Shareholder objections muddle Pharmion buyout

By David Milstead, Rocky Mountain News (Contact)

Published February 19, 2008 at 12:05 a.m.

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Photo by The Rocky / 2002

As the March 6 shareholder vote nears, Pharmion CEO Patrick Mahaffy, shown in 2002, is working to assuage objections that the Celgene deal undervalues the Boulder drug maker.

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Not all Pharmion shareholders are on board with the company's plan to sell out to competitor Celgene.

The Boulder-based drug maker struck the $2.9 billion deal last November, negotiating a price of $72 a share in cash and Celgene stock. It was a 50 percent premium over the company's recent share price.

From the start, however, some investors were displeased:

* Two venture-capital funds affiliated with Pharmion board members declined to sign a voting agreement that pledged support for the transaction.

* Now, at least one major shareholder - hedge fund S.A.C. Capital Advisors - has sent a letter to Pharmion's board saying the company didn't get enough money. Another major shareholder signaled Feb. 8 it may begin talking to management.

All told, they represent nearly 30 percent of the outstanding Pharmion shares.

So far, Wall Street isn't expecting much to come of the efforts. Pharmion stock has consistently traded at a discount to the Celgene offer, suggesting investors aren't expecting a higher bid from Celgene or any other company.

But as Pharmion closes in on the March 6 shareholder vote, CEO Patrick Mahaffy is spending more time selling a deal thought to be a slam dunk.

The Pharmion board believes "the trading price of shares of Pharmion common stock is not likely to trade consistently at or above the value of the merger consideration in the near future," the company told shareholders in a Feb. 5 proxy statement supporting the deal.

Most important, "The merger consideration represents a significant premium to Pharmion stockholders," the proxy says. In a subsequent presentation to a proxy-advisory service, Pharmion said the $72 consideration is 46 percent above the previous day's closing, 73 percent above the average price in the previous 90 days of trading, and 31 percent above the company's all-time high. The deal, Pharmion says in that presentation, "results in greater value to stockholders than pursuing management's current business plan."

After initial conversations with the Rocky, the company's investor relations department stopped returning calls last week.

Whether or not it's a good deal for Pharmion shareholders, "it's a great move for Celgene," Michael King, an analyst with Rodman & Renshaw in New York, told Bloomberg News the day the deal was announced. "Vidaza has the potential to be a billion-dollar product."

Vidaza, designed to treat a blood-cell problem that frequently progresses to leukemia, is 8-year-old Pharmion's chief drug. The company also has a partnership with Celgene, begun in 2001, to sell thalidomide to treat bone-marrow cancer.

Celgene, which has owned 5 percent of Pharmion since 2003, has talked to Pharmion about a full-blown acquisition since January 2004, according to documents filed with the Securities and Exchange Commission.

Celgene got more serious in 2007 as Pharmion's fortunes rose. In early August, Pharmion announced positive survival results in a late-stage study of Vidaza. The company said it hoped the results would bolster an application to sell the drug in Europe, as well as boost U.S. sales, and the shares jumped from $24.64, to $39.03 in a day.

On Aug. 23, 2007, Celgene told Mahaffy it could pay $57 a share, a 50 percent premium to Pharmion's shares. But the Pharmion board decided the offer "significantly undervalued" the company, according to Celgene's filings with the SEC. In October, Celgene suggested it could offer up to $75, a 50 percent premium at the time.

Pharmion's board wanted a "walk-away" right to protect Pharmion from declines in the price of Celgene's shares between the signing of the deal and closing of the transaction. But Mahaffy wasn't able to get that condition in the merger agreement signed in November.

The absence of protection against Celgene's downside apparently bothered two venture-capital funds, longtime Pharmion investors who have representatives on Pharmion's board. The funds "would not execute" an agreement to vote in favor of the merger without the walk-away right, according to merger documents.

The funds are New Enterprise Associates, owner of 7.8 percent of the company at the time, and Domain Associates, which owned 6.2 percent of Pharmion when it struck the merger deal.

James Barrett, Pharmion's chairman, is a general partner of New Enterprise Associates. Director James Blair is a partner of Domain Associates. The two men - who have pledged to vote "yes" with the shares they hold themselves - did not return calls placed to their firms Feb. 14 and Thursday.

The funds' concerns that Celgene stock would fall were well-placed. Its shares were trading in the mid-$60s before it announced the Pharmion deal, but in December, after the announcement of disappointing drug-test results, Celgene stock fell to the mid-$40s.

That broke through a floor price in the deal, and the offer price began to ratchet down. At its low mark after the merger announcement, the deal was worth less than than $64 a share for Pharmion shareholders.

Celgene stock has since rebounded, but it slipped this week, with the merger price again falling below $72.

Some Pharmion shareholders won't be happy even if they get the $72 price.

S.A.C. Capital Advisors, which first disclosed a passive investment in Pharmion in March, kept buying shares after the deal was announced, paying as much as $70 a share to build up a stake of 8.3 percent. S.A.C, run by prominent hedge fund manager Steven Cohen, sent a letter to the company's management Feb. 5 saying the merger terms "would not fairly compensate Pharmion's shareholders."

S.A.C. may not be the last investor to express an opinion. Investors Felix and Julian Baker, managers of funds that invest in biotech and life sciences, said Feb. 8 they had boosted their stake to 7.6 percent.

While the brothers had previously used forms from the Securities and Exchange Commission for passive investment stakes, they reported the change on a Form 13D, used instead by investors who are considering actively trying to influence management. Cohen had used the passive form before converting to a 13D in December.

Leo Kirby, an attorney for the brothers, did not return calls placed Feb. 13 and Thursday.

S.A.C.'s concern is that if the deal goes through, Pharmion shareholders will miss out on a significant improvement in the company's prospects. Dacogen, a Vidaza competitor, might fail to show the same effectiveness as Vidaza in studies, S.A.C. said.

"If Dacogen's survival data are worse than Vidaza's, Vidaza could capture significantly more than half of the . . . market, and peak sales could be $100 million to $250 million higher than current projections," S.A.C. wrote to Pharmion's Mahaffy.

"If the Dacogen trial fails or produces data that are clearly worse than Vidaza's survival data, we believe Pharmion would be worth $80 to $100 or more as a stand-alone company. . . . If the proposed merger is completed, Pharmion shareholders' exposure to this upside will be diluted in Celgene's stock."

Finance Editor David Milstead can be reached at milstead@RockyMountainNews.com or 303-954-2648.

The buyer: Celgene

* Headquarters: Summit, N.J.

* Business: Drugs for cancer and immune-inflammatory diseases

* Main products: Revlimid, thalidomide

* 2007 sales, profits: $1.41 billion, $226 million

* Employees: 1,685

* Stock: CELG (Nasdaq)

The seller: Pharmion

* Headquarters: Boulder

* Business: Drugs for hematology and oncology patients

* Main product: Vidaza

* 2007 sales, net loss: $267 million, ($63.9 million)

* Employees: 550

* Stock: PHRM (Nasdaq)

Unhappy investors

Major Pharmion shareholders who have not embraced the merger and how much of the company they own:

* New Enterprise Associates (7.8 percent) failed to sign a voting agreement supporting the deal.

* Domain Associates (6.2 percent) failed to sign a voting agreement supporting the deal.

* S.A.C. Capital Advisors (8.3 percent) sent a letter to the company's management saying the merger terms "would not fairly compensate Pharmion's shareholders."

* Felix and Julian Baker (7.6 percent) signaled they may try to influence management.

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