Northstar Neuroscience Huddles to Consider Unsolicited Takeover Bid

7/3/08Follow @xconomy

Northstar Neuroscience is in one tight spot. The Seattle-based medical device company’s lead product candidate for stroke patients failed in clinical trials on Jan. 22, and 83 percent of its stock value (NASDAQ: NSTR) evaporated in a heartbeat. Then yesterday, San Diego-based Tang Capital Partners, its largest shareholder, made an unsolicited bid to buy the whole company at a bargain price that says Northstar is worth less than the technology it has in the bank.

Kevin Tang, the investment firm’s managing member, announced his offer of $2.25 a share in cash, which pegs Northstar’s value at about $58.7 million, a 50 percent premium over the company’s closing stock price before his bid was released. Sounds good for shareholders, right? Actually, Northstar had $77.9 million in cash and investments in the bank when it last reported financials at the end of March, meaning that Tang could theoretically buy the company, fire everybody, liquidate assets immediately, and come out ahead.

Northstar CEO John Bowers didn’t do any interviews yesterday, although the company did issue a statement that said it “will review and consider the offer consistent with its fiduciary duties.” Last month, the company tried to shift investors’ attention to potential use of its implanted brain-stimulation technology for patients with depression, yet results to date are still in the early stages and the stock didn’t budge. Yesterday, the company also hired Boston-based investment bank Leerink Swann to evaluate the proverbial “strategic alternatives.”

The alternatives obviously don’t look so hot. Tang said he wants a positive response from the company by July 9, and for Northstar to agree to hand over the company by July 23. If the Northstar board turns Tang down, he could make a direct appeal to shareholders to take over the company through what is known as a “tender offer.”

Shareholders don’t seem to think Tang’s bid is a sure thing. The stock jumped 23 percent to close at $1.84, but it’s still a long way from the $2.25 offer.

“It’s not exactly going out on a limb to say investor interest in early stage biotechs is at fairly low levels,” said Paul Latta, an analyst with McAdams Wright Ragen in Seattle. Despite news of an unsolicited takeover bid of a local company, the phones didn’t exactly ring at his firm. “I know two guys who own the stock, and they’re both on vacation.”

It’s a sad state of affairs for a company that went public in 2006 at $15 a share. Early clinical trials showed that Northstar’s technology, dubbed a pacemaker for the brain, could send electrical impulses through the brain’s outer coating that were able to restore some patients’ arm and hand movement after a stroke. Natick, MA-based Boston Scientific thought enough of it to invest $20 million in the company in 2004. The fact that it didn’t pan out in a pivotal clinical trial, called Everest, was not just bad news for investors, but also for 250,000 stroke survivors in the U.S. who live with long-term hand/movement disabilities.

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