Dainippon offers $2.6B for Sepracor

Investors object, lawsuits allege Dainippon’s offer is inadequate

Lori Lesko

OSAKA, Japan—Dainippon Sumitomo Pharma came one step closerto raising its global image and expanding its pipeline and sales potential inNorth America last month with its proposed acquisition of drugmaker SepracorInc. for $2.6 billion and a cash tender offer for Sepracor's common shares,valued at $23 each.

Based in Marlborough, Mass., Sepracor develops drugs totreat disorders of the central nervous and respiratory systems, notably Lunestafor insomnia, which generates the bulk of its revenue, and Xopenex for asthma.

The acquisition proposal, announced Sept. 3, could be adone-deal by the end of the fourth quarter. If approved, Sepracor stands tobecome a wholly owned subsidiary of Dainippon Sumitomo Pharma America HoldingsInc., and will continue its operations in the United States and Canada.Sepracor will retain its name, branding and intellectual property rights andcontinue to operate as Sepracor.

However, while Dainippon's proposal appears to breathe lifeinto the struggling Sepracor, the acquisition does not sit well with someinvestors.

On Sept. 8, two lawsuits were filed in Delaware ChanceryCourt, Wilmington, alleging Sepracor's proposed $2.6 billion sales price isdetrimental to shareholders because the $23-per-share is too low, and thus,unfair and inadequate.

In the first case, Stationary Engineer Local 39 PensionTrust Fund v. Sepracor Inc., the plaintiffsclaim that Sepracor's directors "did not undertake to canvas the market priorto entering into the proposed merger, and thus failed to inform themselves ofthe inherent fair value of the company."

A second case, Salvatore Toronto v. Adrian Adams, contends, "Sepracor directors failed to conduct anappropriate sales process and implemented preclusive deal protections that willinhibit an alternate transaction. The lawsuits also allege Dainippon's dealprovides for a $77.4 million termination fee and contains restrictiveprovisions such as a 'no solicitation' condition which gives Dainippon time tomatch any other offer. Also, the merger agreement contains an option thatguarantees Dainippon an 'absolute majority ownership' position, even if thecompany doesn't acquire a majority of Sepracor's stock from shareholders whorefuse to tender their shares."

Both complaints ask a judge to bar the deal and awardunspecified damages.

On Sept. 15, a stockholder class action lawsuit was filed inthe Court of Chancery for the state of Delaware on behalf of all publicstockholders of Sepracor, alleging the company's directors breached theirfiduciary duties to Sepracor stockholders by agreeing to sell the company toDainippon "at an inadequate and unfair price following a grossly unfairprocess."

Dainippon declined to comment on the acquisition, andSepracor executives appear undeterred by the swift and sudden flurry of courtfilings.

"With regard to the lawsuits, we are not commenting at thistime on the litigation regarding the acquisition," says Jonae R. Barnes,Sepracor senior vice president of investor relations and corporatecommunications.

"This transaction is about growth for both companies,providing access to fully-integrated U.S. and Canadian-based pharmaceuticalplatforms with a successful, experienced management team and talented employeebase," Barnes says.

Dainippon intends to significantly enhance its salescapability through Sepracor's extensive sales network throughout the U.S. andspecialized expertise in common therapeutic areas, she says. Dainippon willalso benefit from Sepracor's wholly owned subsidiary, Sepracor PharmaceuticalsInc., which markets several additional products in Canada focused in thecardiovascular, central nervous system (CNS), pain and infectious diseasetherapeutic areas.

Dainippon "will leverage Sepracor's expertise to develop andcommercialize lurasidone, the Japan pharma's own self-developed productcandidate for the treatment of schizophrenia, which is in Phase III clinicaldevelopment, as well as other pipeline products," Barnes says. Dainippon"considers Sepracor among the best with its strength in the CNS area, marketpresence and sales capability," she says.

"We were advised by Dainippon that they examined severalcompanies for acquisition in order to help them expand their globalcapabilities," Barnes says. "Sepracor was the best fit to help (Dainippon)achieve a vision of becoming a leading global pharmaceutical company."

Barnes says that the deal on the table makes sense becauseSepracor has an extensive R&D organization with expertise in complementarytherapeutic areas and both companies share a common vision and strategy.Dainippon's focus on CNS and respiratory areas will enhance Sepracor's clinicalproduct pipeline and should enable sustainable growth well into the future,Barnes says.

"Bringing together our two organizations will provideincreased opportunities for the new combined company to be viewed as a partnerof choice with respect to pursuing in-licensing of additional clinicaldevelopment candidates as well as marketed products," she says.

In addition, the transaction will expand the overall scaleof Dainippon's business by adding a portfolio of profitable, marketed productsin the U.S. and Canada, allowing for more flexible and strategic investments inresearch and development, Barnes adds. Specifically, the transaction willaugment Dainippon'ss existing product pipeline with promising productcandidates such as STEDESA (eslicarbazepine acetate) for the treatment ofepilepsy and potentially other indications, she says.

Sepracor's management team will be part of the integration,which should help to deliver tremendous value to our customers, patients andemployees, Barnes says. The completion of this acquisition would give Dainipponaccess to Sepracor's 1,200-person sales force to help support the launch ofantipsychotic drug, lurasidone, currently in Phase III development. Sepracorwill also bring to the joint arrangement several marketed products likeLunesta, Xopenex/HFA, Brovana, Omnaris and Alvesco.

For the year ending March 31, the Japanese firm reportedrevenues of about $2.7 billion. Sepracor reported for the quarter that endedJune 30 that revenues increased 11 percent from the previous year to $326.2million, but its net income fell to $44.9 million.

Masayo Tada, president of Dainippon, stated in a pressrelease, "Sepracor has pursued growth through development of its uniquepipeline and introduction of innovative pharmaceutical products to the market,a strategy that fits perfectly with our management philosophy. We expect thatSepracor will become a 'Center of Excellence' for Dainippon in the U.S., andwill make a significant contribution to Dainippon, both as a commercializationinfrastructure for our self-developed products, and as a strategicallyimportant base for business development."
 
Adrian Adams, president and CEO of Sepracor, stated, "Dainippon is aleading Japanese pharmaceutical company with a distinguished history and anestablished, strong track record of operational and financial performance basedon a number of successful product launches. Both companies share a commonvision, values and strategy, and the transaction should enable Sepracor to enhanceits product pipeline and enjoy sustainable growth well into the future. Webelieve (the acquisition) is not only in the best interest of our shareholders,but also potentially delivers exciting opportunities to our talented employeesnow, and in the future." 

Lori Lesko

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