Bradley Pharmaceuticals (BDY) investors might want to double-check the active ingredients in the company's new prescription for growth.The acquisition of Bioglan, a distributor of prescription dermatology products, doesn't exactly look like the miracle cure Bradley needs to offset plummeting sales of its major drug. Bradley's stock rocketed 16% when the company announced earlier this month it would acquire Bioglan in a deal that Wall Street predicted would boost 2005 earnings by more than 30%. But Bradley bears, who have shorted one-third of the company's stock, have examined the fine print on the transaction and now claim otherwise. They say Bradley is primarily buying the rights to distribute certain drugs -- not the drugs themselves -- and therefore can amortize much of the acquisition only over the life of the distribution agreements. As a result, the short-sellers calculate that Bradley faces $20 million in yearly amortization expenses instead of the $12 million the Street has estimated using a 20-year amortization period, which is the standard in a transaction for drugs alone. "They're making a big error," one short-seller said of mainstream analysts. "And this will make a huge difference to EPS (earnings per share)." Specifically, the shorts expect Bradley to post 2005 profits that are 17% lower than the $1.74 a share that analysts now are anticipating with the fresh help from the Bioglan acquisition. Bradley has merely said the acquisition should add to earnings -- without saying by how much -- after the deal closes at the end of July. The company didn't host a conference call after announcing the acquisition and offered no new details when discussing the transaction with TheStreet.com on Wednesday. Anthony Griffo, director of investor relations for Bradley, couldn't say for sure what the acquisition actually included or how it would be amortized.
Short-sellers, however, claim to have the answers. They point to details in the regulatory filings of Quintiles Transnational, which is selling Bioglan for more than three times what it paid for it a few years ago. The filings show that the biggest chunk of Bioglan, involving the right to distribute an unpatented acne antibiotic called Adoxa, expires in less than seven years. The second piece of Bioglan, a distribution agreement for pre-cancer skin treatment Solaraze, expires around the same time as its patent does -- in just over 10 years. Only the smallest part of the deal, an itching treatment called Zonalon, responsible for about 10% of Bioglan's sales, appears to give Bradley ownership of an actual drug. But that drug has no patent protection. Indeed, it's Bradley's lack of patents in general that has sent short-sellers flooding into the stock. "The short thesis has been, and continues to be, that all of this company's
Bradley's drugs are exposed to generic competition," one explained. "They have no patent protection on anything." The short-seller went on to say that Bradley markets old drugs -- or some updated versions of them -- that were developed before the Food and Drug Administration even existed. As a result, the short-seller said, competitors can copy Bradley products far more cheaply and rapidly than they can those with FDA patents. The short-seller said that Bradley continues to make new drugs (basically by "mixing old stuff together") that briefly boost results as wholesalers buy their initial supplies. But the sudden sales growth -- like that seen with Bradley's Zoderm in the most recent quarter -- immediately begins to fade, the investor added. Meanwhile, sales of Carmol, Bradley's biggest product, keep plummeting. Last year, Bradley generated more than half of its revenue through the sale of the damaged-skin treatment, which also has no patent protection due to its age. Competitors are now aggressively marketing generic versions of the drug that last month alone caused Carmol's sales to plummet by 31%.
But Raymond James analyst Michael Krensavage, who highlighted the ongoing spiral of Carmol's revenue last week, isn't necessarily worried. He is instead strongly recommending Bradley's stock due to growth in its much smaller product lines and, more recently, his excitement about the Bioglan deal. He predicts that the acquisition will boost Bradley's 2005 profits by some 32% through sales growth in both new products and existing drugs other than Carmol. However, Krensavage is basing his projection on a model that allows Bradley to amortize some 85% of the Bioglan deal for an entire 20 years. Short-sellers assert that that assumption makes no sense. They point out that the Adoxa agreement -- which accounts for about 70% of Bioglan's revenue --expires in 2009. And they say that even the remaining two pieces of Bioglan have useful lives that are clearly shorter than two decades. They also question the wisdom of Bradley's decision to buy Bioglan right now. Bradley is paying $183 million -- just $1 million shy of the total cash listed on its latest balance sheet. Then it plans to seek a $100 million credit line, putting itself deeply in debt, to help cover working capital costs. And Bradley could keep spending. "We consistently look for deals and products ... because we are a growing company," Griffo explained. But Noelle Tune, an analyst at Leerink Swann, expressed some concern. "While we view diversification and anticipated earnings accretion as positives, we remain moderately cautious on shares as Bradley acquired only one patented product (Solaraze), may face near-term generic competition for Adoxa and will be shifting to a net debt position upon closing," wrote Tune, who has a market perform rating on the stock.
To be sure, current owner Quintiles has enjoyed quite a run with Bioglan, however. Krensavage points out that Quintiles more than doubled the sale of Adoxa last year and nearly did the same with Solaraze as well. He says little, however, about the only new drug that Bradley will apparently own. Meanwhile, Wachovia analyst Michael Tong highlights potential threats to Bioglan's biggest-selling drug. "Since Adoxa does not have patent protection, generic competition could -- and will likely -- occur in the future," wrote Tong, who nevertheless has an outperform rating on Bradley's stock. "Timing of Adoxa generic competition represents the major risk in this transaction." Still, Tong goes on to predict that Adoxa will face no serious competition for at least 18 months. But Tune isn't so sure, writing that "industry contacts suggest that generic competition for Adoxa 100 mg tablets may be near-term." Some people believe that Quintiles has managed to negotiate a fantastic deal -- with perfect timing -- that will leave Bradley coming up short. They also point out that Bioglan hasn't exactly been a smashing success outside of Quintiles' hands. Various media sources have, over time, documented the spectacular rise and fall of Bioglan as a stand-alone company. But The Daily Telegraph two years ago offered a particularly thorough account. The Telegraph's story goes something like this: Terry Saddler mortgaged everything he owned and maxed out three credit cards to buy Bioglan --then a "tiny distributor of hormones and vitamin pills" -- in 1984. He then grew the company, eventually taking it public, before attempting to acquire a skin-care company with a price tag bigger than Bioglan's entire market capitalization. The deal fell through, major accounting issues surfaced, and the company wound up in receivership.
Quintiles, once viewed as a potential savior for Bioglan, bought the company's choice assets at a dirt-cheap price instead. Bradley critics believe Quintiles is once again about to wind up on the great end of a deal. But Bradley fans nevertheless continue to cheer the transaction. The company's stock, which originally lost some ground after surging on the deal, jumped 6.3% to $26.79 on Wednesday. "The company looks great on paper," one short-seller explained. "But you find out it's not after you really start digging around."