BTG/Biocompatibles: 10p Now, or 48p Later?

At first glance this morning, news of BTG's planned acquisition of UK drug-device group Biocompatibles looked unremarkable, if sensible. It's worth £177 million ($282 million) in cash and shares, progresses BTG's well-documented aim of adding specialist pipeline and specialist hospital products (Biocompatibles sells chemotherapy-eluting beads, among other things), and is earnings-enhancing for BTG in its first full year. Cue those stock-phrases from the CEO; "high complementarity", "faster growth", "acceleration of our path to create a self-sustaining health care company".

Now, we know that these days, rare is the acquisition that comes without an earn-out element. It's still a buyers' market, and buyers like to reduce risk. So lo and behold, BTG's proposed deal includes a "Partial CVN Alternative" -- referring to Contingent Value Notes.

The deal sees Biocompatibles shareholders receiving 1.6733 new BTG shares and 10p in cash, valuing Biocompatibles at a premium of about 28% to its closing price prior to the announcement. But Biocompatibles shareholders can, if they like, forego the 10p cash element in exchange for a Contingent Value Note, worth €0.56/share (about 48p), linked to whether or not AstraZeneca exercises its option to license Biocompatibles' GLP-1 analog compound.

It appears, then, as if Biocompatibles' shareholders are being offered a choice to forfeit their 10p/share today in exchange for rights to the possibility of 48p/share tomorrow -- to pay for their CVN, in other words. That's interesting since most previous examples of CVRs or CVNs (it's all the same stuff, really), don't involve a price, as such.

BTG doesn't quite see it that way, though. This wrinkle in the deal (which is still, incidentally, only a board-recommended deal) resulted, they say, from Biocompatibles' (quite reasonable) demand that their shareholders, and they alone, be given the opportunity to share in the significant (€25 million) milestone payable by AstraZeneca if it options-in the program.

"We agreed a price for the business, but Biocompatibles felt that their shareholders -- and not those of the larger, combined group -- should benefit exclusively from the upside from this particular milestone, agreed in their deal with AstraZeneca ... because it's so near-term," explains a spokesman.

In other words, the CVNs in this deal are less about BTG's wish to push out its costs and mitigate risk, and more about offering Biocompatibles' stakeholders their deserved piece of the action down the line. 10p-today is an offer for the more risk-averse shareholders or those that want out, calculated "via risk-discounted NPV and a negotiation," says the spokesperson. (And these CVNs, unlike Celgene's Abraxane-linked ones in its deal with Abraxis, aren't tradeable.)

Per a Dec. 2008 deal, AZ can exercise its option on Biocompatibles' GLP-1 analog during a 90 day period after a fourth Phase I/IIa trial of the compound is complete, expected sometime around the end of 2011 or during the first half of 2012. If it does, it pays €25 million up front.

It might not, though. That's why the acquisition document includes five bullet points' worth of text as to why the payment may not occur, or what the downsides of accepting the CVNs could be. There are GLP-1s on the market, sure, and it promises to be a lucrative segment of the diabetes market. But other contenders have stumbled, and the program in development is a twice-daily GLP-1 that's not competitive in its current formulation.

Even those taking the 10p today will benefit if AZ does exercise its option, however: the Big Pharma will owe a further €37.5 million in pre-commercialization milestones, up to €256mm in sales milestones, plus royalties ranging from single digits up to the mid-teens.