Question
From:(redacted)
Sent:Thursday, May 31, 2007 12:24 PM
To:Verne, B. Michael
Subject:Question
Hi,Mike -
Hopeyou're having a good day! I am hoping to get your thoughts on the following:
Company A is initiating a tender offer to acquire100% of the shares of Company B. Although the amount which will be paid for thestock of Company B is well in excess of $59.8 million, it appears that thetransaction may be exempt pursuant to 802.4 because the board of Company Aexpects that the non-exempt assets of Company B - a biopharmaceutical company -will have a fair market value of less than $59.8 million.
By way of background, Company B holds a worldwideexclusive license (other than in the U.S.) to make, sell and commercialize apharmaceutical product (the "Product") for all indications; in theU.S. Company B holds a license to make, sell and commercialize the Product onlywith respect to possible indications other than its primary (and only approved)indication. Company A already holds the U.S. license to make, sell and commercialize the Productwith respect to the Product's primary indication. Some time ago, Company A andCompany B entered into a co-development agreement with respect to the Product. Aspart of the agreement, Company A, pays Company B a royalty on Company A's U.S. salesof the Product.
In order to determine whether the $59.8 millionlimitation with respect to non-exempt assets is exceeded, Company A has accessto and will consider the balance sheet of Company B, a public company, inmaking its fair market valuation. The book value of Company B's assets issignificantly less than $59.8 million; assets stated on the balance sheetinclude the following asset classes: cash and cash equivalents, short-terminvestments, accounts receivable, inventories, property and equipment,intangible assets (patents and licenses), goodwill, deferred costs and acatch-all for "other" assets.
We understand that the cash, cash equivalents andshort-term investments (which would be either cash equivalents or securities ofissuers Company B does not control) will be exempt assets for purposes of thecalculation. Further, the value of the worldwide license for the Product (otherthan the value of the US rights for development of the Product forindications other than its primary indication) will be exempt, as will allforeign intellectual property rights (none of the foreign IP generates inexcess of $59.8 million of revenues in the US). We do not believe that theCo-Development Agreement itself would be an asset which would need to be fairmarket valued; the actual royalty stream would be a cash/cash equivalent andthus exempt for purposes of this calculation.
On the contrary, accounts receivable, inventories,property and equipment, US intellectual property (including the right todevelop the Product for other indications), goodwill, deferred costs and"other assets" would need to be fair market valued by the board ofCompany A or its designee. We believe, however, that a significant portion ofthe AIR, inventories, and goodwill are attributable to the foreign IPand could be so incidental to the exempt assets as to be exempt themselves.
According to CompanyA's board of directors, 100% of the purchase price for Company B is due toCompany A's perceived value of the ex-U.S. license for the Product; no valuewas given by Company
A's board to the U.S. right to develop theproduct for other indications because of Company A's belief that there islittle, if any, scientific support for use of the Product in other indications.Although the board understands that its fair market valuation of the non-exemptassets (including the described US development right) would be the amount thata third-party in an arm's length transaction would pay at present withoutcontingencies, it is some indication that Company A's board will view the valueof this asset as minimal or close to O.
Ijust want to make sure I'm thinking about this in the correct way.