Facet Biotech Should Dig in Its Heels over Biogen Bid

While most shareholders would, under normal circumstance, jump at a takeover bid that carried a 64% premium, Facet Biotech (FACT) appears to be sensibly holding out for better terms following an unsolicited $355m approach from Biogen Idec (BIIB).

Despite the initially impressive share price premium, the offer from Biogen does look a little on the light side when you consider just how much cash Facet, which was spun out of PDL BioPharma last year, has on its balance sheet. Standing at $371m as of June, when this is taken into account Biogen is technically making money by bidding for the group.

A steal

Biogen has been Facet’s development partner since 2005, when the two groups signed a licensing deal over antibodies to treat multiple sclerosis, daclizumab, and cancer, volociximab. While its interest may focus on daclizumab, if the deal goes through at this level Biogen will be getting Facet's development pipeline and antibody technology platform essentially for free, which has been validated by the success of PDL’s involvement in the develoment of blockbuster products Avastin and Herceptin.

Acquiring Facet also means that Biogen will be spared from paying the next development milestone when daclizumab enters phase III trials. As some have estimated that this might be around $200m, an acquisition of Facet looks like an even better deal.

Therefore, it is no wonder that the Facet board are more than a little reluctant to fold just now. What will not have helped this battle of wills is the fact that Biogen has in fact lowered its initial offer from $15 a share to $14.50.

Previous resistance

Biogen initially approached Facet on August 17, this informal approach was followed up by an official letter on August 21 offering $15 a share as long as Facet swore off any commercial or strategic transactions until the conclusion of any deal.

After rejecting the bid on August 25, Facet added insult to injury by announcing a mere three days later a $186.5m in-licensing deal with Trubion Pharmaceuticals, which included a $20m upfront fee, for TRU-016, a phase I drug for chronic lymphocytic leukaemia.

So, it appears that by lowering its most recent and public bid for Facet, Biogen is both expressing its disappointment with the Trubion deal, which it believes has damaged the value of Facet, and punishing the company for its willfulness.

Biogen might have a point about the Trubion deal, which was welcomed about as enthusiastically as an ugly step child. Facet investors voted with their feet, pushing the shares down by 22%.

Deal fundamentals

Facet’s flawed licensing strategy aside, having sniffed the chance of a higher bid investors have pushed the share price above the $14.50 and $15 mark, indicating that they believe Biogen, which has clearly stated it wants to get a deal done quickly, will be forced to sweeten its offer materially to clinch the deal.

Some analysts believe that an offer in excess of $18 should wrap up the affair with the kind of haste Biogen is after, but even at this higher price it still could be argued that Biogen will be scooping up a real bargain. As previously examined by EP Vantage, antibody companies are highly desirable, as seen with deals such as Bristol-Myers Squibbs' (BMY) $2.4bn takeout of Medarex and Eli Lilly’s (LLY) $6.5bn acquisition of ImClone Systems (M&A spotlight on antibody companies, 24 July 2009). Even at the higher bid of $15 the 74% premium is still below the 90% premium that BMY offered for Medarex (Bristol-Myers gets its antibody deal at last , July 23, 2009). It is also little above $13 that the shares started trading at when the group spun out of PDL (PDLI) in December 2008.

Facet also leads the smaller biotech companies in terms of sheer number of antibodies in its development pipeline, with an impressive total of 10. The group also has a technology platform that can pump out even more of these and as previously mentioned it is a platform that has been validated by PDL’s on-market drugs.

Additionally, even if only a couple in Facet’s pipeline candidates make it to fruition, given the high cost of antibody treatments and the fact that they are often developed in lucrative areas such as oncology, Biogen’s investment could look like a steal.

The next steps

To hurry things along, having had their offer rebuffed by the board, Biogen might decide to bypass the management team and take their offer straight to the shareholders, who might be less swayed by the fundamentals of the deal, and firmly focused on the premium they will get for their initial investments.

Given that Facet shares were at $7.61only two months ago this could be very persuasive argument, but one that would understandably infuriate the Facet management team, who are bound to believe, and rightly, that this would be selling the company on the cheap.

As such the alternatives left to Facet are the standard poison pill of a shareholder’s rights plan or the ultimate defence against a hostile bidder: finding a white knight.

Comments

[biopharmabull:]

Completely disagree. Facet management wasn't acting in the best interest of shareholders in rejecting the initial $15 offer..and even the subsequent $14.50 offered on Friday.

Majority of commentary surrounding this deal focuses on Facet's valuation-which it naturally should--however the focus on Cash value vs. BIIB's offer price distorts the longer term picture.

Below are some points that should clarify that FACTs pipeline doesn't represent much of a value proposition (except to BIIB) and that a $15-$18 valuation is more than fair, after conducting a basic, but thorough, sum-of -parts NPV analysis for of each individual clinical programs in addition to the company's cash & liabilities:

1) Despite mgt. claims--they will never be able to sublease those enormous buildings that account for significant burn for the next 10yrs
2) Facet has NO preclinical capabilities (and only 1 asset which BMS has rights to) since new management shut it down....that means no new INDs...and eliminates the primary competitive advantage that PDL/Facet has ever had.
3) BIIB's Phase 1 TWEAK mAb for RA looks to be shelved for Tox..Suggesting PDL192 may encounter a similar fate
4) FACT's most promising asset--Elotuzumab--should be discounted, due to BMS' majority stake in future earnings of the product
5) Volociximab, also partnered with BIIB, has failed to show efficacy in almost every major tumor type (except arguably NSCLC), so its future is highly speculative
6) Daclizumab, commentators & FACT mgt. suggest that BIIB is trying to push the acquisition through to avoid paying milestone to FACT for phase 3 start..........but there is very little discussion about what FACTs burn rate will look like after taking responsibility for funding 50% of Phase 3 MS trials
7) Finally, if BIIB walks away, FACT stock will immediately retreat to <$10 range because no other company (even BMS) has interests in FACT....as illustrated by the failed attempt to divest the company under PDL BioPharma mgt.

Sep 08 06:33 PM

[biotech:]

totally agree with the comments above, plus almost all the people who were in PDL and behind the antibody technology platform mentioned in the above article, which were major asset of PDL have already left the company, which is the current Facet.

Sep 08 07:38 PM