Pharmion shareholder raises the stakes

Analysis

It is not often that the efficacy of an uninvolved company's product influences a take over deal. But in a twist to Celgene’s attempt to buy Pharmion, an activist shareholder is pegging the price of the acquisition on the outcome of a trial of a drug that competes directly with prize asset Vidaza.

SAC Capital, headed by Steven Cohen, owns 8.3% of Pharmion shares and is arguing that the offer price should hang on data from a phase III trial of MGI Pharma’s Dacogen. If Dacogen's survival data is less impressive than Pharmion’s Vidaza, the latter becomes more valuable.

Earlier this week SAC Capital sent a letter to Celgene, claiming that the current $72 a share offer for Pharmion, valuing it at $2.9bn, does not take into account the potential of Vidaza, a treatment for blood disorders that can lead to leukaemia.

In its letter, SAC Capital said: "If the Dacogen trial fails or produces data that are clearly worse than Vidaza's survival data, we believe Pharmion would be worth $80 - $100 or more as a standalone company versus the $72 per share in stock and cash offered by Celgene."

Market share

SAC also argued that a negative outcome for Dacogen would enable Vidaza to capture more than half of the myelodysplastic syndromes (MDS) market and increase peak sales by between $100m-$250m. Both products are already on the market in the US.

The group is now trying to either delay the vote on the merger until the data is available later this year, or hike up the offer price if shareholders do not get to wait for the study.

While it is not hugely surprising that a shareholder would try to extract the most value from their investment, some of SAC’s assumptions could be called into question.

Analysts are already expecting Vidaza with its impressive survival data – a 74% increase in median survival compared with its nearest rival – will scoop up the majority of the MDS market.

Consensus rising

Confidence in Vidaza’s success is reflected in the impressive rise in consensus sales forecasts for 2012, which have tripled from $238m to $716m in the last six months. In stark contrast Dacogen 2012 sales are forecast to be a more modest $450m.

Additionally, taking the best case scenario that SAC has outlined and increasing peak sales by $250m to $965.9m, a 35% rise on consensus peak sales, causes the NPV of Pharmion shares to rise to $80.65. That represents a 12% hike in the current offer price and is considerably below the upper limit of $100 a share that SAC Capital believes the shares could be worth.

That said, Celgene appears to have netted itself a bit of a bargain when the dynamics of the deal are examined. Only $25 of the $72 a share offer is to be paid cash. Once Pharmion’s own cash balances of $230m are taken into account Celgene’s cash outlay falls to $700m.

But it could also be argued that Mr Cohen, who has increased his stake in Pharmion over the last year, has already enjoyed considerable upside. The $72 offer price was already a 46% premium to Pharmion's share price the day before the deal was announced.

The 5.1% stake that he disclosed in February 2007 has more than doubled in value from $46.4m to $112.4m. The increase in his stake to 7.1% in December netted him $11.6m as the shares rose from $64.25 to their current level of $70.25. Even his current increased stake to 8.3% disclosed in January has increased in value as the shares have risen by $3 since then.

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