You may have already seen this write up by biotechdaily in their...

You may have already seen this write up by biotechdaily in their back issues (6-Dec-10) by Mark Sinatra but I haven't seen it posted on this site.

He is very knowledgeable when it comes to CXS, he has provided detailed analysis in the past and has interviewed Greg Collier on many occasions.

http://www.biotechdaily.com.au/media/backissues/2010%20December/BD%20Biotech%20Daily%20Dec%206.pdf


MARC SINATRA?S BIOGUIDE BRIEF: CHEMGENEX

As the world knows, earlier this year, Chemgenex didn?t gain US Food and Drug Administration approval for its drug Omapro to treat chronic myeloid leukaemia patients
with the T315I mutation, which creates resistance to the current treatments for CML.

This had a very negative impact on Chemgenex?s share price.
With FDA encouragement, Chemgenex has focused on Omapro?s second indication, chronic myeloid leukaemia patients who have failed two or more tyrosine kinase inhibitors,
rather than the T315I indication.

In a surprise move in October, Cephalon Inc agreed to subscribe for up to $15 million dollars of convertible notes, at a conversion price of 50 cents share, a 13 percent premium to the share price.

At the same time two major shareholders, Stragen International NV and Merck Sante SAS, entered into an option agreement for Cephalon to acquire up to 19.9
percent of the combined shares held by them at an exercise price of 70 cents.

Stragen and Merck received no other fee for granting this option apart from $10. The options are convertible anytime before the later of March 31, 2011 or one week after
the data collection and analysis period has been completed for the study in patients who have failed multiple tyrosine kinase inhibitors.

Similarly, no interest will be payable on the convertible notes and a charge taken over Chemgenex?s assets released if the collection and analysis is completed by March 31, 2011.

So what do we make of all of this? I think the first point is that Cephalon is very interested in Chemgenex and its Omapro, but does see the data collection and analysis of the trial as a fairly big risk.

I don?t think the issue is whether Omapro works, plenty of independent studies demonstrate it does. Furthermore, the updated trial results announced by Chemgenex today are very good.

The issue in the eyes of Cephalon is whether Chemgenex has performed its study adequately to show Omapro works, as compared to the problems demonstrating efficacy
to the FDA with the previous T315I indication application.

The logic of Stragen and Merck granting a virtually free option over their Chemgenex shares is probably due to the nature of their holdings.

Stragen was paid in shares for Omparo patents and Merck Sante invested in the previous metabolic-focused Chemgenex
and has held those shares, possibly awaiting a reasonable offer.

Omapro isn?t really a strategic fit with either company. Stragen is a generics developer and manufacturer and
while Merck Sante does have an interest in cancer, that interest is in solid tumors mainly through its antibody-based therapeutic Erbitux and other products in development.

It should be noted that Stragen and Merck Sante are not investment houses. If they take a stake in another company, there will be, or at least should be, a strategic rationale behind it. Once that stake is no longer strategic, it is a disposable asset.

My guess is that Stragen and Merck took the view that it was worth holding their stakes in Chemgenex based on the
share price appreciation and increased liquidity that the T315I approval would have brought.

This, in turn, would have allowed them to sell what they considered to be a disposable asset rather easily into a more liquid market at a good price.

Unfortunately, for them (and me) that didn?t happen and they have simply decided to get out at the first available opportunity.

The remaining major shareholders, Alta Partners and GBS Ventures, are investment houses and together control about 23 percent of Chemgenex. Because they are investment houses, by definition, their investments in Chemgenex are strategic and they are likely to hold as long as they believe they will make an acceptable return.

So, what does all of this mean for my pre-FDA T315I hiccup valuation of $5.50 for Chemgenex? In short, I have cut my valuation to $2.90 for two main reasons.

The first is the delay in taking Omapro to the market that the FDA?s T315I hiccup has brought.

The second and bigger issue is that I have now factored in a much higher level of clinical trial risk, given the comments by the Oncologic Drugs Advisory Committee during and after review of Omapro?s new drug application for the T315I mutation and the nature of the deals Cephalon has struck with Chemgenex, Stragen and Merck.

The next question is: will the share price ever see this valuation? For it to happen, one of two things needs to occur.

Firstly, another party interested in Chemgenex has to enter the fray with an ensuing bidding war. Such a war broke out for Vision Systems in 2006, pushing its price from around $1.65 to $3.75.

It is worth noting, however, that both Stragen and Merck have directors on the Chemgenex board and would know who has expressed interest in the company.

The obvious suitors for Chemgenex are Hospira, which has licenced the European rights of Omapro; Novartis, who makes the TKI?s Gleevec (imatinib) and Tasigna (nilotinib); and Bristol-Myers Squibb, whose TKI Sprycel (dasatinib) was recently granted approval for first-line therapy of CML.

The latter two companies are huge, $US126 billion and $US44
billion, respectively. If either decided they wanted Chemgenex, they would get it and my target valuation may well be seen.

The other scenario is that Alta Partners, whose 15 percent stake in Chemgenex could block Cephalon from proceeding to compulsory acquisition, holds out.

This may be a risky move, though, since Cephalon, as a 30 percent shareholder, would have a significant say
over the make-up of the board and would only need to acquire 21 percent more of Chemgenex to completely control it.

In all likelihood, though, I don?t think we are going to see $2.90 a share, but how much lower than $2.90 it will go, I don?t know and we probably won?t see any great level of share price appreciation until data collection and analysis is complete.

At the moment, it looks like Cephalon may pick up another Australian biotechnology bargain, as it did buying Arana therapeutics in 2009 for $329 million, well below many
analysts? valuations.

Marc Sinatra
Analyst
* Both Marc Sinatra and Biotech Daily editor David Langsam hold Chemgenex stock