Shares of American Pharmaceutical Partners ( APPX) are down nearly 50% since late November, when the company announced its $4.1 billion takeover of American BioScience. I joined the bear parade in January, with the stock above $37. With American Pharma shares now at $28.29 as of Wednesday's close, after trading at a 52-week low of $27.76 intraday, this grizzly is heading into his cave.

To recap: American Pharmaceutical Partners is tightly controlled by billionaire CEO Dr. Patrick Soon-Shiong. In November, the company said it would spend $4.1 billion to acquire American BioScience, which also happens to be controlled by ( drumroll, please) Dr. Patrick Soon-Shiong.

As reported previously, questions were raised regarding how the company arrived at a $4.1 billion price tag, as no details were released to the public. It turned out that three "independent" board members reviewed and approved the deal. These directors each received a six-figure payment for their efforts. The acquisition is to be completed with stock, diluting current American Pharma investors' holdings by 119%.

As with prior stories, American Pharma did not return calls seeking comment.

The deal actually makes logistical sense. The two companies were splitting the revenue for Abraxane. By combining, the companies can remove some costs and theoretically make the drug more profitable. Abraxane is currently used to treat breast cancer. It is in 74 clinical trials, including some for cancers of the lung, ovaries and prostate. Even if Abraxane turns out to be an effective therapy for these and other cancers, investors have to question whether their best interests will be served by Dr. Soon-Shiong and his board.

My argument against the stock had nothing to do with the company's drugs, sales or pipeline. It centered on the idea that with thousands of public companies to choose from, why would you invest your money with an executive who has proven he will destroy minority shareholders' value in order to enrich himself? On the basis of a flat 80% ownership of American BioScience, Dr. Soon-Shiong's take in the deal is about $2 billion at current market prices.

In sum, Dr. Soon-Shiong has destroyed his credibility with shareholders. I certainly wouldn't invest my money, or anyone else's, with this guy.

Cash In the Chips

Since my bearish column in January, the stock is down roughly 25%. I think current price levels represent a reasonable valuation. Earnings estimates have been slashed as a result of the acquisition. The current First Call EPS consensus estimate for 2006 is 77 cents. Earnings are projected to grow to 94 cents in 2007. Long-term growth is forecast to be 35%. With the stock trading at a P/E-to-growth ratio of 1, I'd take profits on short positions. While the stock deserves to trade at a discount due to the corporate-governance issues, biotech stocks can be volatile, and I wouldn't be willing to risk existing profits on the hopes that the shares will continue to head lower.

Please note, I am by no means turning bullish on the stock. American Pharma could trade at a significant discount with a great pipeline, and I still wouldn't recommend the stock. To me, there is simply no reason to invest with a CEO who puts his interests ahead of those of investors. Nevertheless, I can't ignore valuation and sound money management. It's time to take profits and move on.
In keeping with TSC's editorial policy, Lichtenfeld doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

Marc Lichtenfeld was previously an analyst at Avalon Research Group and The Weiss Group and a trader at Carlin Equities. He holds NASD 86, 87, 7 and 63 licenses. His prior journalism experience includes being a reporter/anchor for On24 in San Francisco and a managing editor of InvestorsObserver, a personal finance Web site. He is a graduate of the State University of New York at Albany. He appreciates your feedback; click here to send him an email.

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