Shareholders unlikely to rewind BASF’s Pronova bid

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If it gets away with it BASF could get a bargain ahead of the January sales, with its cheeky-looking $845m offer for fish-oil drug maker Pronova BioPharma. So far so good – over 60% of the group’s shareholders have agreed to the NKr12.50 a share offer, including the management team and Herkules Private Equity Fund, which holds a 50% stake. But with 90% acceptance needed to seal the deal a small group of shareholders could break up the party.

Today, Pronova shares were a shade higher than the offer price at NKr12.55, indicating that some shareholders at least are hopeful of a rival bidder emerging. But with so little in it, BASF now faces two choices; tough it out, safe in the knowledge that it already has 60% of acceptances and hopefully win the day, or sweeten the pot to quickly win over the remaining shareholders, who must have been looking at the multiples achieved in recent deals in the space.

Anyone to the rescue?

The share price indicates that minority shareholders believe a white knight might come galloping over the hill – and at the moment the nutrition sector does look hot. Only this week Reckitt Benckiser inked a $1.4bn deal for vitamin maker Schiff Nutrition, following intense competition that included rival bids from Bayer.

Interest in the the nutrition market is forecast to grow over the coming years thanks to an increased focus on health and wellbeing in the developed world, particularly among the aged and the growing middle classes in emerging markets. This attractive stable growth has seen other deals struck in the sector.

Pronova produces the triglyceride-lowering drug Lovaza, which is marketed in Europe as Omacor. Last year partner GlaxoSmithKline recorded sales of $917m for Lovaza in the US, with Pronova banking $27m in US royalties.

Problem child

So, while the BASF price tag looks small in comparison, the product is not without its issues. Sales of Lovaza have fallen recently in the US as partner Glaxo has been forced to try to cut down off-label use of the drug in heart failure, and demand has been steadily falling in the region. The recent patent expiry of triglyceride lowering drug Tricor is expected to put further pressure on Lovaza.

It is also facing generic competition of its own. Patents for the drug expired in Europe three years ago, but sales have not been eroded due to the difficulties of refining the raw fish oils that Lovaza is based on. But recently Teva was granted marketing authorisation in the UK and Germany, and other member states could follow next year. If the Israeli group comes up with a bio-equivalent manufacturing process Pronova could be in trouble.

In the key US market the group successfully defended its patents recently, but Apotex is set to launch a version of the drug in the first quarter of 2015 following an agreement struck by Glaxo and Pronova in March 2011 (End of Lovaza patent threat only one less worry for Pronova, May 30, 2012). Pronova will be the supplier to Apotex, so there will be some mitigation of the loss of exclusivity. But sales are still forecast to fall from a peak of $1.02bn in 20123 to $547m in 2015.

New direction

Falling sales in its pharmaceutical indication as well as supply issues have recently seen the group move into consumer health. This can also be seen as an indication of the weakness of Pronova’s pipeline, which only includes one phase I product. But it does look like a sensible change of tack, given the increasing demand for Omega-3 oils and the high margins consumer health attracts.

This might be what BASF has found attractive, given its stated intention of reducing the amount of sales generated from classical chemicals to about 30% by 2020. As such BASF will be doing its utmost to drive the deal. The offering is only a 4% premium to Tuesdays closing price, through.

While some analysts agree the figure does look low, it could prove difficult for unhappy shareholders to get the German group to cough up much more. Investor Herkules Private Equity Fund has previously made it very clear it wanted to exit its investment in the next two years and indicated that other takeover discussions had come to nothing, so it will be willing to take what its currently on the table.

One winner from all of this is Amarin, shares in which rise yesterday as investors predicted that if Amarin does find a buyer, its much stronger patent suite and strong clinical data would net it a much higher price than Pronova.

To contact the writer of this story email Lisa Urquhart in London at lisau@epvantage.com

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