Purdue's Right of First Refusal is Worth 15% of NOV-002
I think a good way to consider Purdue’s right of first refusal is to analyse a comparable right-of-first-refusal for another drug. My example is the recent high-profile shenanigans between Elan, Biogen and J&J over Tysabri.
* Tysabri is an MS drug with Elan & Biogen owning 50% each. * Each company has the right to buy out the other’s 50% interest if a change-of-control occurs & cannot sell this right to a 3rd party. * As part of a recent J&J re-capitalisation of Elan, J&J also guaranteed to finance Elan to buy out Tysabri should a Biogen change-of-control occur. * Biogen took Elan to court claiming the deal amounted to illegally selling the change-of-control right to J&J. * The judge agreed with Biogen – the key point was Elan had delegated the right to negotiate the Tysabri purchase price to J&J. * Elan and J&J then took out this Tysabri financing part of their agreement. * Critically, J&J reduced their payment to Elan by $115m in return for the revised agreement – i.e. this was the value J&J placed on this particular issue.
Can a corporate change of control provision like this be compared to a right-of first-refusal on a licensing deal? I think so.
* A corporate change of control is when a party purchases 50%+ of the economic ownership of a company (through buying a 50%+ shareholding). * An auction of NOV-002 (most likely with all other possible cancer indications as well) amounts to selling 50%+ of the economic value of Novelos (but just not by selling shares).
The next point is to establish the economic value of a 50% ownership of Tysabri. To cut a long story short, I’m going to go with $2 billion (mainly based on Elan’s current market cap.). Bear in mind $115m is also a market transaction so it’s like-with-like.
I have 2 approaches in mind to value the Tysabri change-of-control right (which I’ve argued above is a reasonable proxy for the Purdue right-of-first-refusal over NOV-002) :
We could infer that a right-of-first-refusal on 50% of Tysabri equates to 5.75% of the economic value of 50% of Tysabri – i.e. $115m / $2000m. However, we don’t know if a ‘gentleman’s agreement’ still applies and J&J therefore didn’t demand a bigger cut than $115m. If so, then 5.75% is an understatement.
It’s strongly rumoured (but never confirmed) that Biogen previously offered $500m in cash to Elan to cancel its change-of-control right over Biogen’s 50% Tysabri stake. Strategically, Biogen’s MS franchise is the powerhouse of its $14.2bn market value and Tysabri is the growth story of that MS franchise. Therefore, the change-of-control clause effectively destroys the strategic rationale for taking over Biogen – or a takeover premium being built into the share price.
Now on that basis, you could argue the right-of-first-refusal on 50% of Tysabri equates to 25% of the economic value of 50% of Tysabri – i.e. $500m / $2000m. However, Tysabri isn’t a dominant part of Biogen’s $14bn market cap. Therefore, part of the $500m is for Biogen’s strategic freedom. Therefore, 25% looks too high.
Looking at these 2 separate approaches my own view is to split the difference and say the 50% Tysabri change-of-control right is worth 15% of its market value – i.e. based on 1 known market transaction and one non-confirmed market offer.
This implies Purdue’s right-of-first-refusal on NOV-002 has reduced the economic value of NOV-002 to its shareholders by 15%.
Finally, I would like to make the following points :
* There’s only going to be 1 auction of NOV-002’s US rights. * It’s quite possible it may end up that no shareholder value is lost in that auction from the right of first refusal – e.g. Pfizer bids $2bn but Purdue’s own maximum bid was $1.6bn. * However, if a 1,000 auctions of NOV-002 were to be run then an average of 15% of shareholder value would be lost. * Given no-one knows the outcome before the auction is finished, then a 15% sahre price discount should apply.
It might be in Purdue's best interests to come through with a really great deal as opposed to trying to skimp. With them owning that many shares, the stock price benefit to Purdue could easily outweigh the sales profit benefits of those same dollars due to PE multiples. (not to mention a very hungry drug market)
If Novelos scored a hefty percentage (I mean a HEFTY one) then the value to a potential buyer goes way up. Purdue wins either way.
I think so too. While Purdue is acting in it's own interest solely,they have an interest in a high bid because that makes their stake a lot more valuable. While they also have an interest in making profits from potentially marketing and selling nov 002, they would first have to invest a significant higher sum of money upfront that would not be peanuts for their company like the previous financings have been more or less. Their best case scenario would probably be an all takeout deal because they would make hundreds of millions and their managers would make huge bonuses. While it's a private company, I doubt their management is less greedy than others.