Intercell - Pseudomonas - the undervalued part of the proposed merger   

In this Company Update we concentrate exclusively on the terms and conditions as well as synergies of the proposed merger between Vivalis and Intercell and on the profile of the merged company, while we have left our sales and earnings forecast for Intercell unchanged. In this regard we treat the offered conversion ratio of Intercell shares for Vivalis shares (13:40) as per the closing prices of December 15, 2012 (Vivalis: EUR 6.94, Intercell: EUR 1.96) ahead of the announcement of the merger as fair, as it contains an implied share price of EUR 2.26 with an upside potential of almost 39% (approx. 32% on the average share prices of the last 3 months). In contrast, we treat the offered 13 preferred shares - which can be converted into voting shares of the merged company Valneva with a ratio of 0.4810, if phase II/III of Pseudomonas is successfully completed - as rather aggressive as this implies an additional upside of just approx. EUR 1 under the same price assumptions, whereas we calculated a value of approx. EUR 4 in our previous Company Update, dated December 12, 2012. However, we reckon that in the EGM of Intercell to be held in February 2013 the required majority of 75% of the votes will be likely achieved as we assume that Novartis (holding roughly 15% of the shares) will likely agree to the merger because the agreement between Intercell and Novartis is not infringed by the merger (i.e. Intercell having an option to license out the vaccine to Novartis or to conclude a partnership with an implied sharing of the margin) and many shareholders of Intercell, battered by the performance of the last 2 years will appreciate the offer providing some upside potential in the short term from the exchange ratio and in the long term from the enlarged R&D pipeline.

Merger synergies: From the product focus point of view we see less synergies from the merger. However, we reckon that the two proprietary technologies of Vivalis (EB 66® for the manufacturing of vaccines, VIVAIScreenTM for the analysis and discovery of antibodies) provide an interesting upside potential through milestone payments and potential royalties, while they are less risky and capital intensive compared to the development of the proprietary vaccines of Intercell. On the cost side the management estimates a synergy potential in the area of G&A of some EUR 5-6 mn. Another important factor of the merger is the proposed capital increase of EUR 40 mn, secured by commitments to underwrite from new and old shareholders of Vivalis, which ensures the completion of the developments of the merged company.

Valuation: As we have not changed our DCF model for Intercell on a stand-alone basis our (cum-dividend) price target remains unchanged at EUR 2.00. Based on the provided exchange ratio and the closing prices as per December 20, 2012 (Vivalis: EUR 6.45, Intercell: EUR 1.84) the implied conversion share price of Intercell amounts to EUR 2.10. However, as in both cases the upside is marginal (8% and 14%, respectively) we reiterate our “hold” recommendation.