Cytopia cuts Progen's lunch

Brisbane biotech Progen Pharmaceuticals has withdrawn its proposed merger with Melbourne's Avexa, after a group of shareholders lead by rival suitor Cytopia stymied the deal with a call for a share buy-back.

Cytopia, which had its own overtures to Progen rejected last year, led 14 other Progen shareholders to requisition a meeting to elect a new board and vote on the buy-back. A room had already been booked for March 27 at the Indooroopilly Golf Club and while that will still go ahead, Cytopia has virtually gotten its way anyhow.

Progen, effectively a cash-box with a sideline in developing liver cancer drugs, had proposed to merge with Avexa to fund the development of a range of anti-infective drugs to treat hepatitis C, bacterial infections and HIV. Now however they will have to pay a $500,000 break-fee to Avexa and carry on with a smaller budget for the commercialisation of its liver cancer drug PI-88.

"The merger between Progen and Avexa certainly had the potential to give shareholders a strong return on investment in excess of $2.03 to $3.18 per share based on a discounted cash flow valuation of [Avexa compound] ATC alone,” said Progen chief Justus Homburg. "Unfortunately, we have a voting block of shareholders that are not interested in holding biotechnology shares and instead would like to see their investment realized via a cash return as soon as possible.”

The voluntary $40 million buy-back is at $1.10 per share, equating to 36 million shares or approximately 60 per cent of the share register. Progen said this was the largest buy-back it could undertake if it wished to remain a going concern. Under the proposed merger transaction, $20 million, or 30 per cent of shares would have been bought back.

Cytopia last week sought an injunction in the Federal Court to prevent a meeting of Progen shareholders to vote on the proposed merger on March 11. Cytopia sought for the vote to be held at its requisitioned meeting on March 27 along with a vote on a full share buy-back.

Cytopia has argued that shareholders were not being given a choice in how their capital was managed. In the 2007 financial year, nearly $100 million was raised for Phase III trials of PI-88, yet Progen's shares have fallen from $9.49 in April 2007 to a current level of 85 cents, below cash-backing. The PI-88 trials were abandoned in July of last year, sending Progen's share price tumbling. Pressures from Bayer's launch of a competing drug trial were behind the decision, Progen said.

Following this latest development the team at Cytopia, located in the same building as Avexa, will no doubt be celebrating, much to their cotenant's chagrin.

Progen has been receiving advice from PricewaterhouseCoopers and legal counsel from Clayton Utz. Avexa is being advised by Gresham Partners and lawyers Mallesons Stephen Jaques, while Hall & Wilcox is advising Cytopia.