Dissidents Emerge in Drug Merger

Some Transkaryotic shareholders think $37 a share is too low.
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Emboldened by recent clinical success, some shareholders of

Transkaryotic Therapies

(TKTX)

want management to reconsider the drug company's sale.

Britain's

Shire Pharmaceuticals

(SHPGY)

proposed in April to pay $1.6 billion for Transkaryotic, a Cambridge, Mass.-based biotechnology company in the midst of a turnaround.

Some Shire shareholders squawked when the deal was announced, saying there was no strategic fit between the British company and Transkaryotic. Shire sells 15 products. Adderall XR, for attention deficit hyperactivity disorder, accounts for more than 40% of corporate sales. Transkaryotic focuses on therapies for rare diseases. In some foreign markets, it sells a treatment for anemia associated with kidney disease and an enzyme replacement for Fabry disease, an inherited disease that can cause kidney damage, cardiovascular disease and stroke.

The deal seemed headed toward a quiet, successful conclusion -- stockholders from both companies vote on July 27 -- until two Transkaryotic shareholders filed documents with the

Securities and Exchange Commission

last week, arguing that the company accepted a lowball bid. They echoed some of the comments made by Michael Astrue, who quit as Transkayrotic's CEO and as a director on April 21, the day that his board approved the deal. Astrue said his company was worth more than the $37-a-share offer by Shire.

One unhappy investor, promising to vote against the deal, asked the board to postpone the shareholders' vote. Another shareholder, while not committing to a no vote, said the company is worth between the mid-$40s and the mid-$50s.

As a result, Transkaryotic's share price has sneaked above the Shire offer price by a few cents. It's been as high as $37.12 and closed Thursday at $37.06.

Does this stock activity suggest a third party might become interested? "There's not a formulaic answer," says Martin J. Sikora, editor of

Mergers and Acquisitions

. "Historically, if it's just a few cents above the offer price, it raises a few eyebrows, but it doesn't suggest a new bid is coming in. Had it gone $4 or $5 above, then you've got to sit up and notice."

Sikora says there's "plenty of time" for a third bidder to get involved. "The question is, who is going to pay?" he adds.

What's It Worth?

When Shire announced its bid on April 21, Transkaryotic's stock jumped $4.77, or 16%, to $35.21; shares had gained 23% during the previous three weeks. The investment banking firm Warburg Pincus, the largest Transkayrotic investor, with about 14% of shares, says it supports the deal.

Transkaryotic's shares crossed the $37 barrier July 1, the day after the disgruntled investors filed their comments with the SEC. One complaint came from Porter Orlin LLC, a New York investment management firm, which holds just over 2 million shares of common stock and 486,875 shares through convertible securities, giving it 7.1% ownership.

"We believe the company is worth considerably more than $37 per share," the firm says. "Absent a new buyer at a much higher price, we believe Transkaryotic Therapies should go back to managing its business for the long-term benefit of shareholders, independently."

Porter Orlin says the board should have looked for more bidders, adding that "we understand that only two other parties were contacted." The firm says the board should postpone the merger vote for at least eight weeks to let other companies contemplate making an offer.

The other objection comes from New York-based Millenco LP, a private investment firm, which controls about 3.15 million shares, or about 8.8%. "We believe that the $37 cash offer from Shire does not adequately reflect the current value of the company," Millenco says. "We are confident that the Transkaryotic Therapies stock would be trading well over $37 on a stand-alone basis in the absence of this transaction."

Although it didn't make a commitment, Millenco says it is "evaluating all options" including a no vote on the merger. "We urge the board to exercise their fiduciary responsibility and examine all alternatives to enhancing shareholder value," Millenco says.

Scientific Issues

The dissenting comments from both investors followed a June 20 release of clinical test data showing that a Transkaryotic drug achieved statistical significance in treating a rare inherited disease, Hunter syndrome. The test compared people given the drug vs. people given a placebo in how well they expelled air from their lungs and how well they could walk during a six-minute period.

The bioengineered drug, called IS2, replaces the deficient enzyme in people with Hunter syndrome, which can lead to enlarged liver and spleen, decreased endurance, lung damage and heart failure. The company says there are about 2,000 people worldwide for whom reimbursement may be obtainable for this treatment.

Detailed results will be presented at a medical conference in the fall, and Transkaryotic expects to seek approval from the Food and Drug Administration during the fourth quarter.

Although these test results raised the stock's price by 7%, they also prompted critics to say Transkaryotic should have avoided making any deal until the IS2 information had been revealed. "The structure and the timing of the transaction are perplexing to us, given the magnitude of the impact of the results of the I2S trial on the value of the company," says the Porter Orlin investment firm.