Lev Acquisition Looks Good but More Clarity Needed

The portfolio's second acquisition of the year thus far, Lev Pharmaceuticals agreed to be acquired by Viropharma for approximately $2.75 per share comprised of $2.25 in cash and $0.50 in Viropharma stock (subject to a collar of between $10.03 to $15.68). In addition to this upfront consideration, shareholders have the right to two contingent payments worth up to $1.00 per share: 1) $0.50 per share consideration under 2 potential scenarios: a) Cinryze is approved for acute treatment of HAE and orphan exclusivity is granted or b) orphan exclusivity for the acute treatment of HAE has not become effective for anyone for two years from the date of closing and date of FDA approval for prophylaxis, whichever is later, 2) $0.50 per share consideration when Cinryze reaches $600 million in cumulative net sales within 10 years of closing.

I want some additional clarity on these two milestone payments and their structure and will update subscribers once I get this information. I have also asked for clarity on the potential conditions whereby this agreement would be terminated outside of the customary reasons, such as non-approval by Lev shareholders. The transaction is anticipated to close in the fourth quarter of 2008.

As for the timing of the FDA decisions or process, no updates or changes have been made. FDA approval for Cinryze for prophylaxis use is anticipated to be ruled on by October 14 (which is the PDUFA date), but as I have mentioned in earlier posts to subscribers, there is a good chance the FDA will make their decision earlier.

As for the acute treatment, the PDUFA date is also on October 14, and it is my expectation that the FDA is unlikely to act earlier than this date, although it is always possible. As of the closing price on July 15, Lev is trading at $2.39 per share which is still a fairly healthy 13% discount to the $2.75 upfront consideration and a much larger discount if one were to include the potential contingent payments. It is very likely that Lev will be granted approval from the FDA for the prophylactic treatment of HAE and an acute approval also has significant potential. I will be following up with a more in-depth report, including my opinion of the transaction to subscribers once I have more information on some of the nuances of the deal.

Comments

[JoseMcintryre]

What's to clarify about the milestone payments? They were detailed in the press release and straight forward.

[Dan Weiss]

My focus is on the reasons behind why the merger could be terminated.

[kahona]

This acqusition seems to be done the wrong way. That is, wouldn't you expect the drug license be granted before shopping the company and a takeover deal is announced to maximize shareholder equity?

[Dan Weiss]

I completely agree kahona. I am not sure what the motivation was to get this deal done earlier especially with the very high likelihood of approval on the prophylaxis side. If for some reason Lev is not able to get prophylaxis approval then Viropharma can and likely will exit the deal thus there seems to be little advantage to having this deal done now as they likely (in my opinion) could have received more for the company later. That being said, what is done is done so shareholders will need to live with these terms although Lev shareholders can reject the deal once it comes up to a vote (although this will be a tough hill to conquer).

I have been in contact multiple times with Lev over the past several months and everything sounds as if they will get approval for prophylaxis considering the unanimous Advisory Panel recommendation, constant dialogue with the FDA and strong clinical study results. It is also very possible that Lev gets an approval earlier than the PDUFA date for prophylaxis.