International pharmaceutical company Novartis AG (NOVN) has notified stem cell company Gamida Cell, in which holding company Elbit Medical Technologies Ltd. (TASE:EMTC) owns a 26% stake and Clal Biotechnology Industries Ltd. (TASE: CBI) owns 19%), that it will not exercise its option to acquire the company for a price that could range as high as $600 million. This option, due to expire only in 2016, will officially expire now.
The shares of the two major Gamida Cell shareholders responded with steep declines: the Elbit Medical share plunged 25%, putting the company's market cap down to NIS 95 million, while the share of parent company Elbit Imaging Ltd. (Nasdaq: EMITF; TASE: EMIT) slid 10%, cutting its market cap to NIS 170 million. The Clal Biotechnology share lost 12%.
Elbit Medical Technologies owes NIS 142 million to its controlling shareholder (with an 82.7% stake), Elbit Imaging. Elbit Medical Imaging planned to use almost the entire proceeds from the sale of its Gamida Cell holdings to repay its debt.
Had Novartis elected to exercise its option, it would have paid Elbit Medical NIS 154 million in cash immediately, before taxes and other payments, which would have covered most of the latter's debt, and would also have contributed to the redemption of Elbit Imaging's bonds. Elbit Medical would have also potentially received up to NIS 400 million more. Now, even if this potential does not vanish, it has at least become more distant.
Novartis obtained the option to acquire Gamida Cell after investing $35 million in it a year ago for a 15% stake. The option was to acquire the rest of the company for an immediate $165 million payment and $435 million in additional payments, plus royalties contingent on the product meeting a number of milestones.
Today's report by the companies said that Novartis would continue to consider cooperative efforts of various types with Gamida Cell (these could include, for example, continued monetary investment in the company; acquiring rights to joint development of NiCord, Gamida Cell's leading product; a full license for the leading product; and other possibilities). As of now, Novartis has no rights whatsoever in the product or the company, other than its 15% holding in it.
The companies reported that Gamida Cell had met all of the milestones in the agreement with Novartis. As far as is known, relations between the companies were also good. At the same time, this is not the first time that Novartis has expressed enthusiasm for Gamida Cell, only to adopt a more equivocal position later.
The companies conducted advanced negotiations in 2014, culminating in the signing of a memorandum of understanding for Novartis's acquisition of the entire company for $200-300 million, with potential for another $600 million, subject to milestones and royalties. A year ago, Novartis notified Gamida Cell that it had decided to withdraw from the deal, following which the current structure of investment and an option, which was not exercised today, was formulated.
FDA reversed itself
Managed by president and CEO Dr. Yael Margolin, Gamida Cell has developed technology for improving the density of stem cells within a sample of cells with a given size. The first application of the technology is in treatment of blood cancer in cases in which it is necessary to implant bone marrow from umbilical blood. At present, the stem cell density in an umbilical blood sample is inadequate except for implanting in children weighing up to 45 kilograms. Gamida Cell's development is likely to extend this option to adults.
The company has been through some hard times. Its first product, StemEx, developed in a joint venture with Teva Pharmaceutical Industries Ltd. (NYSE: TEVA; TASE: TEVA), reached the end of a six-year Phase III trial. The trial was successful, but when the company submitted the product for approval from the US Food and Drug Administration (FDA), which had previously expressed readiness to approve the product on the basis of this trial, the FDA changed its mind, and asked for another trial. Investing in another trial was not worthwhile, and development of the product was halted, even though the trial was successful.
The NiCord product is designed to treat the same disease, but is considered a better product, as indicated by Novartis's interest in the company. The agreement with Novartis at the time gave the company renewed confidence, and gave it a possible price tag, so Gamida Cell was not the loser from what happened, despite its obvious disappointment that the option will not be exercised.
For the main Gamida Cell shareholders, the situation is somewhat different. Elbit Medical, indirectly controlled by York Capital, is hungry for an exit in one of its two held companies: Gamida Cell and InSightec, and extension of the option period places it in a state of uncertainty. Clal Biotechnology has seen ups and downs in recent years. Some of its products have made fine progress, with signed agreements having good potential, but the investors have yet to see an official exit with money in the bank, and now the dream is once again receding. Gamida Cell itself has enough cash now to continue development of its product, while hoping for a different deal - perhaps with Novartis, or perhaps with a one of its competitors.
Published by Globes [online], Israel business news - www.globes-online.com - on June 4, 2015
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