Deals in which one drugmaker agrees to buy another are hardly unusual events. Nor are protests from shareholders who believe the terms are somehow inadequate. But every so often an objection is raised in such a way that puts management on the spot. That happened earlier this week, when SuperGen (SUPG) execs held a meeting to discuss their planned acquisition of Astex Pharmaceuticals.
At a gathering at the Four Seasons Hotel in Manhattan before about two dozen investors, SuperGen CEO Jim Manuso and his counterpart at Astex, Harren Jhoti, went through the usual sort of presentation about shareholder value, synergies and product pipelines (see the release about the deal). Then came the question-and-answer period. And Manuso seemed unprepared for what occured.
A former Wall Street analyst who now manages an investment fund took aim. Michael Krensavage of Krensavage Partners argued the deal is misguided and that SuperGen itself should be sold. Why? SuperGen has just one solid revenue generator, but the med - which is called Dacogen and is used to treat certain types of blood or bone marrow cancer - loses patent protection in 2013.
And while Manuso spent time chatting up the prospects for Dacogen approval in Europe for treating the elderly who suffer from acute myeloid leukemia, he noted a Phase III trial did not meet the primary endpoint. As for Astex, the privately held biotech has been around more than a decade, but has apparently not gotten a drug into late-stage development.
Meanwhile, SuperGen shares have performed poorly - four years ago, for instance, the stock hovered around $6 and have sunk since then. Last year at this time, the shares were about $3.75 and were trading at $2.90 when the deal was announced. This week, however, the stock has been sliding and was about $2.65. Manuso, however, has done well. Here’s what Krensavage had to say, according to the transcript:
I’m a shareholder and I think the very fact that you’ve chosen the Four Seasons, which is one of the most posh venues in Manhattan, to me underscores the disregard for shareholder value that you have exhibited, as does your $2,000 a month allowance for your company car and the $15 million that you’ve taken from the company (in compensation) between 2004 and 2009, not even counting 2010.
And when you look at the stock you’ve seen a decline of $200 million of value since you have taken charge (seven years ago). You’ve spent $170 million in research and development, $125 million in SG&A, and yet you’ve advanced, as far as I can tell aside from Dacogen, nothing into advanced clinical trials.
Now, what you’re proposing to do is to spend $130 million of shareholders’ money to buy a business that in 11 years, as far as I can tell, has not gotten a single drug into advanced clinical trials. And in fact you’re going to be burning $15 million a year of cash. So these drugs will require tens of millions if not hundreds of millions of dollars to even get them to the market. Then there’s no guarantee…with the elderly AML clinical trial.
You’re facing a cliff in November 2013 where your revenues will drop significantly. So I have two questions for you. The first question is, what are the calculations that you have used to justify the value of this transaction?…And the second question is have you considered selling the company, because when you look at the $2 of cash and the $2 of royalties you’ll receive and the 50 cents of tax loss carryforward approximately plus the pipeline, this is a Company that probably is worth $4.50, at least, okay, plus the pipeline…Thank you.
How did Manuso reply?
He appeared unfazed. He acknowledged there were other opportunities over time to sell SuperGen, but believes the value is greater than $4 a share. Whether this suggests SuperGen received an offer at that price or higher, though, is unclear. He then maintained that, when he arrived, there were two drugs in late-stage development, which is another way of saying other prospects had existed. Drug development, he argued, is a high-stakes gamble.
As far as the spending on our parts are concerned, appreciate that this is a business that requires considerable amounts of cash.
What about his compensation and other spending? He brushed aside the criticism that a small company made a point of hosting a conference in a high-rent hotel.
As far as the cost of this venue is concerned, I would suggest that we do everything at low prices. I don’t have that exact number for you. And relative to my personal compensation it is certainly competitive with regard to the industry.
Manuso continued by saying this:
But again back to the primary point, and that is why are we spending this money in order to create a larger, and indeed we believe better, company? It’s for you the shareholder. It’s to generate additional returns for shareholders. It’s to retain this as a business. It’s to generate drugs in the future that will help patients and thereby bring about greater sources of revenue. And again, I would suggest to you that we have a fairness opinion that clearly supports the fairness of this deal and certainly invite you to examine the proxy when the time comes.
As an interesting aside, he later acknowledged that a banker was not used to do the deal with Astex.
This is something that Harren and I, over an extended period of time, (had) given a great deal of thought and a great deal of discussion determined that it was in our mutual interest to consider this.
There is more than one way to view this: on one hand, perhaps event may have played out differently if bankers were involved. On the other hand, they saved some money. Nonetheless, the transactions costs are raising expenses, and so earnings guidance was revised downward anyway.
Disclosure: No positions