The Real Story: American Pharma's Tangled Web

Be Careful What You Ask For

A bit of history: In fairness to Dr. Soon-Shiong and American Pharma, Wall Street had been pressing for this deal. American BioScience is a startup biotech with one successfully marketed drug -- cancer fighter Abraxane. Prior to the acquisition, American Pharma had 50% of the rights to Abraxane.

Some on the Street felt that the two companies -- controlled by the same person -- entering into a revenue-sharing deal was a conflict of interest. So, Dr. Soon-Shiong removed the conflict by swallowing up its majority shareholder.

Many on Wall Street have no problem with the strategy behind the acquisition. Abraxane is expected to be a significant drug. It currently has above 14% of the market share for the chemotherapy class known as taxanes. The drug is currently used to treat breast cancer and has shown to be effective with fewer side effects than its competitors. It is currently in 74 clinical trials, including seven phase III trials for lung, ovarian and prostate cancers among others. Merrill Lynch, which advised American BioScience in the deal, estimates 2006 Abraxane sales of $250 million.

But does this deal create shareholder value? Obviously, American Pharmaceutical Partners will argue that it does. By owning the exclusive worldwide rights to what someday could be a $1 billion drug and a pipeline of early stage medicines, shareholders could now own stock in what will be an important player in the health care space sometime down the road.

But investors will have to be patient in order to see the payoff. Shares of American Pharma tumbled 18% when the deal was announced on Nov. 28, and analysts have slashed their earnings forecast as a result of the dilution. Merrill Lynch's Greg Gilbert cut his 2006 EPS forecast by more than half to $0.81 from $1.75. He doesn't see American Pharmaceutical Partners earning $1.75 (actually, $1.78) until 2009.