Avanir’s Takeover Price Leaves Room for Counteroffers

Avanir Pharmaceuticals Inc. has reached a

The Aliso Viejo, California-based company, which makes a drug to control symptoms of Alzheimer’s disease, this week agreed to sell itself to Japan’s Otsuka Holdings Co. for $3.2 billion, or $17 a share. That’s 4 percent lower than analysts’ average projection for where the stock would have traded in a year.

Jefferies Group LLC’s Thomas Wei said he would have valued Avanir at $26 to $31 a share in a takeover. That implies Avanir may have been able to negotiate for at least an additional $1.7 billion for its shareholders.

Counterbidders are still possible. Just one month ago, JMP Group Inc. said Eli Lilly and Co., H. Lundbeck A/S, Mallinckrodt Plc and Shire Plc all could be logical acquirers of Avanir. And they’re among more than a dozen suitable buyers that Wei highlighted this week.

The catch is that Avanir agreed not to seek out other bids, and should it walk away from this deal, it will have to pay Otsuka $90 million. Avanir shareholders also don’t get to vote on the transaction, so to get more money they’ll need another drug company to make an unsolicited higher bid.

Otsuka’s offer is “underwhelming,” Ritu Baral, a New York-based analyst for Cowen Group Inc., wrote in a Dec. 2 note. “While we see no evidence of other potential bidders at this point, we think there might have been interest from other pharmas with portfolios in Alzheimer’s” and related neurologic disorders.

“We will be paying close attention to the upcoming merger filings” for details on the transaction such as the timing of the talks and other potential bidders, she said.

Tight Spread

While Avanir’s stock closed yesterday 8 cents below Otsuka’s offer at $16.92, which usually implies investors aren’t anticipating a bidding war, it’s also a very tight spread for a deal that was just announced. The average spread for pending acquisitions of U.S. companies is currently 5.7 percent below the offer price and the median is 2.4 percent, compared with Avanir’s 0.5 percent, according to data compiled by Bloomberg.

Today, Avanir shares rose 4 cents to $16.96.

Avanir’s stock price had risen 344 percent this year through last week, before the deal was made public. The company makes a drug called Nuedexta that treats uncontrollable crying or laughing believed to be caused by neurologic conditions such as Alzheimer’s. It won a patent case in April that will stave off generic competition for Nuedexta for 12 years.

Positive phase 2 study data on Sept. 15 for another version of the medicine contributed to much of the stock gains. The new version is being tested to treat agitation in Alzheimer’s patients, a much larger market.

Past Talks

Avanir had been in talks in September — before the study data was released — about a merger or sale to a specialty drug company, according to a person with knowledge of the matter. But when the trial results spurred a one-day surge of 85 percent, it put the deal out of range for Avanir’s potential partners, the person said, asking not to be named because the matter was private.

Less than three months later, Avanir has agreed to sell itself to Otsuka. The merger filing with the U.S. Securities and Exchange Commission this week didn’t provide details about Avanir’s sale process or whether it received interest from other buyers. Ian Clements, a spokesman for Avanir, said he couldn’t comment further.

While it agreed to end any talks with other companies and not solicit higher bids, the agreement says Avanir’s board can change its mind if the company receives a better proposal and determines that ignoring the offer would be inconsistent with its fiduciary duties to shareholders.

Possible Counterbidders

As far as other potentially interested acquirers, Cowen’s Baral cited Teva Pharmaceutical Industries Ltd.’s recent investments in products for central nervous system disorders, as well as Actavis Plc’s purchase of Forest Laboratories Inc. earlier this year to gain the Alzheimer’s treatment Namenda. Indianapolis-based Eli Lilly may also be interested in regaining its lead in CNS drugs, she said.

Lundbeck, Mallinckrodt and Shire were also logical acquirers, Jason Butler, a New York-based analyst at JMP Group Inc., said in an interview in October. Copenhagen-based Lundbeck and Dublin-based Mallinckrodt both have products to treat brain diseases. Shire, also based in Dublin, focuses on rare diseases and has a treatment for attention deficit hyperactivity disorder. Shire has said it will continue seeking deal opportunities after AbbVie Inc. unexpectedly dropped plans to buy the company.

Representatives for Shire, Lundbeck, Mallinckrodt, Petach Tikva, Israel-based Teva, Dublin-based Actavis and Eli Lilly declined to comment on whether their companies are planning to bid for Avanir.

Deal Windfall

For investors who bought Avanir shares before May, when they were trading at or below $5 apiece, Otsuka’s offer may be just fine.

“It’s unbelievable,” Peter Zeuli, chief investment officer of Voorhees, New Jersey-based Philadelphia Investment Partners LLC, said in a phone interview. “We started buying the stock when it was around $4 or $5. The portfolio manager in me says, ‘Don’t get greedy.’ But you never know.”