With CNBC bringing on a plethora of crisis consultants in the aftermath of the vice president's recent public relations disaster, you'd think management of publicly traded companies might have taken a few notes. But American Pharmaceutical Partners ( APPX) opted to keep investors guessing on pertinent information regarding fourth-quarter results and, more importantly, expectations for 2006. Management has already come under fire for keeping tightlipped about its pending acquisition of American BioScience, announced in November. To review, American Pharma is purchasing American BioScience in an all-stock transaction. American Pharma founder and majority owner Dr. Patrick Soon-Shiong owns more than 85% of American BioScience and could see a windfall of more than $2 billion if the deal is consummated. Details on how the purchase price was decided were not revealed until Feb. 13 in a document filed with the Securities and Exchange Commission. But the merger was reviewed by a special committee of purportedly independent board members -- board members who were paid six-figure sums to seemingly rubber-stamp the deal. A full recap is available
here . On Friday, American Pharma released its fourth-quarter results. The company earned 38 cents per share (excluding one-time items), beating the consensus estimate of 35 cents. Revenue, however, came in a little light at $144.83 million vs. expectations of $151.5 million. On the conference call, American Pharma symbolically sprayed buckshot in the face of already anxious investors by refusing to give guidance for 2006. The company also failed to assuage concerns of channel-stuffing prior to a year-end price increase for cancer fighter Abraxane.
Due to the lack of guidance, analysts grasped for any kind of data that would help them evaluate American Pharma's prospects. Analysts closely examined the Goldman Sachs analysis that was included in the company's Schedule 14C filing with the SEC. The document provides details on the pending merger with American BioScience. During the question and (refuse to) answer segment, Elliot Wilbur of CIBC World Markets said the document suggests Goldman Sachs relied on American Pharma management for its analysis, and inquired as to whether that document could be considered guidance. Chief Financial Officer Nicole Williams said no. Goldman worked with the "special committee of the board." You know, the special committee that was paid $125,000 to $150,000 each. "None of these numbers were prepared by management for Goldman Sachs," Williams said. They were prepared by the "special committee." So it appears that the numbers that were good enough for Goldman Sachs investment banking analysts to assess the $4.1 billion takeover may not be accurate enough to provide Wall Street with guidance for 2006. Once again, it calls into question just how the purchase price of the deal was arrived at. What does seem obvious is that current American Pharma shareholders are getting the short end of the stick. Morningstar analyst Brian Laegeler said American Pharma will contribute 60% of the combined company's operating earnings, yet American Pharma shareholders will own only 46% of the company. The table below was taken from American Pharma's Schedule 14C. It shows Goldman Sachs' estimate of the percentage each company will contribute to various metrics over the next five years. Interesting that in every one, American Pharma's contribution is larger than the 46% ownership stake its shareholders will have. Morningstar's Laegeler notes that contributions by American BioScience in the later years are based on early-stage drugs that may never reach the market.
Goldman Sachs has been paid $5 million for its services and could receive up to another $2 million. With that kind of money at stake, it's doubtful it would find too many problems with the deal. I'm not implying that Goldman has done anything wrong, just pointing out where all of the potential conflicts lie. Asked for comment, a Goldman representative said she would get back to me; if/when I hear back I will provide an update. Meanwhile, American Pharma's credibility seems to be suffering. Despite management adamantly denying that customers purchased stocks of Abraxane ahead of an 8% price increase on Dec. 29, Merrill Lynch's Greg Gilbert wrote: "We suspect that there could have been some buy-in prior to the price increase, although the company suggested that buy-in was unlikely." And Gilbert is a fan of the company, with a buy rating and $49 price target. On Tuesday the stock was recently down 2.2% to $31.70. Merrill Lynch is acting as an adviser to American BioScience. You'll notice I haven't even discussed the company's products or pipeline, which are solid. That's not the story. The history of conflicts of interest is what shareholders should be most concerned about. The recent lack of transparency should make it easy for investors to pull the trigger and eliminate American Pharma from their portfolios.
|Unholy Union |
American Pharma shareholders give a lot more than they're getting back in the proposed combination with ABI
|Revenues||Gross Profit*||EBIT||Net Income**|
|2006||78.8% / 21.2%||79.5% / 20.5%||87.8% / 12.1%||96.1% / 3.9%|
|2007||67.5% / 32.5%||64.6% / 35.4%||61.3% / 38.7%||64.0% / 36.0%|
|2008||62.9% / 37.1%||60.8% / 39.2%||61.3% / 38.7%||63.5% / 36.5%|
|2009||61.5% / 38.5%||58.3% / 41.7%||58.2% / 41.8%||60.0% / 40.0%|
|2010||56.4% / 43.6%||52.2% / 47.8%||53.8% / 46.2%||55.0% / 45.0%|
| * Gross profit for ABI as per the license agreement between APPX and ABI. |
** For Net Income, profit sharing of Abraxane® U.S. is taxed at APPX's tax rate.
Source: American Pharma 14C filing.