Why was Predix’s value halved?
Shareholders apparently decided to forego value on paper for cash.
Gali Weinreb 5 Apr 06 12:48
On Monday, Predix Pharmaceuticals Holdings Inc. announced a merger agreement with Epix Pharmaceuticals Inc. (Nasdaq: EPIX). The agreement will give Predix access to Epix’s cash lifeline of $125 million, and to the US capital market, which Predix wanted. The only astonishing figure in the deal is the company value of $90 million for Predix.
In October 2005, Predix tried to go public on Nasdaq at a company value of $230 million, but withdrew the IPO, on the grounds that the market conditions were not conducive to success. Market sources claimed that the period was weaker than average, but that companies were able to hold successful issues as planned.
Predix is conducting Phase III clinical trials of a drug with a big market: anxiety disorders. The company says its drug can also treat depression, and it has two other drugs undergoing clinical trials, one for treating Alzheimer’s disease, and the other for hypertension. $90 million is a low valuation not only relative to the company’s ambition at the time of its planned IPO, but also for companies carrying out Phase III clinical trials.
This is usually the stage at which a company signs distribution agreements with international pharmaceutical companies, and may be acquired by them. Epix isn’t a pharmaceutical company and isn’t an especially successful company, at least in terms of its market cap. The main thing it has is cash.
Why wasn’t Predix able to obtain a distribution agreement with a leading pharmaceutical company or hold an IPO at the company value it wanted? First of all, there is the large number of small late-stage companies seeking investment, some of which simply fall off the radar screen. Leader Capital Markets medical market analyst Uri Hershkovitz adds that the anxiety treatment market is especially crowded, and despite its $10 billion size, it has not seen much growth in recent years, and therefore may attract little investor interest.
CE Unterberg Towbin life sciences analyst Andrew Fein recently visited Israel and knows Predix. He says there are many effective drugs in the anxiety treatment market, and even though there is no drug considered perfect, and there is room for more drugs, the market does not excite the drug companies or investors in the way that a market for which there is no effective treatment does, even if the latter is a smaller market or the drug is less advanced.
Hershkovitz and Fein agree that a company’s value should be a function of its ability to offer patients a better treatment than other drugs, and apparently Predix found it difficult to persuade anyone that it was offering a substantial improvement. The results of the company’s Phase III clinical trial, due in September, may be more persuasive.
On the other hand, BioLineRx Ltd. CEO Dr. Morris Laster, who also co-founded Keryx Biopharmaceuticals Inc. (Nasdaq: KERX;) and XTL Biopharmaceuticals Ltd. (Nasdaq:XTLB); LSE: XTL; TASE:XTL), believes that Predix made an excellent deal with Epix. “Although Predix held an issue at a lower value than it had hoped for, it obtained cash, which will help it promote its plans. Epix is not only a company with cash, but also revenue, which will greatly reduce Predix’s risk down the road. They may not have reached the value at which they wanted to go public, but I believe that this deal is better for them, and gives them the chance to raise their value above the one they wanted to get in the IPO.”
Predix’s shareholders will get $35 million in cash from the deal, if Predix’s Phase III clinical trial for its anxiety drug is successful, if it completes Phase II clinical trials for its depression, Alzheimer’s disease and hypertension treatments, or if it signs a strategic agreement with an international pharmaceutical company.
The real question that should be asked is why was Epix traded at less than its cash value? Epix is a company with regular revenue, and has two products in the pipeline. The company had a market cap of $250 million in mid-2005, but its share has been falling steadily since then, to reach its current price. The likely reason is that the US Food and Drug Administration (FDA) has repeatedly postponed approval of the company’s Vasovist molecule. Although Epix has other molecules on the market and in the pipeline, Vasovist is a promising molecule unlike any other. Epix has plummeted in value because it is unclear whether the company will be able to market another promising product in a reasonable timeframe in the event that Vasovist fails.
“We decided it was unwise to put all our eggs in one basket, and we decided to expand beyond diagnostics into therapies, and we’re seeking to buy a pharmaceutical company,” said Epix in March. Its share jumped 20% following the acquisition of Predix.
Published by Globes [online], Israel business news - www.globes.co.il - on April 5, 2006
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