Mallinckrodt May Have to Pay More for Cadence

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Cadence Pharmaceuticals Inc. (NASDAQ: CADX) agreed Tuesday to be bought out by Mallinckrodt PLC (NYSE: MNK) for $1.3 billion, or $14 a share, in cash. There appears to be some speculation that Mallinckrodt may be forced to boost the bid. The offer is a 27.3% premium to Monday’s close of $11.07. What investors have to keep in mind is that Cadence is only just expected to make the turn into profitability this year.

Cadence makes Ofirmev, an intravenous form of acetaminophen used by hospitals to manage pain for surgical patients. The company licenses the formula from Bristol-Myers Squibb Co. (NYSE: BMY), which sells it in Europe and elsewhere under the name Perfalgen.

Almost as soon as the deal was announced, two law firms said they would investigate the deal to see if Cadence directors violated their fiduciary responsibility to shareholders. Both law firms wanted to know if Cadence had actively sought buyers for the company. Shopping the company might have generated a higher bid.

The mean target price for the stock before the deal was announced was $11.32, but one analyst had put a $15 target on the stock. Mallinckrodt said the deal would add to earnings in 2014 and be a significant profit diver in 2015.

The shares were trading at $13.97 Tuesday morning, up 26% from Monday but just below the Mallinckrodt bid. They did reach as high as $14.05 in premarket trading, a signal that some investors at least were betting on a sweetened offer.

Historically, acquisition prices have tended to be about 30% above current stock prices. In the press release announcing the deal, Mallinckrodt said the offer represented “a 32% premium to the trailing 30-trading-day volume weighted average price (VWAP) of $10.62 per share.”

But recent takeovers of health care companies have tended to command much bigger premiums. Mallinckrodt said the deal will accelerate its growth in specialty pharmaceuticals. It just may not reward Cadence shareholders enough.

Ofirmev hit the market in 2011 and is expected to generate $110.5 million in 2013, up 120% from 2013. For 2014, the company expects sales of $173 million to $177 million.

Moreover, analysts have expected Cadence to show a profit of $0.11 a share in 2014, its first since its founding in 2004. The San Diego company was seen reporting a loss of $0.04 a share in 2013, down from a loss of $0.16 a year ago. 2013 revenue is estimated at $32.5 million, up from $17.17 million in 2012.

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