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Abraxis Deal Value Depends On CVRs; CVRs Seen Undervalued

By Maxwell Murphy Of DOW JONES NEWSWIRES NEW YORK -(Dow Jones)- Abraxis BioScience Inc. (ABII) shares soared past the merger bid proposed by Celgene Corp. (CELG), but it's not because Wall Street thinks a higher offer will materialize. It's all about the contingent value rights. As part of the deal, Abraxis holders will get one contingent value right for each Abraxis share they own. These rights, which will be tradable, allow the holder to receive a prorated share of future payments that are mostly conditioned on Abraxis' Abraxane chemotherapy treatment meeting certain targets. CVR holders will split $250 million for U.S. approval of Abraxane, by the Food and Drug Administration, for a type of lung cancer, whereby the drug is allowed to be labeled with what's called "progression-free survival" claims. If Abraxane is approved for pancreatic cancer and can add overall survival claims to the label, that's another $300 million. Further, if Abraxane, currently a breast-cancer treatment, is simply approved for pancreatic cancer by the FDA by April 1, 2013, holders will get another $100 million. Additional royalty payments could ensue if Abraxane and certain other Abraxis pipeline products meet as-yet-undisclosed net revenue targets. If all the conditions are met, CVR holders stand to pocket more than $650 million, or over $16 per CVR given the roughly 40.4 million Abraxis shares outstanding. Apart from the CVRs, the upfront payment Abraxis holders will receive consists of $58 in cash and about 0.26 Celgene shares. At Celgene's Tuesday closing price, that works out to about $71.93 per Abraxis share, but with Celgene off 4.1% in recent trading the value has shrunk to about $71.33 apiece. Abraxis shares recently traded 21.4% higher at $74.40 each, which suggests investors are currently valuing the CVRs at roughly $3 apiece. At least one investor believes that is a low valuation, which would mean Abraxis stock could still present a buying opportunity. Dr. Jeffrey Jay, managing director of hedge-fund company Great Point Partners LLC, sees the CVRs as worth $5 to $7 each, "depending on the assumptions you want to make." He said the CVRs are essentially "complicated call options on contingent, probability weighted events (favorable clinical outcome and trials and a favorable review by the FDA)." Great Point, which held just over 66,000 Abraxis shares at the end of March, believes the current market valuation of the CVRs "is below fair value under any but the most pessimistic set of assumptions about future clinical and regulatory events." However, given the FDA-approval variables and the uncertain, indefinite time horizon surrounding three of the four milestones, assessing the present value of the CVRs is not without difficulties. One savvy Abraxis investor who requested anonymity said his firm was still evaluating the potential value of the CVRs. Normally, a valuation uncertainty like this might present a field day for arbitrageurs, who seek to make money on pricing inefficiencies. But one New York arbitrageur said a lack of Abraxis liquidity--Executive Chairman Patrick Soon-Shiong owns some 82% of its stock--and the scientific expertise needed to evaluate the CVRs has his firm on the sidelines. -By Maxwell Murphy, Dow Jones Newswires; 212-416-2171;

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