Abstral Approval May Fetch ProStrakan The Valuation It's After

A second U.S. product approval in two weeks, plus a partner-driven re-financing, means the price of ProStrakan just went up.

Sometimes it pays to hold out for a better offer. That, certainly, will be the view of the board at ProStrakan Group PLC, whose cancer pain treatment Abstral (sublingual fentanyl) was approved by FDA on Jan. 7, seven weeks after the company had effectively put itself up for sale.

The approval, less than 14 days after FDA also gave the green light to another ProStrakan drug, Fortesta (testosterone gel), marks a change of fortune for the Scotland-based specialty pharma (Also see "FDA Standardizes REMS Documents For Certain Fentanyl Products" - Pink Sheet, 7 Jan, 2011.). In mid-November 2010, a debt-ridden ProStrakan announced it was considering offers from acquirers, following a series of setbacks to its U.S. operation. These included manufacturing problems with chemotherapy-induced nausea patch Sancuso, the company's only U.S.-marketed product, that had culminated in the departure of CEO Wilson Totten in September 2010 .

The board had previously rejected a takeover offer from private European specialty pharma Norgine BV, declaring it to be too low. Norgine went ahead and purchased a 12.6% shareholding, prompting ProStrakan to initiate a more formal auction process.

The recent approvals, plus a debt-refinancing with Canadian partner Paladin Labs Inc., will, the company hopes, significantly push up the price that the group achieves. "The company no longer has its back up against the wall from a financial perspective, and our shares have recovered, so the people we're talking to are those who genuinely see value in the company," says chairman and acting CEO Peter Allen. Shares in ProStrakan have recovered from a 2010 low of barely 40p in September to about £1.14 currently (so Norgine has already made money, whatever its intentions going forward).

Partner Takes Over Debt

On Dec. 16, ProStrakan announced that Paladin had taken over a £50 million ($78 million) secured debt facility in exchange for the option to take on rights to ProStrakan's products in certain emerging territories, at a pre-defined commercial rate. The loan has a three-year term, with conversion rights that mean ProStrakan will only have to pay Paladin back if its shares fall below £1.10p, according to Allen. As for the geographic rights that ProStrakan is giving up: the deal includes territories such as South American and South Africa where ProStrakan would have no intention of going-it alone.

As such, ProStrakan reckons it got a good deal, despite its precarious position. Indeed, Paladin, seeking to expand, "came to us" with the suggestion, recalls Allen.

Since that deal was agreed, ProStrakan has been further helped by a £8.1 million registration milestone from Endo Pharmaceuticals Inc., its U.S. partner on Fortesta, when that drug was approved in December. The company may see a further potential $15 million in payments from Endo this year, subject to the achievement of early commercialization events. (ProStrakan supplies the drug to Endo for the U.S. market and will receive royalties).

Still Seeking a Sale

ProStrakan is back on its feet, then. Besides the approvals and re-financing, the company has also resolved the manufacturing problems surrounding Sancuso, with shipments expected to start in mid-January. The same 56-strong sales team marketing Sancuso will also be able to pick up Abstral since they're both oncology support products. "We've dealt with the issues," sums up Allen.

But ProStrakan's board isn't exactly rushing off to appoint a new CEO; it seems a sale remains the preferred option. Allen won't say how long it will hold out for the right offer, but "by mid-March, when we issue our full-year results, things will be much clearer," he says.

It's likely that at least one investor is pushing for an exit. Private equity group Warburg Pincus, a ProStrakan shareholder for almost ten years, in 2009 sold one-third of its 36% stake. Last month, Warburg exited another of its European holdings, drug delivery firm Eurand, which was sold to Axcan for what many considered to be a buyer-friendly price (Also see "Axcan Is Buying European Specialty Pharma Eurand For $583Mx" - Pink Sheet, 1 Dec, 2010.).

Warburg's likely tired of waiting. ProStrakan is among the most prominent - and long-standing - of the European in-licensing focused companies hoping to create what Shire PLC has built on the back of ADHD drug Adderall. Thus far, however, ProStrakan hasn't created much value for its shareholders at all, for a variety of reasons.

For one, it doesn't have an Adderall-like, "company-maker" product in its stable, as one commentator puts it. Allen acknowledges that the group could have been more aggressive in acquiring products. He also accepts criticism of the company's U.S. efforts to date, saying it has yet to prove itself in the world's biggest market.

Some observers - including Norgine - believe that European-focused specialty pharma start-ups are mistaken in trying to stretch to the U.S. at all, despite the market's appeal. "It's a distraction that you devote resources to, starving the European infrastructure as a result," said Norgine's CEO Peter Stein in a December 2010 interview.

Others - including at Shire-hopefuls Archimedes Pharma Ltd. and EUSA Pharma Ltd. -disagree. With many of Europe's specialty pharma firms in transition, it will probably become clearer during 2011 which strategy, if any, makes most sense.

Part of that clarification may come from the size of any eventual offer for ProStrakan. "Our European infrastructure is good. And I firmly believe the value of ProStrakan is linked to infrastructure and the five or six key products with patent protection," says Allen.

In a pre-close trading update on Jan 10, ProStrakan reported 2010 revenues up 27% to £100 million, product sales up 20%, and EU revenues up 20% to £80 million.

- Melanie Senior (m.senior @elsevier.com)