Progenics Pharmaceuticals, Inc. Pushed Through Questionable Merger with Votes from Directors Who Had Resigned
Progenics Agreed to Large Termination Fee in Possible Move to Trap Shareholders in Deal
Corporate Governance Expert Finds Termination Fee, Lame Duck Director Votes “Troubling”
Stock Trading Above Offer Price, Suggesting Shareholders Want A Kiss or Deal Scrapped
Progenics Pharmaceuticals, Inc. is in the business of helping cancer patients get better. But recently, it has taken actions that made some shareholders feel downright ill.
The pharmaceutical company has been at loggerheads for several months with group of shareholders representing 11.7% of the outstanding stock including Velan Capital, which has criticized Progenics for its failure to get drugs approved and poor share-price performance (the stock has fallen 14% since CEO Mark Baker took the helm in 2011). At the annual meeting in July, it became clear that many other shareholders were fed up: Two directors, Peter J. Crowley and Michael D. Kishbauch, each received just 35% support from shareholders and tendered their resignations. Mr. Baker narrowly squeaked by with 56% support, even without Velan campaigning shareholders to vote against him.
Since then, Velan has launched a so-called consent solicitation to hold a meeting where it will propose replacements for five of the seven member board. The nominees have strong backgrounds in pharmaceutical commercialization, shareholder engagement and financial analysis. All five have served as board directors at public companies.
But before a shareholder meeting could happen, something extraordinary occurred: In early October, the board of directors, including Messrs. Crowley and Kishbauch, approved a deal to sell the company to Lantheus Holdings, Inc., another pharmaceutical company specializing in cancer treatments. The two directors, despite their resignations, still technically held their seats, so were able to vote.
One corporate governance expert said the decision for two outgoing directors to vote on such a serious matter is concerning. “It was legal but that doesn’t make it the correct approach. I would consider it bad form,” said Professor Charles Elson, Director of the John L. Weinberg Center for Corporate Governance at the University of Delaware. “Usually directors will leave immediately when they resign. You shouldn’t have them making big decisions for the same reason lame duck politicians leave those to their incoming replacements.”
What’s more, the deal has a termination fee of $18 million – a significant amount for a company this size – that would be payable if Progenics were to back out of the deal.
“The outgoing directors were told to leave by shareholders, then approved a deal with a significant termination fee, effectively locking it in,” Mr. Elson said. “It’s troubling.”
Other corporate governance experts, including those who often discourage shareholder activism, have said that directors who are voted out in uncontested contest elections should step aside after shareholders tell them to do so. Martin Lipton, Founding Partner of Wachtell, Lipton, Rosen & Katz, told CorpGov in a recent interview that votes against directors in such elections need to have “teeth.”
Even if the deal had been made with a more orthodox director vote, it still looks problematic. While the all-stock offer appeared to be at a 21.5% premium, Progenics shares have hardly budged since the announcement, likely in part because Lantheus shares have fallen dramatically.
Analysts at Brookline Capital Partners panned the deal. “Lantheus management has indicated that it expects the deal to lead to $15-$20M in run-rate cost savings by 2022,” Brookline wrote in a note to clients. “While we agree that the deal makes strategic rationale and provides cost synergies, we believe that the deal does not unlock value for Progenics shareholders, undervalues the company and does not reflect the potential of the pipeline. We believe that it would be more prudent for company to stay independent and pursue changes with a new board and management to create value for shareholders.”
The synergies from any merger are indeed significant. Assuming $20 million of cost savings, put on a multiple of 10 times and taxed at 25%, they’re worth $150 million. Net operating losses could easily send the total synergies’ value north of $200 million – a chunky figure considering Lantheus is expected to generate $106 million of Ebitda in 2020, according to Sentieo.
Somewhat unusually, shares of Progenics are trading slightly above the implied offer price ($5.22 vs. $4.78). Merger arbitrageurs say such a situation can happen in an all-stock deal, particularly if shareholders are expecting the buyer to bump the offer. It could also signal the stock is actually trading independent of the deal because investors expect the activist to prevail, scrap the deal, and take steps to generate more value.
Indeed, the slate of directors is impressive across the board. Of particular note are Dr. Gérard Ber Heinz Mäusli. Dr. Ber was Co-Founder and COO of Advanced Accelerator Applications, which he built and sold to Novartis for $3.9 billion. Mr. Mäusli was CFO and General Counsel of Advanced Accelerator Applications and led the negotiations in the Novartis deal.
A spokesman for Progenics said “[t]he entire Progenics Board of Directors unanimously determined that the transaction with Lantheus is fair to and in the best interest of all Progenics shareholders. Separately, the Board had accepted contingent resignations previously submitted by Messrs. Crowley and Kishbauch, with an effective date of October 17th or such earlier time as the Board determines the responsibilities of the resigning directors have been sufficiently transitioned to the remaining Board members. Further detail on the Board’s consideration of the transaction will be included in the proxy statement.”
A spokesman for Velan Capital declined to comment.
John Jannarone, Editor-in-Chief