Friday, December 17, 2010

2010 M&A DOTY Nominee: Celgene/Abraxis Bioscience

It's time for the IN VIVO Blog's Third Annual Deal of the Year! competition. This year we're presenting awards in three categories to highlight the most interesting and creative deal making solutions of the year. The categories are M&A Deal of the Year, Alliance Deal of the Year, and Exit/Financing Deal of the Year. We'll supply the nominations (four or five in each category throughout December) and you, the voting public, will decide the winners (by voting early and often, commencing once we've announced all the nominees). Strap yourselves in, it's The Race for the Roger™.

As we noted a week ago, Celgene hasn't been shy about striking creative deals. The $2.9 billion cash and stock acquisition of Abraxis Bioscience fits the mold, for reasons we'll explain in a minute, but the creativity isn't what makes this deal worthy of a DOTY nomination.

It's actually Celgene's bet itself that intrigues us: after building its bona fides in liquid tumors with Thalomid (thalidomide) and the now-blockbuster Revlimid (lenalidomide), the New Jersey firm is spending nearly $3 billion to expand into solid tumors, an aggressive move at a time when retrenchment (Biogen Idec), reorganization (Genentech, via its parent Roche), desperate defense (Genzyme) and urgent reinvention (Amgen) are the main trends for big biotechs. In late 2007, Celgene's dealmakers high-stepped into the spotlight after years of relative silence, and they haven't relinquished the stage. The Abraxis deal, dollar-wise, is Celgene's largest yet.

For what, exactly? Abraxis' only marketed product is Abraxane, a reformulation of the generic chemotherapy paclitaxel using albumin nanoparticles that's been approved for metastatic breast cancer. It's a modest seller so far -- $360 million in 2009 revenue -- but Celgene sees promise in other solid tumor indications, including a potential submission for use in non-small cell lung cancer in the first half of 2011. Abraxis owns the "nab" nanoparticle delivery technology; whether Celgene puts it to use to reformulate other drugs remains to be seen. Investors at first were befuddled at the June 30 deal announcement, driving Celgene's stock below $50 from a high of $56.58, but they've since come round. Celgene ended trading Thursday, Dec. 16 at $58.79.

Terms of the acquisition were complicated and suggest this was a product Celgene had to have. In the end, Celgene paid $2.5 billion in cash and issued 10.7 million shares of common stock worth $58.21 each, or about $620 million, on Octo. 15, the day the acquisition finally closed.

In addition, Celgene has promised significant earn-outs, or contingent value rights (CVRs), to Abraxis shareholders -- most especially founder Patrick Soon-Shiong (pictured, right). The CVRs include a $250 million cash payment upon approval of Abraxane by FDA for NSCLC with a progression-free survival claim; either a $300 million or $400 million cash payment upon approval of Abraxane by FDA for pancreatic cancer with an overall survival claim; and potential cash royalty payments if Abraxane and certain pipeline drugs reach established sales thresholds.

It's hard to say CVRs are creative deal-making when so many acquisitions these days require them, though in the public markets, unlike the private side, they're still the exception, not the rule. There was an added twist, as well. To get the deal past the finish line, Celgene agreed to make the CVRs tradeable -- in essence, a tracking stock that follows the value of one product, Abraxane. Very few CVRs have ever been converted into tradeable securities, and Soon-Shiong has been involved in two of the most prominent examples as we discuss here.

Industry pundits continue to opine about the wisdom of spending billions for a single asset, but this diversification into solid tumors makes sense for Celgene. Data released at ASH suggests Revlimid may face headwinds in the maintenance setting for multiple myeloma. That could stymie the product's growth, a worrisome fact since it now accounts for 70% of Celgene's total revenue. Celgene wants to be one of the leaders in the increasingly competitive oncology space and it's not afraid to spend money or meet the deal requirements of the companies its courting. That chutzpah deserves your vote for DOTY, if nothing else.

Photo courtesy flickr user health2con.

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