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The Real Story: American Pharma's Tangled Web

There's still good money to be made in medicine. Just ask Dr. Patrick Soon-Shiong, a former surgeon from UCLA who founded generic-drug maker American Pharmaceutical Partners (APPX). With a net worth of $2.2 billion in 2005, Dr. Soon-Shiong was ranked the 116th-richest American in the Forbes 400. The good doctor likely will see himself catapult into the top 100 after American Pharma acquires privately owned American BioScience in an all-stock deal worth $4.1 billion.

First, let's be clear: I believe in capitalism and the marketplace. I think there is nothing wrong with captains of industry profiting from their creations -- especially in the biotech/pharma area, where incentives should be great to encourage costly research that can ultimately add to the common good. However, the American Pharma-American BioScience deal raises questions about incestuous corporate relationships that enrich executives and their minions at the expense of average shareholders.

You see, Dr. Soon-Shiong is the chairman, CEO and founder of both companies and owns over 80% of American BioScience. American BioScience currently owns approximately 64% of American Pharmaceutical Partners. The merger proposal was submitted to American Pharma by American BioScience. Think about that for a minute. A private company (owned by Dr. Soon-Shiong) approaches a public company (majority owned by Dr. Soon-Shiong) with a proposal to be acquired.

Under the terms of the deal, American Pharma will issue 86 million new shares to American BioScience. This will raise the latter's ownership share to over 83% and, in the process, dilute American Pharma's 72.2 million shares outstanding by 119%. The deal is expected to close in the first half of the year.

Based on a flat 80% ownership of American BioScience, Dr. Soon-Shiong's take in the deal is over $2.4 billion at current market prices. At the same time, the holders of American Pharma's existing 72.2 million shares will suffer from the dilution of ponying up 86 million new shares, most of which go to Dr. Soon-Shiong.

Although Dr. Soon-Shiong is a majority shareholder in American Pharma, due to his controlling interest in American BioScience, he has in effect created a windfall of $2.4 billion for himself. Minority shareholders of American Pharmaceutical Partners get left holding the bag.

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