Buying pains

Pfizer proposes to acquire pain-treatment collaborator Icagen in transaction valued around $56 million

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NEW YORK—Pfizer Inc. announced in late July a definitive merger agreement with Research Triangle Park, N.C.-based Icagen Inc. under which Pfizer will acquire 8.3 million of the outstanding shares it doesn't own at a price of $6 per share. Currently, Pfizer owns approximately 11 percent of Icagen's fully diluted shares, and the aggregate value of the transaction, including the value of the shares currently owned by Pfizer, is approximately $56 million.

The shares already owned by Pfizer aren't the whole story of the two companies' past relationship. In 2007, Pfizer and Icagen entered into a worldwide collaboration for the discovery, development and commercialization of compounds that modify three specific sodium ion channels as new potential treatments for pain and related disorders.

According to the companies, these sodium ion channels "are important in the generation of electrical signals in nerve fibers that mediate the initiation, transmission and sensation of pain," and by selectively targeting these sodium channels, they have been seeking to develop effective treatments for serious pain disorders while generating fewer adverse effects.

"We're excited that Icagen, a global leader in pain research, will join Pfizer, further strengthening our innovative core," said Ruth McKernan, senior vice president of Pfizer's pain, sensory disorders and regenerative medicine unit, known as Neusentis, in the news release about the deal. "Icagen's capabilities and core ion channel technology will help to further expand Pfizer's position in the pain relief disease area and our ability to develop potential first-in-industry drugs for the treatment of pain and related disorders."

Likewise, Icagen CEO Dr. P. Kay Wagoner said: "During the nearly four years since the initiation of our collaboration, each side has developed a mutual appreciation of the expertise and capabilities of the other. By joining forces in a more integrated manner, we believe our joint efforts towards the identification and development of novel pharmaceuticals targeting specific ion channels will be significantly enhanced."

Neither company would speak on the record with ddn regarding the deal except to note that additional information about the background of the tender offer could be found in the publicly available U.S. Securities and Exchange Commission (SEC) documents.

Reviewing some of those documents presents a somewhat less warm-and-fuzzy tone than the news release would suggest.

Notably, Pfizer Senior Vice President of Worldwide Business Development Douglas E. Giordano on Aug. 26 sent a letter to Icagen's board of directors stating: "In light of the scheduled Aug. 31 expiration of our offer to purchase Icagen common stock and the communications by Merlin Nexus III LP and New Leaf Ventures II LP, we thought it appropriate to reaffirm unambiguously, as we made clear when negotiating the merger agreement with you, that $6 per share is our best and final price. Pfizer will not pay more.
"We expect Icagen stockholders will follow your unanimous recommendation and tender shares based on the recognition that $6 is a full and fair price, the letter continued. If a majority of the shares are not tendered, however, we still will not raise our offer."

In late August, Merlin Nexus and New Leaf publicly expressed their disapproval of the tender offer and criticized the decision by Icagen's board to recommend that shareholders sell for $6 per share, thus spurring the letter from Pfizer.

Merlin, for example, wrote in a letter Aug. 25, "We reiterate our position that the current terms of the proposed Pfizer acquisition do not reflect the fair value of Icagen's assets."

One point made by Merlin is that Pfizer is seeking to acquire Icagen for $56 million but "the true cost to Pfizer to acquire the company's assets is only $22 million when near-term R&D and milestone payments as well as the cash Icagen currently owns are put into the equation. This cost would be even lower if the Pfizer-Icagen R&D collaboration were renewed after it expires later this year."

Also, Merlin notes that Icagen has several R&D programs that could lead to "breakthrough therapies for the treatment of pain, representing potentially multi-billion dollar commercial opportunities" for Pfizer, which has publicly noted that neuroscience and pain is one of its five high-priority therapeutic areas with the highest potential to deliver value, with ion channels identified as an area of focus by Pfizer's leadership team.

Merlin went on from that second point to "conservatively estimate" that Icagen's pain programs alone could be worth between $100 million and $165 million, or the equivalent of $11 to $19 per share.
Among the several other points cited by Merlin was the fact that Pfizer initiated the Phase I study of the Pfizer-Icagen partnership's lead compound in December 2010 and proposed to acquire Icagen in July 2011 after having declined a chance to acquire the company on multiple prior occasions. Merlin has suggested that the clinical trial data "provide Pfizer with an unfair advantage not afforded to all investors to determine the value of this program."

All that—and more—having been said in documents submitted to the SEC, Icagen has been seeking a possible merger for some time. In late October 2008, at the request of the Icagen board, J.P. Morgan started contacting potential acquirers and collaboration partners. Over the course of several months, J.P. Morgan contacted some 30 companies, including Pfizer, to discuss strategic alternatives with Icagen. Four of the companies expressed interest in a transaction, but only one submitted a term sheet, in which it proposed a licensing transaction that the board found unfavorable. During late 2008 and through mid-2009, no parties expressed interest in a strategic transaction with Icagen, despite ongoing outreach by management and J.P. Morgan.

On June 4, 2009, Icagen publicly announced that it had retained J.P. Morgan, and the board directed J.P Morgan to cast a wider net. While companies of various sizes nibbled at the idea at various points, no serious offers were put forward. In 2006, prior to the initiation of the 2007 collaboration with Pfizer, Icagen and Pfizer had discussions about a potential strategic transaction. In addition, Pfizer was included on the lists of companies that J.P. Morgan contacted in 2008, 2009 and 2010. Each of those times, Pfizer declined interest in pursuing a strategic transaction.

On or about April 13, though, Dr. Barbara Dalton, vice president of venture capital at Pfizer, called Dr. Anthony Evnin, one of Icagen's directors, to informally inquire about Icagen's potential interest in a transaction. In addition to suggesting the need for a renewal or extension of the existing collaboration between the companies, Dalton asked Evnin whether Icagen would be willing to explore an acquisition by Pfizer.

That marked the start of a series of discussions and negotiations that resulted in an early exploration of a $4 to $5 per share tender offer.

By May 19, Pfizer's Giordano was speaking with J.P. Morgan and indicating that Pfizer might be interested in a transaction price of $5 per share and a contingent value right that would have a value of approximately 50 cents per share to Icagen stockholders.

That ultimately developed into a consideration of an all-cash transaction at a price of $6 per share, which even then Pfizer stressed would be the highest price it would consider.

At the same time, J.P. Morgan contacted representatives of a pharmaceutical company referred to in SEC documents as "Company A" about a possible acquisition of Icagen, which resulted in a proposal for a stock-for-stock merger at a small premium to Icagen's stock price. The Icagen board determined that the expression of interest from Company A was not competitive with the proposed transaction with Pfizer as it would provide a smaller premium to the company's stock price and it was not a cash deal.

This led to a series of meetings, discussions and filings that ultimately ended with a merger agreement executed on the morning of July 20, 2011, the issuing of a joint press release announcing the transaction and the filing of appropriate SEC documents.

The merger agreement is, of course, subject to customary conditions, with the companies targeting a closing before the end of the year.

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