Healthy Prescription
PORTFOLIO POINT: Acquiring Zenyth would extend CSL’s portfolio and skills, give Zenyth researchers stronger financial backing and its shareholders an exit path that would not hurt the company. |
CSL, Australia’s leading bio-pharmaceutical company, on July 17 announced a proposal to acquire Zenyth Therapeutics by way of a scheme of arrangement, a court based process that allows for a minimum of 75% of shareholders to agree to the proposal for the merger to take place.
The cash offer merger proposal values Zenyth at 86¢ a share or $108 million, comprising 82¢ for the Zenyth business ($103 million) and 4¢ a share for Zenyth’s shareholding in Avexa, which would be distributed to Zenyth shareholders by of way of a special distribution. (Zenyth owns 21.1 million shares in Avexa.)
We estimate Zenyth’s cash resources to be about $45 million. The offer at 82¢ a share values Zenyth’s technology assets at $61 million. Zenyth’s most advanced assets include CAM3001, a rheumatoid arthritis (GM-CSF receptor alpha) antibody program being co-developed with Cambridge Antibody Technologies (which itself is to be acquired by Astra Zeneca), and MK6105, an asthma (IL-13 receptor) antibody partnered with Merck. Both these programs are expected to enter clinical trials in 2007.
The merger is conditional on an independent expert providing an opinion that the share scheme and the special distribution are in the best interests of Zenyth shareholders. It is conditional on shareholder and court approval. It is also conditional on consent being obtained from the CSIRO and the Ludwig Institute for Cancer Research (LICR) for the novation or assignment of a collaboration agreement with Zenyth to CSL.
This relates to the now defunct Cooperative Research Centre for Cellular Growth Factors, to which Zenyth was the commercialisation partner. In addition, several other standard non-specific conditions apply. The merger proposal can be terminated by Zenyth if a more favourable offer is made, but which is capable of being valued and completed.
Merger drivers
There are convincing reasons for both parties to effect the merger.
For Zenyth: A major driver for Zenyth is that the proposed merger with a much, much bigger ASX listed company allows for shareholders to achieve a stable exit of their investment and for some to certainly crystallise a reasonable return on their investment. These shareholders include not only the more substantial investors such as Circadian, and Thorney Pty Ltd, the State Government of Victoria and Queensland Investment Corporation, but also medical research institutes such as the Walter and Eliza Hall Institute of Medical Research and the Howard Florey Institute, to which the receipt of investment returns may be more than welcome.
A merger with a more similarly sized company may have worked against the plans of significant shareholders to exit the investment without precipitating a fall in the share price of the merged entity. At the very least a merger with a more similarly sized company would require those shareholders to stage an orderly exit over a long period of time.
For CSL: CSL’s current growth plan, as set out at its AGM in 2005, has three components. The first is to foster and deliver operational efficiencies in the global business as its stands at present. The second plank, “Value through innovation”, builds on royalty revenues expected from sales of Gardasil, differentiated plasma and flu products and exploitation of CSL’s vaccine adjuvant ISCOMATRIX technology. The third component, involves the generation of new products that are “IP protected, high margin, important medicines”, sold globally by CSL.
Attending to the third component will require the company to step further outside its internal discovery and development capabilities, and beyond its current in-licensing arrangements, to build a comprehensive drug development portfolio through acquisition and in-licensing.
Therefore the proposed acquisition of Zenyth Pharmaceuticals is a solid step in this direction. It is a logical proposition that CSL gives thought to the acquisition of other companies, to both access proprietary technologies, products, people and know how. We would expect that future acquisitions would focus more on next generation antibody fragment or scaffold technologies, or on the acquisition of companies that CSL may be paying to access rights to use various protein optimisation or enhancement technologies.
Few companies can possess the complete set of skills required for protein and monoclonal drug development, and Zenyth is likely to bring to CSL some methods and know-how for a range of discovery and development processes that it does not possess, as well as knowledge of diseases that CSL is not familiar with such as asthma.
Zenyth also recently signed an important licensing agreement with Dyax, to access Dyax’s phage display libraries of monoclonal antibodies. Agreements of this type are nontrivial and CSL benefits at least by having bypassed the management cost of establishing such an arrangement. Also, the deal was effected before AstraZeneca announced its bid for Cambridge Antibody Technology, a rival phage display company, and license terms may now have become more expensive since that bid, a major event in the world of antibody discovery and engineering, was announced.
Other factors
Several other factors may have been at play in encouraging the boards of both CSL and Zenyth to agree to the merger proposal. One key point is that both companies are based in Melbourne and have strong links to Melbourne medical research institutes, particularly those based in Parkville, where CSL is located. Both companies have links to the Ludwig Institute of Cancer Research, which has a branch located in Parkville, and both companies have licensing agreements with US pharmaceutical company Merck; CSL with the HPV vaccine Gardasil and Zenyth with its asthma antibody. In other words, geography and the familiarity of both companies with a range of local research institutes may contribute to a relatively easy integration of Zenyth into CSL.
Sector ramifications
Should this merger proceed it will take its place as the second merger to occur between two listed ASX biotech companies this year. It will be added to mergers announced or consummated over the past twelve months of Alchemia with Meditech Research, Bioton’s (Poland) acquisition of Scigen, and that of Sigma and Arrow Pharmaceuticals.
An important similarity between the CSL/Zenyth proposition and the Alchemia/Meditech Research merger is that they are mergers of disproportionate companies. Unlike Meditech Research, which was in a perilous funding position, Zenyth is relatively well resourced. However, it appears that the presence of a stronger funding or resourcing capability of one company relative to another is a key element in achieving at least the initial recommendation by the boards to proceed with the acquisition.
Assessment
The proposed merger between CSL and Zenyth, given publicly available current information, appears to be a satisfying solution to several challenges faced by both companies. On the positive side it’s a very complementary deal, with Zenyth’s product portfolio likely to benefit significantly from CSL’s superior funding base and broader and stronger product development skills.
mAppraisal of the CSL/Zenyth Merger | |
Zenyth | CSL |
Positives | ![]() |
Shareholders achieve stable exit for investment |
Strengthens portfolio of potential high margin protein based drugs in development, notably IL- 13 R mab, and GM-CSF R mab |
Projects have potential to receive stronger funding support and at lower cost of capital |
Enhances and complements in-house protein and monoclonal anitibody dug development skills |
Issue of current and prospective weak market traction for Zenyth stock price removed |
Adds a building block for its ambition to build new revenue streams for the company outside of its blood products and vaccines business |
Zenyth's own co-development risk of CAM3001 is mitigated | Negligible impact on balance sheet |
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Accesses licensing arrangements with Dyax and Murigen without expense of management effort |
Integration costs likely to be on the low side and integration process likely to relatively easy for both parties | |
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Negatives | ![]() |
There is a risk that Zenyth's currently unpartnered projects do not receive attention and funding because of bureaucratic funding battles in CSL |
Some of Zenyth's programs are in disease areas new to CSL (eg asthma), which may present challenges going forward in the clinic and in sales and marketing |
Although local current market conditions are not very supportive of protein therapeutic companies, the possibility of a significant surge in interest and uplift in value would not out of the question for a continuing Zenyth |
Zenyth has a substantial patent portfolio to manage, of which the management may be costly and time consuming |
There is a general risk in any merger that the acquiree party will have been under compensated | There is a general risk in any merger that the acquiring party will have paid too much |