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Vasogen and Privately held Intellipharmaceutics to combine – Deal largely misunderstood

|Includes: PRX, Vasogen Inc. (VSGN)

In a long line of corporate blunders, mishaps, and negative PR’s it is not surprising that the latest development from Vasogen was largely ignored and misunderstood on Wall Street, and failed to garner the excitement that it should have had it been communicated effectively.  However, this presents a rather exciting opportunity to pick shares in this Biotech issue at rather depressed levels.  In order to arrive at a potential value for shares of Vasogen, let’s first look at the latest development.

On August 17th, after a very lengthy strategic review process Vasogen announced a set of rather complex deals.  First and foremost, the company entered into an agreement with a limited partnership named Cervus LP to monetize roughly $225M of  tax losses that Vasogen had accumulated throughout the years.  In order to achieve the transfer of tax losses, Vasogen carved out all of its assets and liabilities leaving its corporate shell and tax losses.  Cervus LP will then transfer its status from a limited partnership, to a corporation assuming or taking over Vasogens old corporate shell and tax losses.  For this, Cervus LP will pay Vasogen $7.5M in cash, or in other words, non-dilutive financing as far as Vasogen shareholders are concerned.  Why is this important?  Vasogen was able to raise $7.5M, and with 22.6M shares currently outstanding, this would equate to $.33/share.  When Vasogen last reported their second quarter 2009 earnings, they had $5.8M cash on hand, $0 Debt, and less than $1M other liabilities.  In total, Vasogen should currently have over $.50/share in cash minus liabilities if they were to liquidate and return the cash to current shareholder.  So then why does Vasogens stock currently trade at roughly $.26/share, or about half the value of their cash on hand. 

Let’s look at the second announcement from August 17th.  In a separate agreement, Vasogen announced that they would be merging with a private biotech that develops both new and generic controlled-release pharmaceutical products called Intellipharmaceutics.  All of Vasogens assests, IP, and liabilities will follow it to this newly combined company, mostly meaning its cash, for which current Vasogen shareholders will receive a 14% stake in the new entity.  The newly created Intellipharmaceutics will focus on its own business plan, while potentially trying to sell its acquired Vasogen IP, patents, etc.  So what is a 14% stake in this private company worth?  I believe this question is why shares currently trade at such levels.  Shareholders have been given little information about the private Intellipharmaceutics.  What we do know, is they currently have 15 product candidates in its development pipeline several of which are partnered with third-party drug companies. IPC's lead product candidates include a generic version of the marketed drug Focalin XR, which is partnered with Par Pharmaceutical and is currently the subject of an Abbreviated New Drug Application (ANDA) filing with the FDA, and a generic version of the brand name drug Coreg CR, an internal pipeline product now ready for entry into pivotal bioequivalence studies.  So again, how do we value this 14% stake in Intellipharmaceutics if we do not have access to any revenue forecasts, development timelines, potential third party milestone payments or royalties, etc.?  Well, there is one thing we can look at.  In 2007 Par Pharmaceutical acquired an equity interest in Intellipharmaceutics, and as such, will receive a 3.6% stake in the newly combined company.  It should be noted that Par Pharma paid $5M in 2007 for this equity stake.  If we use this to value Vasogens 14% stake in the merged entity, this would equate to a value of roughly $19M or $.85/share.  We also know that Vasogen hired outside consultants JMP Securities whom had full access to Intellipharma’s books and development pipeline, and JMP rendered their fairness opinion of this deal.  Throughout the strategic review process, Vasogen continued to mention the fact that liquating the company and returning cash to shareholders was the ultimate benchmark which upon any merger would be judged.  Liquidation would return over $.50/share to current Vasogen shareholders.  One must note that Vasogens BOD, as well as,  JMP Securities must have felt that completing this merger would ultimately bring over $.50/share to Vasogens shareholders or they would have no entered into this agreement with Intellipharma.  Despite these facts, Vasogens stock continues to trade at $.26/share. 

It should also be noted that Vasogen has also received a notice from Nasdaq that it does not currently meet the minimum bid price, and could potentially be delisted.  However, Vasogen plans to request a hearing before the NASDAQ Listing Qualifications Panel to review the continued listing of their common stock. They expect that any discussions for regaining compliance will be impacted by the proposed transactions recently announced, allowing them to maintain their listing. 

For the reasons outlined above I believe these set of deals are largely misunderstood, and the potential for Nasdaq delisting should not be concering.  As more information becomes available, including the joint proxy, Vasogens shares(while not for the faint of heart) should trade significantly upwards allowing room to take advantage of the current disconnect between what’s reality and where the share price currently trades. 

Disclosure: Long VSGN