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Brisbanetimes.com.au
The biotech bets start to pay off
March 29, 2011
Ian McIlwraith

The US pharmaceutical giant Cephalon's $225 million offer yesterday for the locally listed ChemGenex was not only the closest thing to a sure bet for biotechnology watchers but it also crystallised a nice payday for management.

Cephalon came on the scene in October, agreeing to lend $15 million to ChemGenex in the form of secured convertible notes and taking an option over 20 per cent of the company owned by two of its largest shareholders, Merck Sante and Stragen.

The options were exercisable at 70? each by March 31, or a week after ChemGenex completed the data collection and analysis of its application to the US Food and Drug Administration to approve its leukaemia treatment drug, Omapro. From October, so long as the data collection worked out, ChemGenex was going to be acquired by Cephalon and 70? was the minimum it could offer.

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ChemGenex's long-serving chief executive, Greg Collier, who helped steer Omapro's development, will make (say the scribblings on the back of our envelope) at least $1.5 million from his options if the recommended takeover goes through.

The bulk of that comes from ChemGenex's decision in January to replace some 3 million lapsed options for Collier with 4.6 million new ones exercisable at 47.5?. Shareholders got to vote on the deal in early February, so if they had been paying attention they could have worked out the likely windfall to Collier this month if Cephalon bid.

Collier's options were not due to vest until 2013 but, as is normally the case with executive issues, they vest immediately and are available for exercise when ''change of control'' events such as this occur.

Clients of UBS in the US, and perhaps a few here, got a heads-up on the likely Cephalon acquisition last month. Its research note declared ''we believe Cephalon would acquire all of ChemGenex if Omapro is approved''.

Omapro is what pharma companies call a ''third line'' treatment for chronic myeloid leukaemia, administered when patients have either failed to respond or reacted to earlier treatment.

The value in Omapro, according to UBS, is partly in its timing. A rival treatment, ponatinib from Ariad Pharmaceuticals, is administered orally rather than under the skin and is thought to work slightly better - but is a year or two behind in terms of clearing regulatory hurdles and getting to market.

UBS estimated that Omapro has a lifespan of about four years from its launch in the second half of 2012, which should generate up to $US150 million in earnings for Cephalon. Apart from its own benefits, Omapro can piggy-back on Cephalon's existing sales network for leukaemia drugs and perhaps extend the life of another of its drugs by being used in combination.

The UBS estimate suggests a valuation gap between what Cephalon is paying for ChemGenex and what it will earn. It is not clear whether the analysis includes what ChemGenex might earn in Europe, where is making a separate application.

Omapro is not the only string to ChemGenex's bow, so there is every chance Cephalon has an eye on the rest of the portfolio to add value. ChemGenex's share register is dominated by offshore specialist funds that - unlike most in Australia - will risk capital for a payoff in the whimsical, expensive world of pharmaceutical development.

The most significant Australian investor was the Queensland Biotech Fund, part of the Queensland Investment Corporation, which last year had 4.9 million ChemGenex shares, although is understood to have sold a few.

The biotech fund's chief executive, Cherrell Hirst, was breathing a sigh of relief that the offer was finally on the table yesterday. She declined to say what price she paid for the stock but said, ''We are in the money and quite happy.''

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