Hedge fund makes offer to derail Amag-Allos merger

A New York hedge fund’s offer to buy Amag Pharmaceuticals has perked up its ailing share price. Down 25% since the Massachusetts blood and imaging specialist agreed to buy out oncology company Allos Therapeutics, investors today responded to the bid by pushing the stock up 11% to $16 in early trade.

The head of MSMB Capital, Martin Shkreli, says the bid is aimed at blocking the Allos acquisition, a move supported by Amag investors based on their reaction today. There is reason, however, to wonder at the seriousness of the transaction as the fund’s $82m bid to acquire SeraCare Life Sciences in June sparked only a brief flurry of investor excitement before the diagnostics company underwent a strategic shake-up.

Pleased investors

MSMB offered $18 in cash for each share in Amag, a $381m offer that represents a 25% premium on Tuesday’s close and would restore most of the losses sustained since the Allos transaction was announced July 20. That transaction gave Allos shareholders 0.1282 Amag shares for every Allos share they own, giving the Allos shareholders control of 39% of the company (Allos and Amag’s marriage of convenience could end happily, July 21, 2011).

Given the decline in the value of Amag’s market capitalisation since the deal was announced, it was looking to be a less and less attractive offer for the Allos shareholders, with an initial offer equalling $2.09, a rather small 7% premium, declining to $1.84 based on yesterday's prices. Shareholder lawsuits are being prepared, claiming the transaction undervalued Allos.

However, there was more to the deal than just short-term share values; the hope was that two struggling one-product companies with sluggish sales numbers would emerge as a stronger two-product company, based on the ability to save $55m-$60m in the first fiscal year by merging offices and reducing sales force numbers. Some observers cast doubt on that thesis, however – analysts from Jefferies called the transaction “neutral to Amag’s bottom line.”

In a note today, analysts from RBC argue that a merger “does not address the key underlying problem at both companies, in our view, which is that the products are under-performing.” Launched in 2009, Allos’ Folotyn, a lymphoma treatment, sold $35m in 2010, less than half of what analysts expected at the end of 2009. Amag’s Feraheme, a treatment for iron deficiency anaemia in chronic kidney disease patients, sold $59m in 2010, less than two-thirds the forecast at the end of 2009.

Breaking the merger would trigger a $14m fee to Allos, a low barrier to a pullout but not a significant benefit to the Colorado group, the RBC analysts write.

Strength through weakness?

Mr Shkreli disagrees with the strategy of achieving strength by combining weakness, arguing in a letter to shareholders that management instead should have sought a buyer; his target of June, SeraCare, is evaluating the possibility of doing that as part of its strategic review.

That Amag shares did not immediately shoot up to the Mr Shkreli’s offer price likely signals some uncertainty about whether the transaction will come through, and some hope that a better option than the Allos move might emerge. For its part, Amag’s management said it will “carefully” evaluate the offer.

As Amag is sitting on nearly $240m in cash and no debt, MSBM's $381m offer, should it succeed, would not actually require a big outlay. The company, however, is projected burn through this cash over the next couple of years to support the launch of Feraheme.

However, Amag does have a marketed product, and a potential cash flow. Investors can hope another bidder will see this and enter the picture; whether that happens will depend on whether any value can be found in Feraheme.

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