The pitfalls of using market price as a measure of value.

The Cellestis notice of proposed acquisition contains the following statements

Attractive premium of 24.3% to the 1 month VWAP and 31.5% to the 3 month VWAP of Cellestis shares up to 1 April 2011

This appears to be sufficient reason for the Company to state that

Cellestis Directors unanimously recommend that Cellestis shareholders vote in favour of the scheme

Deloittes said that

fair value is defined in Australian Accounting Standards as ‘the amount for which an asset could be exchanged between knowledgeable, willing parties in an arm’s length transaction’.

Deloittes also advise that the above AASB guideline was to be revised

The core principle of the proposed new guidance is that ‘fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

This now moves the valuation method from an actual record of transaction to a hypothetical situation.

If one was to use market price as an indication of value one would probably be an advocate of the Efficient Market Hypothesis* which postulates that markets are "informationally efficient," markets are rational and that the current market price for a security is the best predicator of its future price.

This also supposes that all the shares are available to the market and that the market is "active and liquid" with no group or groups of shareholders having a blocking or controlling interest. Should the market not be "active and liquid" the share price could be subjected to a "control premium."

So what is and how much is a "control premium?" Grant Thornton advises

A control premium is an amount that a buyer is willing to pay over the current market price of a publically traded company.

Shares traded on stock markets like the Australian Securities Exchange are usually in minority parcels representing a very small portion of the total number of issued shares of a company. Investors trade these shares because they like the earnings profile, the dividends or the potential capital gains...

...When valuing the target on a 100% or control basis, the expert needs to incorporate a control premium which is commonly reflected in the multiples used in the valuation. 

The experts conclude the level of control premium used by using empirical evidence based on historical successful takeovers which states that the control premium is generally between 20% to 40%.

Accountancy firm RSM Bird Cameron analysed 212 successful takeover offers and schemes of arrangement over the 5 year period ending 30 June 2010 on the ASX and found that

as asset prices fell during the 2009 financial year on the back of the global economic downturn, control premiums soared in that period, rising by 16.5% in the financial year to an average of 42.1%. It appears that both purchasers and vendors recognised that during this period the market was severely undervaluing businesses and as result there was a need for a significant rise in the control premium offered to achieve a successful takeover.

This hypothesis holds true in the 2010 financial year, with average control premiums easing slightly to 40% as buyers factor in the recovery in share market prices into their offers.

It appears that with the Qiagen proposal what we have is an offer equating to the recent share price plus a control premium. Therefore it could be argued that, on the available evidence, both the acquirer and the directors relied solely on the EMH to determine what is fair and reasonable and in the best interests of Cellestis shareholders and that shareholders will have to patiently wait** for an Independent Expert to verify this opinion.

-----------

*after the collapse of banks, economies, sovereign states along with the stock market you would think that the EMH had about as much life left as a Norwegian blue parrot.

**Cellestis Chairman Ron Pitcher letter to shareholders

QuantiFERON does Dallas

This I like

Global Clinical Diagnostics Automation Market to Reach $10.5 Billion by 2017, According to a New Report by Global Industry Analysts, Inc.

San Jose, California (PRWEB) April 28, 2011

Clinical laboratories worldwide are increasingly eying automation as a key aspect to their future survival, as economic forces continue to intensify competition in the market. Presently, several market forces are acting in tandem that is threatening the sustenance of several players in the market. These include continued decline in reimbursement rates for laboratory tests, cost-cutting measures adopted by the managed care industry, and the general shift towards cutting healthcare costs. Such forces are creating relentless pressure on laboratories to increase cost-efficiency and productivity. An obvious way to achieve the same is to alter internal processes that could deliver increased productivity at lower budgets, an area where automation proves to be a major solution.

Although several options are available for enhancing laboratory efficiency, automation stands apart given its ability to bring in significant cost-savings into clinical laboratories. Over the recent years, the industry has observed a decline in expenses pertaining to clinical and biological diagnostics, despite a rise in sophistication of technologies employed and a wide range of parameters for detection. Apposite portfolio of automated systems in various laboratory settings can make them an ideal solution for enhancing robustness and efficiency. Going forwards, however, technologies should focus on ability of these systems to be used by any member of the staff in a laboratory rather than highly trained specialists. As the market further progresses and novel instruments with enhanced features surface, manufacturers are required to focus enhancing awareness of potential applications of such products to end users.

The US represents the single largest market for clinical diagnostics automation worldwide, as stated by the new market research report on Clinical Diagnostics Automation. Europe represents the second largest market for clinical diagnostics automation. However, market growth for clinical diagnostics automation is expected to mainly emanate from the Rest of the World market, which is forecast to grow at a compounded annual rate of more than 12% during the analysis period, driven primarily by the burgeoning population in Asia. The global market for clinical diagnostics automation is led by automated analyzers. Stand-alone automation represents the fastest growing segment in the global clinical diagnostics automation market, with a projected CAGR of 16.8% during the analysis period.

Total Lab Automation (TLA) is ideal for use in large hospitals with 550 beds or more, or with a substantially large outpatient numbers. Adoption of TLA remains confined to only a few large hospitals, serving a niche market. Despite being powerful and efficient, large-scale automation systems are laden with certain limitations such as inflexibility, complexity, huge time for implementation, and certain communication issues in addition to cost constraints. This resulted in a lower penetration of TLA in the market. Meanwhile, smaller laboratories have espoused modular work cell automation concept, which is relatively more ideal for their size and budget.

--------

For more details about this comprehensive market research report, please visit - www.strategyr.com/Clinical_Diagnostics_Automation_Market_Report.asp

Point-Counterpoint: Should Interferon Gamma Release Test become the standard method for screening patients for Mycobacterium tuberculosis infections in the United States?

A provocative title for an important debate

The Centers for Disease Control and Prevention have recently published updated guidelines for the use of Interferon Gamma Release Assays (IGRA) to detect Mycobacterium tuberculosis. This document gives a balanced analysis of the strengths and weaknesses IGRAs. To date, these assays have not been widely adopted in the United States by clinical laboratories. In this Point-Counterpoint we have asked two experts, Thomas Alexander of Summa Health Care who has adopted an IGRA for M. tuberculosis detection in his laboratory and Melissa Miller of UNC Hospitals who evaluated one but has not chosen to adopt it to explain how each reached this decision based on their experience with the test and the data that has been published concerning IGRA.

Skipping to the end bits; Summa Health Care*

In conclusion, the advantages of IGRA tests is that they offer increased convenience, sensitivity and specificity when compared to TST. While the test is more expensive than the TST, the use of an IGRA assay in appropriate clinical situations can reduce the overall cost to the health care system and lower the potential morbidity associated with treating many patients with positive TST due to exposure to non tuberculous mycobacteria.

and UNC Hospitals

for the routine implementation of IGRAs for detecting LTBI and active TB in our low
prevalence population with low rates of BCG vaccination and for the screening of HCWs, we will await more compelling data to indicate the sensitivity and/or PPV of the IGRAs are superior to well-performed TST before investing the resources needed to replace TST with an IGRA institution-wide.

The author then lists the points of agreement, which I have abbreviated;

1. There is no diagnostic gold standard for LTBI
2. IGRA have very specific advantages over TST.
3. Both IGRA and TST have technical challenges in both performance and in interpretation
4. IGRA is more expensive for the laboratory.

and issues that need to be resolved

1. lack of good longitudinal studies with IGRA
2. Is IGRA cost justifiable in a low incident population?
3. the effect of multiple prior TST is on the accuracy of IGRAs.
4. The interpretation of IGRA in HIV infected patients with CD 4 counts of less than
200/ul appears to be as problematic as the interpretation of TST.

-------

It's my opinion that adopters of QFT are happy with their decision whilst those who continue with the TST continue to be dissatisfied. At the 2010 AGM Cellestis attempted to classify these customer related marketing challenges;

– Some customers are simply very slow to change
– Some will find reasons not to change
– Latent TB is not the front of mind priority for many customers
– Perception of cost remains a factor despite realities


 * Summa Health Care is a multi $Billion business

Week 5, where are we at?

To be honest I don't know if its week 5, 15 or 50 - such has been energy focused on this particular event.

I would class this phase as the discovery phase with all parties declaring their interests, staking their claims, having their assumptions tested whilst having look at how the other side are travelling.

I would wager that Qiagen did not expect that Cellestis shareholders were so involved and active in their Company and I am surprised that the Cellestis board did not advise them of the existence of the strong shareholder support for the Company.

This has the potential to be a productive phase; the media are now aware of the situation and the many secondary issues arising from the proposed acquisition.

Next step, the legals.

Mea culpa

Previously I had said that shareholders are not company owners, as their involvement is limited to a share of the capital they are only stakeholders. My argument is based on the assumption that shareholders own stock, not the company. As most shareholders bought their stock on the stock market they are only secondary holders and have not contributed capital to the company, as did the primary holders.

Well blow me down with a feather, the ASX Corporate Governance Principles and Recommendations clearly state that

The rights of company owners, that is shareholders, need to be clearly recognised and upheld - Principle 6.

Now I know that these Principles are not enforceable

The ASX Corporate Governance Council’s Recommendations are not mandatory

however, if a Company states that they have incorporated these principles into their own Corporate Governance shareholders (ie owners) can expect that these principles have been followed.

The ASX Guidelines are well worth reading, especially for owners.

Policy failure in the UK, again

As published in the Lancet,

“If we had applied national guidance…only 29% of latent infections would have been identified, leaving nearly three-quarters (mostly from the Indian subcontinent) undiagnosed and at risk of developing the disease and possibly infection others,” emphasise the authors.

Week 3, where are we at?

After the initial amazement and confusion...the shock and awe...arising from the Bomber announcement...wits have been gathered, forces martialled, game plans drawn....says Tim Boreham (Criterion)

Holders in fellow takeover target Cellestis (CST, $3.40) have more to fear. A rebel group opposed to the $3.55-a-share offer claim they account for 34 per cent of the register, and we don't think they're bluffing.

He then advises nervous investors to sell, but he always says that.

More importantly, the Cellestis Research Report is out there for reading, analysis, comment and discussion.. said one commentator

a superb bit of work

thanks to all who did this. i can't imagine the "independent expert" doing anything as comprehensive as this.

As they say in the US, you are most welcome.

Our little group is attracting a bit of attention from foreign markets, (roughly translated)

Qiagen shares added 0.36% on 13.980 euros thus ignoring the Internet blog of the Cellestis Shareholder Action Group (CSAG), according to which have 34.2% of the shareholders of the Australian diagnostics company Cellestis Limited opposed to the aquisition by Qiagen.

Oh really? - now that's what I call drawing a long bow.

Shareholder votes, a bridge too far

As noted at the Cellestis Shareholders Action Group (of which I am a member) the numbers are 32,853,318 or 34.2% who will vote "No".

I should say were as there are still more people registering!

As noted in the Fairfax article by Malcolm Maiden

...if the opposition holds, the 75 per cent ''yes'' vote that scheme of arrangement takeovers need is a bridge too far..

This gap can be illustrated thus;

In the unlikely event that 100% of all available shares are voted on the "Yes" vote still falls short of the required 75% by a margin of 9.2%.  As the rate of participation by shareholding decreases so does the "Yes" vote, relative to the "No" - at 90% participation the margin increases to over 11.5%.

At 65% participation the "No" vote represents +50% of all votes!

When no means yes.

Writing in the Australian Financial Review Shareholders May Sink Cellestis Deal Andrew Lau remarked that

Qiagen would not comment but its spokesperson said that several brokers had noted that the acquisition price was expensive given that it was about 8.5 times Cellestis’ 12-month trailing revenue, although that may not be a fair comparison due to the target’s low market penetration.

Is that or is that not a comment?

Clear as mud

No doubt many shareholders would have received an email advising of a new announcement - for some reason the link did not work for me so I went directly to the website and downloaded it from there.

After reading it a few times I came to the conclusion that the Board were trying to clarify a few points regarding the status of options, directors' obligations and voting intentions. Regarding their voting intentions the chairman confirmed that the

Board has also stated its intention to vote the shares that they control in favour of the Scheme

yet

the Substantial Shareholders* have not entered into a binding arrangement with QIAGEN to vote in favour of the Scheme

This is just silly, a prerequisite of this Scheme of Arrangement is that the Board holds unanimous support for the scheme.  It would appear** that should any board member subsequently withdraw or adversely alter their recommendation the result would be that the Board support would lack unanimity, the Scheme would be terminated and Cellestis would be obliged to pay a penalty for liquidated damages.

By saying that there is no binding arrangement with Qiagen sounds like double talk to me, the Board has entered into an arrangement to vote in favour of the Scheme.

To my mind this Company Announcement only serves to confirm the complexity and the lack of clarity with this particular scheme - clearly the documents were written by lawyers for lawyers leaving shareholders scratching their heads.

Is that a fair thing?

-----------

* I have assumed that Substantial Shareholders refers to those Board members listed under 20 Largest Shareholders in the 2010 Annual Report.

**I use the word appear advisedly as there are several clauses in the deed that appear to give differing interpretations on this very issue. Perhaps my confusion is down to my lack of expert legal qualifications!

NEJM - Horsburg & Rubin

Latent Tuberculosis Infection in the United States

Link

Our recommendations for screening are a blend of those in the published guidelines: screening is recommended only for population subgroups with a high prevalence of latent tuberculosis infection or those with a high likelihood of progression from latent tuberculosis infection to active disease (Tables 1 and 2). Although data informing the optimal approach to screening in various subgroups are limited, we prefer the use of IGRAs when the prevalence of recent infection is likely to be high: these populations include close contacts of patients with active tuberculosis, recently arrived foreign-born persons, drug users, incarcerated persons, and homeless persons. IGRAs are also of value for screening persons who have received the BCG vaccine. For populations in which the prevalence is low or infection is likely to have been remote, we prefer the tuberculin skin test because IGRAs have either not been well studied (e.g., among smokers or persons with diabetes mellitus) or have performed poorly (e.g., among health care workers). Screening with either test is not recommended in persons at low risk, since such persons are much more likely to have false positive than true positive results.

The CDC clarify the recommendations against testing low risk persons; it is not correct to assume that IGRA have the same rate of false diagnosis as the skin test;

As with the TST, IGRAs generally should not be used for testing persons who have a low risk for both infection and progression to active tuberculosis if infected (except for those likely to be at increased risk in the future). Screening such persons diverts resources from higher priority activities and increases the number of false-positive results. Even with a test specificity approaching 99%, when the prevalence of M. tuberculosis infection is ≤1%, the majority of positive results will be false positives. If persons at low risk for both infection and progression are to be tested, selection of the test with the greatest specificity will minimize false-positive results, reduce unnecessary evaluation and treatment, and minimize the potential for adverse events from unnecessary treatment.

Obviously when it comes to testing low risk it would be logical to use the test with the highest specificity.

TB Control - Facing Challenges - Discovering Solutions

2011 National TB Conference

CDC promo - it all helps

Ramping up TB, with IGRA given a role

Cellestis Shareholders Action Group update

For the latest press release from the CSAG click here.

Currently voting numbers are being double and triple checked for accuracy. At this point it appears that the margin for the NO vote is overwhelming ie the margin over the required 25%.* Should there be less than 100% participation in the vote this margin can only increase**.

From the 2010 Annual report there are are 125 shareholders with >100K shares. I am one of those and so are most of those I am in contact with yet AFAIK only one of us has been approached by Cellestis for their opinion. It appears that they really have no idea how shareholders view the proposal and therefore is important to let the board know of your intentions. You can do so by ringing 1300 893 956 or by email.

Once voting numbers are finalised representation will be made to the Board advising them of the situation.

-----

* reading that back, it seems just a tad confusing. At the end of the day for the proposal to succeed it needs 75% of shares that are voting to vote YES. Therefore if +25% of the shares that vote vote NO the deal will be stopped in its tracks.


** More from Ian Verrender

According to research conducted by polling firm, Global Proxy Solicitations, only 33.5 per cent of retail shareholders voted on some of the biggest takeover schemes in Australian history in recent times.

Of the 14 transactions researched - including the Wesfarmers takeover of Coles - the average percentage of all capital voted was just 64.92 per cent, and that included the votes of the big institutional shareholders.

It seems the apathy is concentrated among those who don't hold strong negative views about a merger. They rarely vote in favour.

Those, however, who hold strong negative views almost always vote no, which is making it more difficult to get schemes of arrangement across the line.

Biotechs boost bad puns and poor analogies.

News Ltd Tim Boreham is at it again, this time scattering with abandon hyperbole such as nuclear winter, patent cliff and biotech orchards..ripe for the picking. And just what is it that compels this terrible tsunami of tautology?

Driving the trend is the desire of global drug companies to refresh their product repertoire as a slew of big-name drugs go off-patent in the next few years....

....According to Lavelle, big pharma companies have discovered their own R&D efforts have not yielded the next blockbuster drugs.

"So they're looking around for clever stuff from biotechs globally," she says.

That is one driver, another is the desire by the venture capitalists to cash in

"There is a conflict between being a business and getting rid of it at a seemingly good price but well below the potential of the business."

Of course not all shareholders were fortunate or able to buy in at venture capital prices, a source of further conflict. What a venture capitalist deems as being a "good price" may not be how an ordinary shareholder views their investment, with each party equally entitled to their opinion.

Collectively this conflict could bring stormy weather to the orchard of plenty sending those share farm chickens back home to roost

Behind the good news about lucrative deals, there is some disquiet that founders of innovative technology are selling out too cheaply for short-term gains.

The Cellestis deal faces an early backlash from a group of investors claiming to account for about 30 per cent of the register.

With full patent protection, a global marketing and distribution network and a unique product, a pre-molecular diagnostic of latent infection, Cellestis has the potential to consistently bear more fruit than one opportunistic windfall.

Looking forward with hindsight.

In April 4 2011 edition of Biotech Daily

Dr Radford said the offer was good value for the early investors in the company which was floated in 2001 at 25 cents a share when the Australian dollar was worth 50 US cents.

He said that the offer of $3.55 a share should be considered in the light of the strong Australian dollar.

The implication is that for those that did not buy into the float at 25 cents $3.55 is not good value.

Criterion criteria critiqued

In his News Ltd piece Tim Borham says that

Criterion agrees the offer looks generous on Cellestis's current earnings.

And if you just look at earnings as expressed in the CST ASX ann

A price to earnings multiple of 37.1x for the 12 months ending December 2010

yes, they could be viewed as being generous. But others argue that using PE is inappropriate as Cellestis has only just begun to make those earnings

New CDC IGRA Guidelines represent a 'quantum' shift for the U.S. market 

Largest single market for QFT

Est. 17 million skin tests per year are performed in U.S.- 2010 AGM

To all intents and purposes CST is a growth stock and the growth has been defined as

Revenue growth of between 30% and 40% is expected for full fiscal year 2011...our goal in FY2012 is to achieve similar revenue growth as this fiscal year.

A PE ratio that equals growth is fair and reasonable, not generous.

"The P/E ratio of any company that's fairly priced will equal its growth rate" - Peter Lynch

.

Qiagen's bid divides Cellestis investors and board.

CRITERION: Tim Boreham
From: The Australian
April 12, 2011 12:00AM


NOT all investors are happy with the biotech deal bonanza that promises quickie gains after years of vapid promises.

Cellestis (CST) $3.46

Unmoved by the 24 per cent-plus premium on offer, a rump of long-standing Cellestis holders want to stymie the Frankfurt-based Qiagen's $3.55-a-share offer for the TB diagnostic group, unveiled last Monday.

The dissidents -- mobilised as the Cellestis Shareholders Action Group -- reckon they account for at least 30 per cent of Cellestis's share base, enough to block the 75 per cent approval threshold under the scheme of arrangement. Leading the refusenik push is Melbourne-based private portfolio manager Gavin Ross, who claims to account for 20 per cent of the register (both directly and via clients).

According to Ross, Qiagen is moving just as Cellestis gains traction with its diagnostic Quantiferon, which accounts for 5 per cent of the TB market and has been adopted by customers such as New York and San Francisco.

Quantiferon generated revenue of $45 million last year, but Cellestis (and Qiagen) expect double-digit growth. "The valuation is totally inadequate and doesn't reflect the progress of Cellestis or its future prospects," Ross says.

However, analysts at the Qiagen end opine the offer is, if anything, a tad generous. Morgan Stanley's US biowatchers say that at 6.5 times current-year revenues, the $355m valuation is at the "higher end of deals in this space".

As for Cellestis, chairman Ron Pitcher says the board received an offer which valued the company at "significant premium" to the prevailing price. "In the circumstances, the board obtained legal and financial advice and determined it appropriate to ensure that this offer was put to shareholders," he says.

Criterion agrees the offer looks generous on Cellestis's current earnings. But arguing all day about what the current-value worth of the blue sky potential is like groping an octopus.

Criterion had Cellestis as a hold at $3.47 after the shares rocketed on news of the offer. We revert to a sell: there's a danger of the shares retreating if the rebels have as much blocking clout as they claim.

Investors are only losing 8c per share by not waiting for the scheme documents, while the true believers can buy back in later if they please...



borehamt@theaustralian.com.au

The Australian accepts no responsibility for stock recommendations. Readers should contact a licensed financial adviser. The author does not

Cellestis Qiagen - update #1

A central point has been created to deal specifically with the proposed acquisition of Cellestis by Qiagen. It is titled Cellestis Shareholders Action Group and will become the focus of the fight for those shareholders who wish to retain their investment in Cellestis.

As Vic has intimated, it has taken just a little time for shareholders to fully comprehend the sudden changes by the board of Cellestis to their investment in Cellestis. That time is at an end and it is now Game On!

The dark side of owner-management

SMH

Nathan Bell

April 11, 2011

Investors tend to take comfort from managers with a large stake in a business. They're often highly-driven entrepreneurs that know their business inside and out.

Westfield's Frank Lowy, ARB Corporation's Brown brothers and Harvey Norman's Gerry Harvey are good examples - all owner managers with large shareholdings who put them in the same boat as smaller shareholders.

In contrast, investment bankers pocket huge salaries and bonuses from taking risks with other people's money. With Merrill Lynch chief Stan O'Neal receiving $161.5 million in stock, options and retirement benefits after presiding over an $8 billion loss, you can see the attraction of owner managers. But there's a dark side, too.

The Intelligent Investor recommended small healthcare company Cellestis (see Cellestis passes the biotech test) at $2.35 in November last year. Company founders Dr Tony Radford and Dr James Rothel, whom together speak for around 24 per cent of its shares, are exactly the type of owner managers investors should seek out.

You'd think, then, that a $3.55 per share takeover bid by German biotech company Qiagen - a profit of 51 per cent on our original recommendation - would be good news. But it isn't.

The bid significantly undervalues the company and, unless Qiagen increases its offer price, we're recommending shareholders vote against it.

Price check

What's difficult to comprehend is why directors and major shareholders would consider selling at an inadequate price. There are several possible explanations.

First, management may dislike the pressures associated with running a listed company. Communicating with shareholders and analysts, preparing accounts and attending annual meetings isn't much fun. The company founders probably got into this business because they enjoyed the science behind it, not the marketing or accounting.

There's circumstantial evidence for this. We've heard that some shareholders have been unhappy about management's limited communication and Radford didn't return calls before the publication of our research last November.

As Cellestis has grown, it's likely that the founders became more removed from what got them excited about the business in the first place. If so, who can blame them for wanting out?

Second, Radford and Rothel are already wealthy. At the takeover price, their combined stake is worth $81 million. An extra 50 cents on the bid price would mean an extra $11 million to them - not much when your bank balance already has plenty of zeroes.

Third, directors may be a little unclear about their role. Chairman Ron Pitcher said recently that: "As part of Qiagen, we will be able to accelerate our growth much faster than as a stand-alone company and offer even greater benefits to patients and healthcare providers".

That may well be true. But it's not Pitcher's role to advocate for anyone other than existing shareholders. Isn't making a potential purchaser's argument inappropriate?

Rubber stamp warning

Finally, it's possible that the current offer is "fair and reasonable", as independent experts like to say, and that our estimation of value is over-stated. That hangs on valuing potential future growth, something that independent experts tend to view with a deeply conservative eye.

Certainly, the current offer of eight times revenue and 37 times earnings sounds attractive. Except for the fact that earnings growth of 40-50 per cent per annum over the next few years is highly likely.

If the company manages to double earnings in two years - a scenario we deem reasonably likely - the price-to-earnings ratio will be well under 20. That's cheap for a company like Cellestis, as the potential purchaser no doubt knows.

Radford and Rothel have done an outstanding job running Cellestis. But their motives, especially non-financial ones, are different from those of small shareholders: they have to run this business, small shareholders do not. But their fortunes are tied to these two men and both seem to want out.

Blameless
To be clear, Radford and Rothel are doing nothing wrong.

It's a hard slog starting and building a business, especially for those with a research or scientific bent. No one could blame them for wanting to exit. But in so doing, rather than aligning interests, the founders' large shareholdings inoculate them from small shareholders wanting a better deal. That's not how it should work.

Cellestis will almost certainly get taken over. It's now the job of the board to ensure that it happens at a fair price, not a cheap one. The board, which has the fundamental job of representing shareholders large and small, should hold out for a higher offer.

Cellestis is a company that deserves to be valued at a price higher than the current bid. And small shareholders deserve to get their fair share of it.

This article contains general investment advice only (under AFSL 282288).

Nathan Bell is research director of The Intelligent Investor. BusinessDay readers can enjoy a free-trial offer. For more Intelligent Investor articles click here.

Lawyers at 20 paces..

Plenty of legal opinion coming in...even freebies from Freehills

In the BC Iron matter, BC Iron Limited entered into an implementation agreement with Regent Pacific Group Limited, a Hong Kong Stock Exchange listed company, on 20 January 2011. Consideration under the scheme was $3.30 cash per BC Iron share. On 15 March 2011, Regent Pacific announced that the reported opposition to the deal by a 21% shareholder in BC Iron had caused its board to withdraw its recommendation and that it could therefore unilaterally terminate the implementation agreement.

BC Iron believed that the termination was a breach of the agreement and undertook legal steps to rectify the situation

BC Iron Limited (“BC Iron”) (ASX: BCI) intends to apply to the Takeovers Panel to challenge the validity of Regent Pacific Limited's (“Regent”) purported termination of the Scheme Implementation Agreement ("SIA") between the companies as announced on Tuesday 15 March 2011.

The Takeovers Panel found in favour of BC Iron

The Takeovers Panel has made orders that Regent Pacific and its subsidiary Regent Pilbara PtyLtd cannot rely on clause 15.1(d) of the SIA to terminate that agreement..

...In light of the Takeovers Panel's orders, BC Iron considers that the SIA is back on foot and will continue to comply with its obligations under that agreement.

The terms of the Scheme Implementation Deed between Cellestis and Qiagen are quite specific and bind both parties equally to a specific process.

Small shareholders are kingmakers

Something to think about, this article by Ian Verrender on "schemes of arrangement" and their pitfalls - to the proponents

For a bidder, once large numbers of small shareholders become active, a deal that's been approved by directors and ticked off by the target's independent expert still has the potential to go right off the rails.

Qiagen look forward to receiving the benefits of owning QuantiFERON

ACQUISITION OF CELLESTIS LTD 

Gaining exclusive rights to QuantiFERON® technology 

Strictly in confidence.

As reported in the Australian Cellestis CEO Tony Radford said that

Qiagen dropped by (but only to say hello) a few months ago

What he failed to mention was that the "hello" involved signing this;

The effect of this confidentiality deed was to give Qiagen full access to company information not normally accessible to shareholders. It also indicates that prior negotiations had taken place, possibly before the 2010 AGM.

It also has the effect that any meaningful communication with shareholders from that date is virtually denied. 

You would wonder why Qiagen is interested in CST as it's diagnostics platforms do not appear to be harmonious. Investment firm William Blair analyst Brian Weinstein urgued caution saying Qiagen's dominance in the HPV market will be challenged by Roche and Gen-Probe.

Sharing those concerns are Goldman Sachs,

who in a report issued in February said that Gen-Probe's advantages in automation and Roche's sizeable sales force could consume part of Qiagen's HPV market share.

Also of concern to Weinstein was

Qiagen's success, or lack thereof, with the US Food and Drug Administration is a red flag, calling the company's record "unproven." Despite dozens of platforms and thousands of products, Qiagen has only a "handful" of FDA approvals that it has sponsored itself, he said, noting this is "particularly important given our belief that product launches are one of the three key things that will move a stock."....

....Questions around the deal exist, however. Qiagen said that Cellestis' QuantiFeron tests for TB and cytomegalovirus would be moved onto its QIAensemble, QIAsymphony, and ESE point-of-care platforms. Weinstein, however, said it is unclear what regulatory pathway there may be for getting the two tests approved for Qiagen's instruments.

"Also, we are not sure whether currently installed instruments will require retrofitting to accommodate the assays," he said.

It would appear that Qiagen need CST more than CST needs Qiagen.

Qiagen/Cellestis acquisition - humpty dumpty or regeneration?

A lot of heat is being generated over the proposed acquisition of Cellestis for $3.55 per share - and that heat is white red hot. Some are saying "its over", I would argue that "it's just beginning" meaning that this is the start of a new phase for CST and QFT.

As they say, watch this space.

Considering the options..

In the Scheme Implementation deed are these two items;

Excluded Shareholder  any Cellestis Shareholder who is a QIAGEN Group Member or any Cellestis Shareholder who holds a Cellestis Share on behalf of, or for the benefit of, any QIAGEN Group Member. (p8)

Scheme Meeting  the meeting of Cellestis Shareholders (other than Excluded Shareholders)...(p13)

Should the directors act on behalf of Qiagen it could be argued that they are, by their own definition, Excluded Shareholders and therefore unable to vote on the proposal at the Scheme Meeting.

Something that needs clarification from an independent legal mind.

An Independent Valuation of Cellestis

As reported here regarding the proposed acquisition of Cellestis by Qiagen NV, Peter Lawson of investment firm Mizuho Securities said the deal

"fits with the high growth, high multiple acquisitions selected by management. While near-term dilution of a few pennies and the premium valuation are not positives, we believe the announcement removes the acquisition overhang for the stock, and long-term accretion and growth are a positive."

Lawson raised the 12-month target on Qiagen's shareprice to $24 from $20

According to publicly available sources Qiagen NV (QIA) has 232.83M shares which, at $20 is $4.656B and at $24 is $5.578B. If you were to accept the valuation of Peter Lawson of Mizuho Securities the purchase of Cellestis, for $341.3M will improve the value of QIA by $931.2M!

Now I know that there is always a margin between wholesale and retail but 270%....

(For the exercise I have assumed parity for the $AU)

HT: puzzled

Conflicting interests

As noted in the Australian

THE founders of biotech Cellestis have reaped a windfall...

Having now had their faith in the board sorely tested Cellestis shareholders just might need to see that expert opinion, to determine for themselves the degree of independence and level of expertise, before making a decision on their shareholding.

Indeed, it is a condition of the scheme that it is

subject to the Independent Expert confirming that the Scheme is fair and reasonable and in the best interests of Cellestis Shareholders

Intelligent Investor record their disappointment with the announcement;

The scheme meeting to approve the takeover is scheduled for late June but, as it stands, we’re likely to recommend you vote against the proposal unless the price is improved...

..for now, there’s nothing to do but HOLD

Various online forums have received pledges amounting to ~5 million shares, all voting No. Another group of private investors reliably claim to hold ~23% of shares and they are also speaking with one voice.

As it stands the deal looks unlikely to be successful.

Over egging the pudding.

The media appear to be quite happy to repeat somebody else's mistakes;

Cellestis shares jump on agreed $341m takeover offer from Qiagen

Now I know more than just a few shareholders who are more than happy to point out that on this issue the media is sadly mistaken. Until a 75% vote is obtained this deal is just a doodle on a phone pad.

These guys (aka significant shareholders) are angry and say that they have been sold out, they have lost faith in the board to best represent their interests and therefore they will be voting NO.

Should this turn into a populist rout there may well be no winners and many losers. It is over to Cellestis' management to manage this situation for the benefit of all shareholders.

It's all in the numbers.

In comments Islay makes mention of a

deep well of indignation and anger among shareholders.

I can vouch for that, emails have been flying across my screen and they are all angry and they are are all indignant. It is becoming apparent that for this deal to be successful more effort will have to be made by the board.

Market madness

With the deal to acquire Cellestis @ $3.55/ps an almost foregone conclusion you would wonder why holders continue to to sell at a discount. Certainly the buyers are snapping them up.

Plos one study on improved QuantiFERON.

Study

Abstract 

Background

A challenge in tuberculosis (TB) research is to develop a new immunological test that can help distinguish, among subjects responsive to QuantiFERON TB Gold In tube (QFT-IT), those who are able to control Mtb replication (remote LTBI, recent infection and past TB) from those who cannot (active TB disease). IFN-γ response to the Heparin-binding-hemagglutinin (HBHA) of Mtb has been associated with LTBI, but the cumbersome procedures of purifying the methylated and immunological active form of the protein from Mtb or M. bovis Bacillus Calmette et Guerin (BCG) have prevented its implementation in a diagnostic test. Therefore, the aim of the present study was to evaluate the IFN-γ response to methylated HBHA of Mtb produced in M. smegmatis (rHBHAms) in individuals at different stages of TB who scored positive to QFT-IT.

Methodology/Principal Findings

87 individuals at different stages of TB who scored positive to QFT-IT were selected. IFN-γ response to in vitro whole blood stimulation with rHBHAms was evaluated by short-term and long-term tests and detected by ELISA or flow cytometry. We demonstrated that the IFN-γ response to rHBHAms is mediated by CD4+ T-cells with an effector-memory phenotype. This response, evaluated by short-term-tests, is significantly lower in active TB than in remote LTBI (p = 0.0010) and past TB (p = 0.0152). These results were confirmed by long-term tests. The qualitative data confirmed that IFN-γ responses higher than the cut-off point identified by ROC analysis are associated with the status of non-active disease.

Conclusions

In this study we show that the T-cell response to a recombinant and methylated HBHA of Mtb produced in M. smegmatis is useful to discriminate between active and non-active TB disease among those responsive to QFT-IT in a whole blood system. Further studies are needed to improve the accuracy of the assay.

New Experimental Diagnostic Test Able to Quickly Distinguish TB Infection

Link

A potential new experimental diagnostic test able to quickly distinguish individuals with active tuberculosis (TB) from those with latent TB infection has been developed. If the preliminary results of the study will be confirmed in a larger population sample, the new diagnostic system could allow more effective strategies to control the spread of the re-emerging pathology.

The work was performed by a group of scientists from the Catholic University of Rome, the National Institute of Infectious Diseases "L. Spallanzani" of Rome and the University of Sassari, in a study published on the international journal PLoS One.

TB is an infection caused by Mycobacterium tuberculosis, the bacterium known as Koch's bacillus, named after its discoverer (Robert Koch) in 1882. Following infection with the bacillus, two different scenario may occur: "active disease", clinically evident, and that - if not properly treated - can lead to death and the so called "latent infection", that is asymptomatic and that can last for a lifetime.

Worldwide it is estimated that no less than 2 billion people are infected with the TB bacillus in the latent form, and, luckily, only 5 percent to 10 percent of these infected individuals may develop TB disease. The causes responsible for the manifestation of the disease are still unknown and rapid diagnosis of patients with pulmonary TB is essential to reduce the cure time and to limit the spread of the infection to the community. Diagnosis of infection with Mycobacterium tuberculosis is still performed by the intradermal tuberculin test, developed in the early 20th century, used as a means of screening to determine the spread of infection in the population.

"The tuberculin skin test has several drawbacks, primarily that is unable to differentiate between infection with environmental mycobacteria (typically not dangerous to humans), vaccination with Bacillus of Calmette et Guerin (BCG) and infection with M. tuberculosis," says Delia Goletti, corresponding author of the paper published on PLoS One and that together with Dr. Enrico Girardi has coordinated the study at the National Institute of Infectious Diseases. 

The new blood test, called Interferon-γ release assays (IGRA), based on the release of interferon-γ in response to M. tuberculosis-specific antigens, is able to selectively identify those who have contracted TB infection. "However," Goletti says, "IGRA, as well as the tuberculin test, are not able to distinguish people with latent TB infection compared to those with active TB disease."

"The response to HBHA can be used as a biomarkers for latent TB infection and then to some extent can be considered as a response of protection to TB. It is important to understand what are the mechanisms triggered by the infection which can cause the appearance or not of the disease," says Stefania Zanetti, professor of microbiology at the University of Sassari.

"In this study we have developed an innovative diagnostic algorithm, which consists of a response to the protein HBHA in combination with the IGRA and the results have shown that the response to HBHA associates with latent TB infection. This procedure allows to rapidly identify those who really need the treatment for active TB," Goletti says.

"In order for the test to be effective, the HBHA protein must have special features, and to date it has been difficult to obtain large amounts of this protein," Delogu adds. "Well, our research group has developed an innovative experimental protocol to obtain large amounts of protein with limited costs, opening the possibility to use this test on a large scale."

"The results of our study", says Giovanni Delogu, first author of the article, which, together with Prof. Giovanni Fadda has coordinated the research group at the Institute of Microbiology of the Catholic University of Rome - demonstrate that it is possible to distinguish those infected from those with the disease, by simply performing an extra blood test using a protein of the bacillus named HBHA".

For free marketeers everyday is April's Fool Day

Writing in the Financial Times the former Chairman of the Federal Reserve and lifelong libertarian Republican, Alan Greenspan notes

Today’s competitive markets, whether we seek to recognise it or not, are driven by an international version of Adam Smith’s “invisible hand” that is unredeemably opaque. With notably rare exceptions (2008, for example), the global “invisible hand” has created relatively stable exchange rates, interest rates, prices, and wage rates.

The notably rare exception was the global financial crisis to which Greenspan famously said

Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief

The deregulated free market did not perform as expected. Greenspan also put the blame for the collapse of the financial system on a notably rare exception, a

“once-in-a-century credit tsunami”

Risk analysts are appalled at Greenspan's comments, said the loquacious Paul Krugman

To be honest, I didn’t know quite how to respond; I was, very nearly, left speechless by the lack of self-awareness on display 

Previously Paul Krugman had been scathing of Greenspan's performance saying that

By repeatedly shilling for whatever the Bush administration wants, he has betrayed the trust placed in Fed chairmen, and deserves to be treated as just another partisan hack.

The comment notably rare exception has attracted the dark humour of others;

With notably rare exceptions;

• Japanese nuclear reactors have been secure from earthquakes
• Germany remained largely at peace with its neighbors during the 20th century
• Mrs. Lincoln enjoyed the play
• Saddam Hussein had weapons of mass destruction
• Pompeii has always been a safe place to raise a family
• Human beings are immortal
• insurance is a complete waste of money.
• all swans are white.

And so on. However, the last laugh stays with Alan Greenspan and his

“invisible hand” that is unredeemably opaque

How can something be both invisible and opaque?

Think TB in people with HIV; start routinely screening for TB now.

From I-TECH comes the TB Prevention Tool Kit

This toolkit has been developed to assist facility level administrators and health care workers in communities with a high prevalence of both TB and HIV to implement TB infection prevention and control measures..

Included in the toolkit is this, Think TB in people with HIV. Whilst not directly concerned with IGRA or latent TB infection it does have some general applications eg TB Control programmes

TB control programmes generally rely on passive TB case finding – where the onus is on the individual with TB to come in for diagnosis and care.

There isn’t time for that in people with HIV, who are at much greater risk of getting TB

The recommendation is to adopt a policy of intensified case finding (ICF)

Studies have shown that early detection, diagnosis and treatment of TB can interrupt disease transmission by infectious cases

The problem is that, for a variety of reasons, ICF has not been widely implemented. One of the reasons for this was that there was no internationally recommended standardised TB screening tool, another that there are no international guidelines

Internationally-accepted guidelines lead to advocacy and training in the various WHO regions, then changes in national policies, and then finally implementation, monitoring and evaluation in individual countries. The absence of guidelines creates a vacuum in which various implementers adopt their own ICF strategies, but no one analyses the data in a uniform way.”

Failure to issue proper guidelines has resulted in a loss of confidence by those in TB control which, in turn, leads to an increase in disease

“People are dying unnecessarily with readily diagnosable TB disease,” said Dr Kimerling. “It is the health system that is failing them, not their willingness to get screened.”

From this one could draw the conclusion that an increase in TB is directly related to a failure by respective governments and policy makers to ensure that TB control is appropriate and effective.

Australian TB Control - looking back not forwards.

EXPERTS WARN OVER RISE IN RESISTANT TB

By Danny Rose, AAP Medical Writer, AAP

March 24, 2011, 6:32 am

After a couple of generations at the fringe of public health concerns in Australia, tuberculosis looks intent on making a comeback.

There was a 30 per cent jump in Australian cases of multi-drug resistant tuberculosis (MDR-TB) from 2007 to 2009, while last year saw the nation record another rare case of even harder to kill XDR-TB.

The bacteria, which can cause a lethal lung infection, is apparently no longer the disease that modern medicine, and Australia's extra efforts at infection control, was supposed to make "just disappear".

"The trend has been an increase in multi-drug resistant TB in Australia over the last 10 years, which is worrying," Dr Bernadette Saunders, from Sydney's Centenary Institute, said to mark World TB Day on Thursday.

"Many people thought tuberculosis would just disappear over time but, really, TB levels have been rising since the 1990s.

"It's a disease that we need to be aware of, certainly in terms of MDR-TB and, in the last few years, there has been what we call `XDRs` which are extreme-drug resistant strains."

About 1200 Australians fall ill with TB every year, and usually they pick up the respiratory infection while travelling overseas.

While this number has remained stable, the proportion of MDR-TB infections seen in Australia has risen steadily - up from just eight cases in 2000 to 24 in 2007, and 31 in 2009.

People with non-resistant TB are given an array of antibiotic tablets for up to 12 months before they clear the infection.

Those with MDR-TB are quarantined in hospital for at least six months, where their doctors are faced with an increasingly narrow band of antibiotic options.

Without such efforts, infection with TB and its increasingly resistant strains would rise uncontrollably in Australia.

Dr Saunders said many older Australians would remember the public health initiatives leading up to the 1960s that all but eradicated the community-level spread of TB.

"We had very active campaigns to try and reduce TB levels, buses would go around and people would go in and have chest X-rays and if their X-rays weren't clear they were given antibiotics," she said.

"You talk to people who were older and they will say I remember the buses, or going with mum to stand in line for the chest X-ray."

There is a vaccine to prevent TB - recommended to those headed for an extended stay in developing countries - and it is not included in the array of inoculation given to Australian children.

It is thought about a third of the world's population is carrying TB bacteria, although it remains dormant in around 90 per cent of infected people as their immune system controls it.

The 10 per cent who do fall ill can pass on the bacteria by coughing.

About a quarter of all people infected with MDR-TB globally die from it - more than double the mortality rate of non-resistant TB.

Around the world, about eight to nine million new cases of TB infection are reported each year, with about 1.7 million deaths.

"It is a major, major health issue, across the globe," Dr Saunders said.

"In some parts of the world levels of multi-drug resistance is very high and if we're not vigilant, and continue to work very hard, to keep drug resistance low and treat people who are multi-drug resistant, there is a strong potential for it to spread."