Javelin’s production woes could impact Hospira deal

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With many whirlwind romances there is often a period of reflection and this week Hospira appeared to be experiencing some cooling in its affections for Javelin Pharmaceuticals after it was revealed that the small biotech’s UK partner would be withdrawing Javelin’s lead product, Dyloject, in the UK following safety concerns.

The cracks in the engagement started to show last Wednesday when Hospira extended its tender offer from May 19 to June 2, an announcement that caused Javelin's shares to fall by 18% on the day on fears that the proposed $145m takeover might be heading towards the rocks (Javelin infidelity leaves Myriad looking for another partner, April 13, 2010).

It now appears that the extension was driven by the UK Dyloject supply chain issue, caused by the discovery of particles in some vials of the painkiller drug, which has resulted in a withdrawal of all batches from the UK market. The announcement by Javelin yesterday caused its shares to drop a further 44%, leaving them at $1.26. Today they started trading at $1.22, significantly below Hospira’s offer of $2.20 a share, but later recovered to $1.43.

Material events

Hospira obviously considers the UK product suspension a material adverse event, which under the takeover agreement signed by the two companies not only allows the tender offer period to be extended, but could also see Hospira walk away from the deal.

However, the stance of Hospira could be rather hard line given that the particulate matter has been present in Dyloject batches that have been in use since 2008 with no reported adverse events in patients. The drug has been approved in the UK since December 2007.

So although the ‘better safe than sorry’ approach by UK regulatory authorities may be sensible in terms of patients, it also allows Hospira large amounts of leverage.

Lower price

Hospira, which has acceptances for just under 80% of the shares, could now use the 'material adverse event' clause to pressurise Javelin into accepting a much lower offer if the shares continue to languish.

Javelin, which stands to lose pretty much everything if it is abandoned by Hospira having spurned a lower all-share offer from Myriad Pharmaceuticals only five weeks ago, is hardly in a position to put up much resistance.

To say Javelin has a precarious cash position is to seriously understate the situation. The group had only reserves to get it through the first quarter and in its last income statement reported cash of $1.1m at the end of March. It has only been surviving thanks to loans extended by Hospira as part of the takeover proposal.

So if Hospira does decide to walk away Javelin will have to pay back the $4.5m that it was lent and then almost certainly start to think about winding up the company.

Javelin, desperate to keep the current deal on track, is sensibly pointing to the fact that there are currently no issues in the US supply chain of Dyloject and also strongly believes that the conditions of the tender offer have been fully satisfied.

Even bigger steal

Dyloject is one of the major reasons why Hospira has made a play for Javelin, alongside Ereska, a form of intranasal ketamine used in post operative cancer pain. Dyloject has a PDUFA data scheduled for October 3 and Ereska is on track to be filed by the end of the year.

Both products are worth considerably more than both the current market cap of Javelin, standing at $82m, and Hospira’s present offer, according to EvaluatePharma’s NPV Analyzer, which values the two drugs at $550m. As such, it had been thought that Hospira was getting a steal at $2.20 a share for Javelin.

However, if Hospira does manage to invoke the material adverse event clause and use this to reduce the price then the take out of Javelin could be even more of a bargain than it currently looks.

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