Lundbeck gets Chelsea out of jail

The proposed takeover by Lundbeck looks like the best outcome that Chelsea Therapeutics’ investors could have hoped for, and closes the tortuous story of the biotech group’s sole product, Northera.

It also bears out a recent key industry trend: pre-revenue biotech takeouts are rare, but when they do occur it is at a point where most if not all product development risk has already passed. Moreover, the real upside in the deal is tied to future payments triggered by sales levels that Northera will struggle to reach.

True, the share price premium is not earth shattering, but at 29% over yesterday’s close excluding the contingent value right (CVR) element it is in line with recent deals (Development-stage M&A premiums reward very patient investors, May 7, 2014). Chelsea investors will get $530m in cash up front including the exercise of options and warrants, equivalent to a market value at which Chelsea last traded over three years ago.

In the intervening period, of course, the company suffered the delay to Northera, a formulation of droxidopa for symptomatic neurogenic orthostatic hypotension, a rare form of low blood pressure that can cause light-headedness in patients with conditions like Parkinson’s disease.

After a US filing was rejected in March 2012 Chelsea redesigned trials and resubmitted the application, and was rewarded for its hard work with an approval two months ago, which clearly served as the takeover trigger (Chelsea smiles as Northera gets not-so-accelerated approval, February 19, 2014).

On a call today, Lundbeck confirmed that its attraction to Chelsea was based around Northera being a low-risk opportunity. “All we have to do is launch it,” said the Danish group’s chief executive, Ulf Wiinberg.

He also cited droxidopa’s use in Japan, where it has been marketed since 1989 for treating hypotension. Lundbeck said Northera would sit well in its portfolio and allow the group to remain focused on two high-risk phase III assets – Lu AE58054 for Alzheimer’s disease and desmoteplase for ischaemic stroke.

Risk hedged

That said, some risk remains for Northera, such as warnings on its US label and uncertainty around its benefit over two weeks’ treatment. But Lundbeck has managed to limit its exposure through the use of CVRs – three will be assigned for each Chelsea share held, adding another $128m to the potential value of the takeover.

The related conditions are onerous. A complex formula in the CVR agreement boils down to Northera sales having to exceed $100m, $200m and $300m in 2015, 2016 and 2017 respectively for each of the three CVRs to pay Chelsea shareholders a 50-cent milestone.

And according to EvaluatePharma that is a long shot. Sellside consensus data see revenue in those three years amounting to just $68m, $135m and $219m, so those hoping for a future payout will have to bank on Northera faring exceptionally well in Lundbeck’s hands. Curiously, the CVR will not be tradeable, Lundbeck said.

Anyone still thinking that Lundbeck is buying Chelsea on the cheap should not lose sight of the launch costs that the Danish company is committing to, not to mention a post-approval study that it has also promised to fund.

A takeout with a 29% premium is surely preferable to a protracted search for a marketing partner or a dilutive fund-raising – each of which would have left Northera languishing in biotech purgatory as an approved but unlaunched product. Lundbeck has given Chelsea a get-out-of-jail card.

To contact the writer of this story email Jacob Plieth in London at jacobp@epvantage.com or follow @JacobEPVantage on Twitter

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