IN THE MONEY: Igen Plays David To Goliath Roche
By MAXWELL MURPHY
A Dow Jones Newswires Column
(This article was originally published Friday.)
NEW YORK -- Score one for the little guy.
After six years of fierce legal battles with Swiss drug giant Roche Holding AG (RHHBY), Igen International Inc. (IGEN) came out a big winner when Roche late Thursday agreed to buy Igen in an interesting $1.4 billion deal that is a windfall for Igen shareholders. Igen now trades at a decent premium to Roche's offer, and at least one large investor believes there's still lots more value in store for the small diagnostics company, despite its modest revenue of $56.5 million for the fiscal year ended in March and its history of losses.
Igen holders will get, for each share they now own, $47.25 in cash, a 27% premium to the price at Thursday's close of trading. Not only that, for each current share they'll also get one share of a new public company to be spun off by Igen, and that to-be-named new company is hardly different than today's Igen; if anything it should be better.
All Roche seemingly gets, and all it really wanted anyway, are the fully-paid, perpetual worldwide rights - non-exclusive mind you - to continue to market Igen's Origen technology, which tests bodily fluids and identifies chemicals by the light they emit when stimulated. Roche believes its annual immunodiagnostics business could approximately double to $900 million in five years due to the deal, roughly doubling its market share to more than 20% from 11% or so.
Roche, which inherited the case when it bought Boehringer Mannheim in 1998, has said it expects the merger to close in four to six months, contingent on regulatory approval. Igen sued Boehringer in 1997 over a 1992 licensing agreement, charging Boehringer failed to pay sufficient royalties and didn't adhere to several other aspects of the pact.
Roche recently got a judge to throw out all but $18.6 million of a $505 million judgment against it, but the judge allowed Igen to terminate its licensing agreement with Roche, which it did. Roche's diagnostics division last year posted sales of over $400 million from products related to Origen technology.
So it was either give up that revenue stream or take its medicine, and Igen used that leverage for all it was worth. Dan Owczarski, an analyst with Belmont Harbor Capital, says Roche has around 9,000 customers who use Origen-related products in Roche's Elecsys diagnostics product line, and within days Roche would have had to stop selling to them if no pact was reached.
News of the deal has sent Igen shares skyward Friday, recently changing hands at $58.80 apiece, 58.1% above Thursday's close and $11.55 more than the takeover price.
Talk About A Cash Grab
Igen holders seem justifiably ecstatic, and it's hard to imagine anyone who'd be more gleeful than Samuel Wohlstadter, an Igen founder and its chairman and chief executive. Including exercisable options, Wohlstadter and his wife hold nearly 4.5 million shares, or almost 19% of the company, so he stands to collect some $212 million when the deal is done. Richard Massey, also a founder and currently Igen's president and chief operating officer, will look forward to a more than $54 million payday from his 4.8% stake and Chief Financial Officer George Migausky will land nearly $10 million with his holdings of 205,065 shares. To top it off, the executives will, through the spinoff, retain their management posts and same-size stakes in the new company, which will continue to be headquartered in Gaithersburg, Md.
Let's take a look at the valuation of that new company. If we strip $47.25 away from the current price, that means investors are valuing the new Igen at only $11.55 a share, a far cry from the $37.20 the shares fetched just yesterday. Remove the $155 million, or about $6.52 a share, in new working capital the new company will have, thanks mostly to an infusion from Roche, and the potential of Igen's future incarnation is being valued at just over $5 per share.
Belmont Harbor's Owczarski says the premium reflects the value of the new company and its working capital. The new Igen will also have the current Igen's patents and will assume Igen's promising biodefense, life science and industrial businesses, as well as its opportunities in clinical diagnostics. Plus, it gets to use past improvements to Origen developed by Roche and also some royalty-bearing licenses to PCR, a genetic-material-amplification technology used in health-care and bioscientific research. Again, all this for about $11.55 a share, less than half of which isn't supported by its working capital.
Owczarski says Igen shares were trading so high before the deal because investors have known for some time that Igen would come out somehow better off as a result of the Roche litigation, punctuated earlier this week when Igen confirmed rumors it was talking with Roche concerning a transaction. The analyst owns no shares but Belmont Harbor has done investment banking for Igen in the past.
Still Holding After All These Years
Joseph Besecker, whose Emerald Advisers Inc. owns around 433,000 shares, thinks Igen is still undervalued, though he's very pleased by the Roche resolution. Besecker, president of the roughly $1 billion Emerald Asset Management that owns Emerald Advisors, says Igen's core business is "going extremely well" and the folks at Emerald are "big believers in (Igen) management."
Emerald will continue to hold Igen, a stake it began "opportunistically" building in 1997 or 1998 at prices well below the all-time high of $59.05 shares touched earlier Friday, Besecker says. He says he understands why some investors would want to take profits, especially those holders who might not want to be forced into the fully taxable event that will be the new Igen spinoff. However, he thinks that if investors who have been patient for years have just "a little more patience," wait for profit taking to end and let Igen show what it's capable of now that it's removed from the onerous burden of suing a behemoth like Roche, they will see the value of the stock rise considerably.
Besecker says he isn't sure exactly how the taxable spinoff will affect shareholders' wallets and expects to find out more when Igen hosts a conference call on Wednesday afternoon to discuss both the deal and the results of its fiscal first quarter ended June 30.
"If anybody at this point thinks that Sam Wohlstadter doesn't know what he's doing, they've got another thing coming," he says.
("In The Money" is a column that takes a sophisticated look at the value of companies and their securities and explores unique trading strategies.)
By Maxwell Murphy; Dow Jones Newswires; 201-938-5173; maxwell.murphy@dowjones.com
Updated July 28, 2003 7:34 a.m. |
