IC51, which is worth $1.98bn according to the EvaluatePharma NPV Analyzer, conversely, Intercell’s market capitalisation is $1.79bn. The NPV valuation also does not take into account the rest of the pipeline, which includes four phase II products and four phase I treatments.

Blocking stake

In answering who would buy the vaccine maker, the most obvious candidate would be Novartis. The Swiss giant already has a very close relationship with Intercell following an agreement last July that saw it pay €120m up front, spend €150m on 4.8m Intercell shares and promise double-digit royalties and milestone payments on certain products.

In return Novartis secured the rights to use the IC31 adjuvant in its flu vaccines, an option to develop up to 10 products in Intercell’s pipeline and opt-in rights to all future vaccine candidates discovered by Intercell during the collaboration.

If Novartis is not considering taking Intercell out, the 15.9% equity stake it now has in the group effectively acts as a large hurdle for another company.

Money brings independence

Another barrier is the improved financial situation of the company over the last few years that mean it is not desperate to do a deal. During 2007, Intercell reported that it had moved into profitability, its cash also increased to a very healthy looking €289m as of March.

There are also no longer-term financial worries. Profitability should be sustained during the year, whilst the cash keeps stacking up thanks to milestone payments from its partners and the potential marketing of Japanese Encephalitis treatment IC51.

An FDA inspection of the JE facility is scheduled for April, and an Advisory Committee meeting could occur by the end of May, indicating that the JE vaccine could receive US approval earlier than the standard 10 month review period.

Sales for the product are almost guaranteed given the agreement the company has struck with the US army to supply all of its personnel working in affected areas to be vaccinated against the disease, once the vaccine is approved. This should help while uptake among travellers, the group’s secondary market, grows.

Phase II trials in a paediatric setting are also expected soon and will be the first stepping stone to approval in Asian markets where the disease is most prevalent. The first sales could happen as early as 2009.

Jewel in the crown

While the JE vaccine is the group’s most advanced product, the one that makes Intercell look particularly attractive and could be the source of takeover talk is IC31, the vaccine adjuvant licensed to Novartis.

The drug has shown promise in boosting the immune response when used in a variety of vaccines. It also differs from other adjuvants, which all enhance the effectiveness of a vaccine, through boosting the immune response by inducing both T and B-cell responses.

Most of the focus for the product has been in flu where analysts have been particularly excited by the prospect of a drug that if effective could be charged at a substantial premium to standard cell cultured produced flu vaccines.

It is thought that the drug would have high take up in higher risk groups such as children and the elderly, who often have lower immune responses to flu vaccines. Additionally, the prospect of a flu vaccine that offers superior protection could also entice healthy individuals to have the shot.

Merrill Lynch has forecast the shot could capture 26% of the $5bn global flu vaccine market by 2015.

Staying single

As such, it is unlikely that the Austrian group would be willing to give up on such a profitable drug unless the acquirer came up with a substantial premium or went hostile. Hostile bids are rare in the industry and rarely successful. The most recent, German Merck’s unsolicited bid for Schering AG, was scuppered by an agreed tie up with Bayer.

Any hostile attempt on Intercell would almost certainly be the trigger for Novartis to step in to protect its investment. With that in mind for now it looks as if Intercell might be going it alone for a little bit longer.

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