avexa and progen, page-3

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Progen, Avexa agree to merge


Ari Sharp, Biotechnology reporter
December 22, 2008 - 1:25PM

ONE company had a mountain of cash but a struggling liver cancer drug whose development had been put on hold. The other had a late stage HIV drug but needed a deal or a capital raising to push it through the development pipeline.

The merger proposal announced this morning to bring together the cash-rich Progen with Melbourne-based Avexa was described by the combined entity's chairman-designate Nathan Droma as a "true merger of mutual interest".

"This merger will create a leading Australian biotech company with expertise in two major indications, oncology and infectious diseases," Mr Droma said.

But shareholders in both companies appeared unconvinced on the merits of the deal, wiping 11% off the value of Progen shares and 23% off Avexa's value after the deal was announced. Shareholder disappointment may stem from scaling down of plans for a return of Progen's

cash to investors and the discounting of Avexa shares.

Under the proposal, shareholders in the dual Australian-US listed Progen will hold 56% of the merged entity, and Avexa shareholders will hold the balance. Avexa shareholders will get one Progen share for each 12.857 Avexa shares. The deal offers Progen shareholders $1.35 a share

in value, a 50% premium to its pre-deal closing price of $0.90, but in doing so discounts the value of Avexa scrip.

At noon, shares in Avexa were off 2.5 at 8, while shares in Progen were down 10 at 80.

Mr Droma, currently chairman of Avexa, defended the benefits of the deal for his company's shareholders, insisting the discount for accessing Progen's cash was more favourable than if the company was forced to undertake a capital raising.

The key drug for the merged entity will be Avexa's HIV antiretroviral apricitabine (ATC). The company claims the merger will provide enough cash to fund the first pivotal phase III trial of ATC through to its 24-week milestone, the potential start of a filing for registration with US regulatory authorities.

Mr Droma said the proposal did not block the company from striking previously mooted deals with major pharmaceutical companies over the drug.

"We have received a high level of interest in potential partnering for ATC and at this stage we can tell you we are still in active discussions with large pharma," he said.

"We intend on partnering this program with the right partnering deal, but not the first one that we can sign and announce. It has to be the one that maximises shareholder value."

Shareholder vote

Shareholders in both companies will get a chance to vote on the plan early in the new year. The proposal is notionally a takeover of Avexa by Progen, and so will require the support of 75% of Avexa's shareholdings. Progen chairman Mal Eutick has committed to putting the deal to a

vote of his company's shareholders despite their being no legal compulsion.

For Progen shareholders, the alternative to the Avexa merger is the return of its $70 million cash under a pledge made by the company's board at its annual general meeting in November following the halt to the development of its key drug PI-88 earlier this year. Under the capital return plan,

shareholders would get $1.10 per share, compared to $1.35 in value the merger proposal. But if market continues to push the share prices south, the option of a cash return will become more appealing. The merger proposal does include a plan to return up to $20 million of Progen's cash

balance to its shareholders in the form of a $1.10 per share buyback.

Scientia Capital fund manager Lawrence Gozlan applauded the deal. "This is the type of transaction I think sector-specific biotech investors want to see. We certainly want to see board's thinking creatively and giving the best outcome to shareholders."

Avexa chief executive Julian Chick will be chief executive of the combined group, while Progen chief executive Mal Eutick will join the board of the merged entity.

The Age