West Coast Editor

Jazz Pharmaceuticals Inc. got hip to Orphan Medical Inc.'s approved cataplexy drug Xyrem and plans to buy out the company for about $123 million, or $10.75 per share for each of Orphan's 11.4 million outstanding shares.

"The full math would need to include the potentially dilutive shares," said Matthew Fust, chief financial officer of Palo Alto, Calif.-based Jazz. "They have preferred stock convertible and some outstanding warrants, and employees' stock options, and by the time you put all those pieces in, you'd be a little above that."

Tim McGrath, vice president and chief financial officer for Orphan, of Minneapolis, told BioWorld Today the deal's value is about $145 million to $150 million, and said filings with the SEC shortly will provide more detail.

Unanimously approved by Orphan's board, the merger is priced at a premium of about 26 percent to Monday's $8.55 closing price of the firm's stock (NASDAQ:ORPH), which ended Tuesday at $10.51, up $1.96, or 22.9 percent.

Fust said Jazz "had a specific interest in launching the commercial part of our business. We didn't want to have to wait until our own products came all the way through the pipeline in order to launch the commercial organization," although Jazz has one undisclosed compound enrolling a Phase III trial.

The deal is expected to finish in the third quarter, after Orphan stockholder approval. Current shareholders, including Orphan CEO John Bullion and affiliates of Alta Partners, OrbiMed Advisors and UBS Capital, have entered a voting agreement with Orphan and Jazz, agreeing to cast ballots in favor of the merger. Orphan will become a wholly owned subsidiary of Jazz.

To make the buyout happen, privately held Jazz has obtained a commitment for $75 million of senior debt financing, led by Lehman Brothers Principal Investments in New York. Founded in March 2003 and focused on neurology and psychiatry, Jazz has raised $265 million in equity funding from a premier group of private equity and venture capital investors.

In May 2003, Jazz raised the seed round through Prospect Venture Partners, also of Palo Alto, and Versant Ventures in Menlo Park, Calif., and about a year ago raised another $250 million in the Series B.

"The debt financing is specific to this transaction," Fust said.

Jazz gets Orphan's marketed Xyrem (sodium oxybate), approved in July 2002 for cataplexy, or sudden loss of muscle tone, in narcolepsy patients. Orphan hopes to market the drug with a label that includes reduction of excessive daytime sleepiness and the improvement in fragmented nighttime sleep, and the FDA is considering a supplemental new drug application. (See BioWorld Today, Jan. 19, 2005.)

"We're talking to companies all the time, and we'd been talking to Jazz for a while about a relationship," McGrath said. The "significant overlap" of therapeutic areas led to the merger talks, he said.

Because it's privately held, Jazz has "had the luxury to not fully disclose our pipeline," Fust said, telling BioWorld Today the firm has seven development-stage projects under way.